e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(MARK ONE)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 28, 2008
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-26946
INTEVAC, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
94-3125814 |
(State or other jurisdiction of
|
|
(IRS Employer Identification No.) |
incorporation or organization) |
|
|
3560 Bassett Street
Santa Clara, California 95054
(Address of principal executive office, including Zip Code)
Registrants telephone number, including area code: (408) 986-9888
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). o Yes þ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
On
August 1, 2008, 21,791,135 shares of the Registrants Common Stock, $0.001 par value, were outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEVAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
|
(In thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
25,960 |
|
|
$ |
27,673 |
|
Short-term investments |
|
|
11,948 |
|
|
|
110,985 |
|
Trade and other accounts receivable, net of
allowances of $88 at June 28, 2008 and $57 at
December 31, 2007 |
|
|
29,111 |
|
|
|
14,142 |
|
Inventories |
|
|
25,730 |
|
|
|
22,133 |
|
Prepaid expenses and other current assets |
|
|
3,189 |
|
|
|
4,162 |
|
Deferred income taxes |
|
|
4,981 |
|
|
|
3,609 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
100,919 |
|
|
|
182,704 |
|
Property, plant and equipment, net |
|
|
15,404 |
|
|
|
15,402 |
|
Long-term investments |
|
|
78,195 |
|
|
|
2,009 |
|
Goodwill |
|
|
7,905 |
|
|
|
7,905 |
|
Other intangible assets, net of amortization of
$362 at June 28, 2008 and $218 at December 31,
2007 |
|
|
1,638 |
|
|
|
1,782 |
|
Deferred income taxes and other long term assets |
|
|
6,750 |
|
|
|
5,611 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
210,811 |
|
|
$ |
215,413 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Note payable |
|
$ |
1,952 |
|
|
$ |
1,992 |
|
Accounts payable |
|
|
6,155 |
|
|
|
7,678 |
|
Accrued payroll and related liabilities |
|
|
4,971 |
|
|
|
8,610 |
|
Other accrued liabilities |
|
|
4,912 |
|
|
|
5,454 |
|
Customer advances |
|
|
3,858 |
|
|
|
4,340 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
21,848 |
|
|
|
28,074 |
|
Other long-term liabilities |
|
|
271 |
|
|
|
278 |
|
Long-term note payable |
|
|
|
|
|
|
1,898 |
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value |
|
|
22 |
|
|
|
22 |
|
Additional paid in capital |
|
|
124,153 |
|
|
|
120,056 |
|
Accumulated other comprehensive income (loss) |
|
|
(623 |
) |
|
|
571 |
|
Retained earnings |
|
|
65,140 |
|
|
|
64,514 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
188,692 |
|
|
|
185,163 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
210,811 |
|
|
$ |
215,413 |
|
|
|
|
|
|
|
|
Note: Amounts as of December 31, 2007 are derived from the December 31, 2007 audited consolidated
financial statements.
See accompanying notes to the condensed consolidated financial statements.
2
INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
|
(In thousands, except per share amounts) |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems and components |
|
$ |
28,126 |
|
|
$ |
69,603 |
|
|
$ |
57,140 |
|
|
$ |
143,196 |
|
Technology development |
|
|
4,006 |
|
|
|
2,502 |
|
|
|
8,167 |
|
|
|
5,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
32,132 |
|
|
|
72,105 |
|
|
|
65,307 |
|
|
|
148,479 |
|
Cost of net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems and components |
|
|
16,597 |
|
|
|
39,895 |
|
|
|
31,987 |
|
|
|
81,980 |
|
Technology development |
|
|
2,402 |
|
|
|
1,383 |
|
|
|
4,876 |
|
|
|
2,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of net revenues |
|
|
18,999 |
|
|
|
41,278 |
|
|
|
36,863 |
|
|
|
84,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
13,133 |
|
|
|
30,827 |
|
|
|
28,444 |
|
|
|
63,609 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
8,418 |
|
|
|
9,648 |
|
|
|
17,806 |
|
|
|
21,840 |
|
Selling, general and administrative |
|
|
7,413 |
|
|
|
7,839 |
|
|
|
14,477 |
|
|
|
15,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
15,831 |
|
|
|
17,487 |
|
|
|
32,283 |
|
|
|
37,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
|
|
(2,698 |
) |
|
|
13,340 |
|
|
|
(3,839 |
) |
|
|
26,417 |
|
Interest income and other, net |
|
|
806 |
|
|
|
1,538 |
|
|
|
2,217 |
|
|
|
2,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(1,892 |
) |
|
|
14,878 |
|
|
|
(1,622 |
) |
|
|
29,275 |
|
Provision (benefit) for income taxes |
|
|
(955 |
) |
|
|
3,326 |
|
|
|
(2,248 |
) |
|
|
7,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(937 |
) |
|
$ |
11,552 |
|
|
$ |
626 |
|
|
$ |
21,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities
held as available for sale |
|
|
12 |
|
|
|
|
|
|
|
(1,555 |
) |
|
|
|
|
Foreign currency translation adjustments |
|
|
129 |
|
|
|
(11 |
) |
|
|
361 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
(796 |
) |
|
$ |
11,541 |
|
|
$ |
(568 |
) |
|
$ |
21,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(0.04 |
) |
|
$ |
0.54 |
|
|
$ |
0.03 |
|
|
$ |
1.00 |
|
Shares used in per share amounts |
|
|
21,691 |
|
|
|
21,396 |
|
|
|
21,669 |
|
|
|
21,345 |
|
Diluted income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(0.04 |
) |
|
$ |
0.52 |
|
|
$ |
0.03 |
|
|
$ |
0.97 |
|
Shares used in per share amounts |
|
|
21,691 |
|
|
|
22,146 |
|
|
|
22,115 |
|
|
|
22,167 |
|
See accompanying notes to the condensed consolidated financial statements.
3
INTEVAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
|
(In thousands) |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
626 |
|
|
$ |
21,397 |
|
Adjustments to reconcile net income to net cash and cash equivalents
(used in) provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,252 |
|
|
|
2,187 |
|
Equity-based compensation |
|
|
3,238 |
|
|
|
2,738 |
|
Deferred income taxes |
|
|
(2,800 |
) |
|
|
|
|
Changes in operating assets and liabilities |
|
|
(23,359 |
) |
|
|
(9,005 |
) |
|
|
|
|
|
|
|
Total adjustments |
|
|
(20,669 |
) |
|
|
(4,080 |
) |
|
|
|
|
|
|
|
Net cash and cash equivalents (used in) provided by operating activities |
|
|
(20,043 |
) |
|
|
17,317 |
|
Investing activities |
|
|
|
|
|
|
|
|
Purchases of investments |
|
|
(7,000 |
) |
|
|
(71,661 |
) |
Proceeds from maturities of investments |
|
|
28,500 |
|
|
|
48,200 |
|
Acquisition of DeltaNu LLC, net of cash acquired |
|
|
|
|
|
|
(2,083 |
) |
Purchases of leasehold improvements and equipment |
|
|
(2,263 |
) |
|
|
(3,406 |
) |
|
|
|
|
|
|
|
Net cash and cash equivalents provided by (used in) investing activities |
|
|
19,237 |
|
|
|
(28,950 |
) |
Financing activities |
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock |
|
|
940 |
|
|
|
1,861 |
|
Repayment of note payable |
|
|
(2,000 |
) |
|
|
|
|
Excess tax benefit from equity-based compensation |
|
|
|
|
|
|
767 |
|
|
|
|
|
|
|
|
Net cash and cash equivalents (used in) provided by financing activities |
|
|
(1,060 |
) |
|
|
2,628 |
|
Effect of exchange rate changes on cash |
|
|
153 |
|
|
|
7 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(1,713 |
) |
|
|
(8,998 |
) |
Cash and cash equivalents at beginning of period |
|
|
27,673 |
|
|
|
39,440 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
25,960 |
|
|
$ |
30,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Cash Flow Information |
|
|
|
|
|
|
|
|
Cash paid (received) for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
|
|
|
$ |
6,544 |
|
Income tax refund |
|
$ |
(1,135 |
) |
|
$ |
|
|
Other non-cash changes |
|
|
|
|
|
|
|
|
Notes payable issued for the acquisition of DeltaNu, LLC |
|
$ |
|
|
|
$ |
3,720 |
|
See accompanying notes to the condensed consolidated financial statements.
4
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Basis of Presentation
In the opinion of management, the unaudited interim consolidated condensed financial
statements of Intevac, Inc. and its subsidiaries (Intevac or the Company) included herein have been
prepared on a basis consistent with the December 31, 2007 audited consolidated financial statements
and include all material adjustments, consisting of normal recurring adjustments, necessary to
fairly present the information set forth therein. These unaudited interim condensed consolidated
financial statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in Intevacs Annual Report on Form 10-K for the fiscal year
ended December, 31, 2007 (2007 Form 10-K). Intevacs results of operations for the three and six
months ended June 28, 2008 are not necessarily indicative of future operating results.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America (United States) requires management to make judgments,
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those estimates.
Reclassifications
Certain prior year amounts in the Condensed Consolidated Financial Statements have been
reclassified to conform to the 2008 presentation. The Condensed Consolidated Statements of Cash
Flows for the period ended June 30, 2007 was reclassified to reflect the year-end 2007 presentation
of the cash flow impact of the acquisition of DeltaNu, LLC. The reclassifications had no material
effect on total assets, liabilities, equity, revenue, net income or comprehensive income previously
reported.
2. New Accounting Pronouncements
In May 2008, the Financial Accounting Standard Board (FASB) issued Statement on Financial
Accounting Standards (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles
(SFAS 162), which identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of non-governmental entities
that are presented in conformity with generally accepted accounting principles (GAAP) in the
United States. SFAS 162 is effective sixty days following the SECs approval of The Public Company
Accounting Oversight Boards related amendments to remove the GAAP hierarchy from auditing
standards. Intevac is currently evaluating the potential impact of the implementation of SFAS 162
on its financial position and results of operations.
In April 2008, the FASB issued FASB Staff Position (FSP) 142-3, Determination of the Useful
Life of Intangible Assets (FSP 142-3). The FSP amends the factors that an entity should
consider in determining the useful life of a recognized intangible asset under SFAS 142, Goodwill
and Other Intangible Assets, to include the entitys historical experience in renewing or
extending similar arrangements, whether or not the arrangements have explicit renewal or extension
provisions. Previously an entity was precluded from using its own assumptions about renewal or
extension of an arrangement where there was likely to be substantial cost or modifications.
Entities without their own historical experience should consider the assumptions market
participants would use about renewal or extension. The amendment may result in the useful life of
an entitys intangible asset differing from the period of expected cash flows that was used to
measure the fair value of the underlying asset using the market participants perceived value. The
FSP is effective for financial statements issued for fiscal years beginning after December 15,
2008, and for interim periods within those fiscal years. Early adoption is prohibited. The
requirements for determining the useful life of intangible assets apply to intangible assets
acquired after January 1, 2009. The disclosure requirements will be applied prospectively to all
intangible assets recognized as of, and subsequent to, the effective date. Intevac is currently
evaluating the potential impact of the implementation of FSP 142-3 on its financial position and
results of operations.
5
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities An Amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 enhances
required disclosures regarding derivatives and hedging activities. SFAS is effective for fiscal
years and interim periods beginning after November 15, 2008. Intevac is currently evaluating the
potential impact of the implementation of SFAS 161 on its financial position and results of
operations.
In December 2007 the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141R). SFAS
141R retains the fundamental acquisition method of accounting established in Statement 141;
however, among other things, SFAS 141R requires recognition of assets and liabilities of
non-controlling interests acquired, fair value measurement of consideration and contingent
consideration, expense recognition for transaction costs and certain integration costs, recognition
of the fair value of contingencies, and adjustments to income tax expense for changes in an
acquirers existing valuation allowances or uncertain tax positions that result from the business
combination. SFAS 141R is effective for annual reporting periods beginning after December 15, 2008
and will be applied prospectively. Intevac is currently evaluating the potential impact of the
implementation of SFAS 141R on its financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an Amendment of Accounting Research Bulletin No 51 (SFAS 160). SFAS 160
establishes accounting and reporting standards for ownership interests in subsidiaries held by
parties other than the parent, changes in a parents ownership of a noncontrolling interest,
calculation and disclosure of the consolidated net income attributable to the parent and the
noncontrolling interest, changes in a parents ownership interest while the parent retains its
controlling financial interest and fair value measurement of any retained noncontrolling equity
investment. SFAS 160 is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early implementation is
prohibited. Intevac must implement these new requirements in its first quarter of fiscal 2009.
Intevac is currently evaluating the potential impact of the implementation of SFAS 160 on its
financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, Including an Amendment to FASB No. 115 (SFAS 159). Under SFAS 159,
entities may elect to measure specified financial instruments and warranty and insurance contracts
at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings
each reporting period. The election, called the fair value option, will enable entities to achieve
an offset accounting effect for changes in fair value of certain related assets and liabilities
without having to apply more complex hedge accounting provisions. SFAS 159 is effective as of the
beginning of a companys first fiscal year that begins after November 15, 2007. Intevac chose not
to apply the provisions of SFAS 159.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about fair value measurements.
Intevac implemented the measurement and disclosure requirements related to financial assets and
financial liabilities in the first quarter of fiscal 2008. The implementation of this standard did
not have a material impact on Intevacs financial condition, results of operations or cash flows.
In February 2008, the FASB issued FSP 157-1, Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13 (FSP 157-1) and FSP 157-2,
Effective Date of FASB Statement No. 157 (FSP 157-2). FSP 157-1 amends SFAS No. 157 to remove
certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS No. 157
for all non-financial assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually), until
fiscal years beginning after November 15, 2008.
6
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Inventories
Inventories are priced using average actual costs and are stated at the lower of cost or
market. Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Raw materials |
|
$ |
10,888 |
|
|
$ |
13,666 |
|
Work-in-progress |
|
|
9,123 |
|
|
|
6,191 |
|
Finished goods |
|
|
5,719 |
|
|
|
2,276 |
|
|
|
|
|
|
|
|
|
|
$ |
25,730 |
|
|
$ |
22,133 |
|
|
|
|
|
|
|
|
Finished goods inventory consists primarily of completed systems at customer sites that are
undergoing installation and acceptance testing.
Inventory reserves included in the above balances were $8.2 million and $7.8 million at June
28, 2008 and December 31, 2007, respectively. Each quarter, Intevac analyzes its inventory (raw
materials, work-in-progress and finished goods) against the forecasted demand for the next twelve
months. Raw materials with no forecasted requirements in that period are considered excess and
inventory provisions are established to write those items down to zero net book value.
Work-in-progress and finished goods inventories with no forecast requirements in that period are
typically written down to the lower of cost or market. During this process, some inventory is
identified as having no future use or value to us and is disposed of against the reserves.
4. Equity-Based Compensation
At June 28, 2008, Intevac had equity-based awards outstanding under the 2004 Equity Incentive
Plan (the 2004 Plan) and the 2003 Employee Stock Purchase Plan (the ESPP). Intevacs
stockholders approved both of these plans.
The 2004 Plan permits the grant of incentive or non-statutory stock options, restricted stock,
stock appreciation rights, performance units and performance shares. During the six months ended
June 28, 2008, Intevac granted 161,000 stock options with an estimated total grant-date fair value
of $1.1 million. Of this amount, estimated awards of $222,000 are not expected to vest.
The ESPP provides that eligible employees may purchase Intevacs common stock through payroll
deductions at a price equal to 85% of the lower of the fair market value at the beginning of the
applicable offering period or at the end of each applicable purchase period. Offering periods are
generally two years in length, and consist of a series of six-month purchase intervals. Eligible
employees may join the ESPP at the beginning of any six-month purchase interval. During the six
months ended June 28, 2008, Intevac granted purchase rights with an estimated total grant-date
value of $408,000.
7
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Compensation Expense
The effect of recording equity-based compensation for the three- and six-month periods ended
June 28, 2008 and June 30, 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
|
June 28, 2008 |
|
|
June 30, 2007 |
|
Equity-based compensation by type of award: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
$ |
1,325 |
|
|
$ |
1,169 |
|
|
$ |
2,649 |
|
|
$ |
2,314 |
|
Employee stock purchase plan |
|
|
297 |
|
|
|
214 |
|
|
|
500 |
|
|
|
427 |
|
Amounts
(capitalized as inventory) released to cost of sales |
|
|
20 |
|
|
|
1 |
|
|
|
89 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity-based compensation |
|
|
1,642 |
|
|
|
1,384 |
|
|
|
3,238 |
|
|
|
2,738 |
|
Tax effect on equity-based compensation |
|
|
(640 |
) |
|
|
(305 |
) |
|
|
(1,264 |
) |
|
|
(737 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect on net income |
|
|
1,002 |
|
|
|
1,079 |
|
|
|
1,974 |
|
|
|
2,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.09 |
|
|
$ |
0.09 |
|
Diluted |
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.09 |
|
|
$ |
0.09 |
|
Valuation Assumptions
The fair value of share-based payment awards is estimated at the grant date using the
Black-Scholes option valuation model. The determination of fair value of share-based payment awards
on the date of grant using an option-pricing model is affected by Intevacs stock price as well as
assumptions regarding a number of highly complex and subjective variables. These variables include,
but are not limited to, the expected stock price volatility over the term of the awards, and actual
employee stock option exercise behavior.
The weighted-average estimated value of employee stock options granted during the three months
ended June 28, 2008 and June 30, 2007 was $7.09 per share and $11.49 per share, respectively. The
weighted-average estimated value of employee stock options granted during the six months ended June
28, 2008 and June 30, 2007 was $6.99 per share and $13.35 per share, respectively. The
weighted-average estimated fair value of employee stock purchase rights granted pursuant to the
ESPP during the six months ended June 28, 2008 and June 30, 2007 was $5.61 and $10.54 per share,
respectively. No purchase rights were granted under the ESPP during either the three months ended
June 28, 2008 and June 30, 2007. The fair value of each option and employee stock purchase right
grant is estimated on the date of grant using the Black-Scholes option valuation model with the
following weighted-average assumptions:
8
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 28, |
|
June 30, |
|
June 28, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Stock Options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility |
|
|
65.16 |
% |
|
|
68.30 |
% |
|
|
65.16 |
% |
|
|
67.93 |
% |
Risk free interest rate |
|
|
3.13 |
% |
|
|
4.67 |
% |
|
|
3.04 |
% |
|
|
4.59 |
% |
Expected term of options (in years) |
|
|
4.4 |
|
|
|
4.4 |
|
|
|
4.4 |
|
|
|
4.5 |
|
Dividend yield |
|
None |
|
None |
|
None |
|
None |
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 28, 2008 |
|
June 30, 2007 |
Stock Purchase Rights: |
|
|
|
|
|
|
|
|
Expected volatility |
|
|
61.26 |
% |
|
|
63.48 |
% |
Risk free interest rate |
|
|
1.5 |
% |
|
|
4.84 |
% |
Expected term of purchase rights (in years) |
|
|
1.3 |
|
|
|
1.5 |
|
Dividend yield |
|
None |
|
None |
The computation of the expected volatility assumptions used in the Black-Scholes calculations
for new grants and purchase rights is based on the historical volatility of Intevacs stock price,
measured over a period equal to the expected term of the grant or purchase right. The risk-free
interest rate is based on the yield available on U.S. Treasury Strips with an equivalent remaining
term. The expected term of employee stock options represents the weighted-average period that the
stock options are expected to remain outstanding and was determined based on historical experience
of similar awards, giving consideration to the contractual terms of the equity-based awards and
vesting schedules. The expected term of purchase rights represents the period of time remaining in
the current offering period. The dividend yield assumption is based on Intevacs history of not
paying dividends and the assumption of not paying dividends in the future.
As the equity-based compensation expense recognized in the Condensed Consolidated Statements
of Operations is based on awards ultimately expected to vest, such amount has been reduced for
estimated forfeitures. Forfeitures were estimated based on Intevacs historical experience, which
Intevac believes to be indicative of Intevacs future experience.
5. Business Combinations
On November 9, 2007, Intevac acquired the assets and certain liabilities of Creative Display
Systems, LLC (CDS) for a purchase price of $6.0 million in cash, net of cash acquired. The
acquired business is a supplier of high-performance micro-display products for near-eye and
portable applications in defense and commercial markets. In connection with this acquisition,
Intevac recorded goodwill of $2.5 million and intangible assets of $1.6 million. Of the $1.6
million of acquired intangible assets, $890,000 was assigned to purchased technology (to be
amortized over 10 years), $560,000 was assigned to customer relationships (to be amortized over 13
years), $110,000 was assigned to acquired backlog (to be amortized over 1 year), and $40,000 was
assigned to covenants not to compete (to be amortized over 3 years).
On January 31, 2007, Intevac acquired the assets and certain liabilities of DeltaNu, LLC
(DeltaNu) for a purchase price of $5.8 million of which $2 million was paid in cash at the close
of the acquisition, $2 million was paid on January 31, 2008 and $2 million is payable on January
31, 2009, which is in the form of a non interest-bearing note. Interest is imputed, and the related
note payable is recorded at a discount in the accompanying Condensed Consolidated Balance Sheets.
The acquired business is a supplier of small footprint and handheld Raman spectrometry instruments.
In connection with this acquisition, Intevac recorded goodwill of $5.4 million, an
9
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
indefinite-life tradename of $120,000 and amortizable intangible assets of $280,000 which are
comprised of customer relationships, covenants not to compete and backlog to be amortized over
their respective useful lives of 1-2 years.
The results of operations for the acquired businesses have been included in our consolidated
statements of operations for the periods subsequent to our acquisition of DeltaNu and CDS,
respectively. The results of operations for DeltaNu and CDS for periods prior to their acquisition
were not material to our consolidated statements of operations and, accordingly, pro forma
financial information has not been presented.
At June 28, 2008, Intevac had recorded a total of $7.9 million of goodwill and $120,000 of
unamortized intangible assets, from the acquisitions described above, all of which was attributable
to the Intevac Photonics segment. Goodwill and unamortized intangible assets are tested for
impairment on an annual basis or more frequently upon the occurrence of circumstances that indicate
that goodwill and unamortized intangible assets may be impaired. Intevac did not record any
impairment of goodwill and intangible assets during the six months ended June 28, 2008.
Total amortization expense of purchased intangibles for the three months and six months ended
June 28, 2008 was $68,000 and $145,000, respectively. As of June 28, 2008, future amortization
expense is expected to be $191,000 for the remainder of 2008, $152,000 for 2009, $143,000 for 2010,
$132,000 for 2011, $132,000 for 2012 and $768,000 thereafter.
6. Warranty
Intevac provides for the estimated cost of warranty when revenue is recognized. Intevacs
warranty is per contract terms and for Intevacs systems the warranty typically ranges between 12
and 24 months from customer acceptance. For systems sold through Intevacs distributor, Intevac
offers a 3 month warranty, where the remainder of any warranty period is the responsibility of the
distributor. During the warranty period any defective non-consumable parts are replaced and
installed at no charge to the customer. The warranty period on consumable parts is limited to their
reasonable usable lives. Estimated repair or replacement costs are used along with Intevacs
historical warranty experience to determine Intevacs warranty obligation. Management exercises
judgment in determining the underlying estimates. Intevac also provides for estimated retrofit
costs, which typically relate to design changes or improvements we identify. On a case-by-case
basis, management determines whether or not to retrofit systems in the field at no charge to the
customer.
On the Condensed Consolidated Balance Sheet, the short-term portion of the warranty provision
is included in other accrued liabilities, while the long-term portion is included in other
long-term liabilities. The expense associated with product warranties issued or adjusted is
included in cost of net revenues on the Condensed Consolidated Statement of Operations and
Comprehensive Income.
10
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table displays the activity in the warranty provision account for the three- and
six-month periods ending June 28, 2008 and June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Beginning balance |
|
$ |
2,578 |
|
|
$ |
5,229 |
|
|
$ |
3,092 |
|
|
$ |
5,283 |
|
Expenditures incurred under warranties |
|
|
(537 |
) |
|
|
(1,189 |
) |
|
|
(1,211 |
) |
|
|
(2,424 |
) |
Accruals for product warranties
issued during the reporting period |
|
|
430 |
|
|
|
674 |
|
|
|
790 |
|
|
|
1,748 |
|
Adjustments to previously existing
warranty accruals |
|
|
(335 |
) |
|
|
(156 |
) |
|
|
(535 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
2,136 |
|
|
$ |
4,558 |
|
|
$ |
2,136 |
|
|
$ |
4,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table displays the balance sheet classification of the warranty provision
account at June 28, 2008 and at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Other accrued liabilities |
|
$ |
1,915 |
|
|
$ |
2,814 |
|
Other long-term liabilities |
|
|
221 |
|
|
|
278 |
|
|
|
|
|
|
|
|
Total warranty provision |
|
$ |
2,136 |
|
|
$ |
3,092 |
|
|
|
|
|
|
|
|
7. Guarantees
Intevac has entered into agreements with customers and suppliers that include limited
intellectual property indemnification obligations that Intevac believes are customary in the
industry. These guarantees generally require Intevac to compensate the other party for certain
damages and costs incurred as a result of third party intellectual property claims arising from
these transactions. The nature of the intellectual property indemnification obligations prevents
Intevac from making a reasonable estimate of the maximum potential amount Intevac could be required
to pay its customers and suppliers. Historically, Intevac has not made any significant
indemnification payments under such agreements, and no amount has been accrued in the accompanying
consolidated financial statements with respect to these indemnification obligations.
8. Cash, Cash Equivalents and Investments in Debt Securities
Cash and cash equivalents are comprised of short-term, highly liquid investments with
maturities of 90 days or less from the date of purchase. Investments are comprised of both
available-for-sale securities, which are recorded at estimated fair value, and held-to-maturity
securities, which are carried at amortized cost. Unrealized gains and losses associated with
Intevacs investments, if any, are reported in stockholders equity. Included in accounts payable
is $1.7 million and $2.1 million of book overdraft at June 28, 2008 and December 31, 2007,
respectively.
11
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents the amortized principal amount and major security type for Intevacs
investments:
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Amortized Principal Amount: |
|
|
|
|
|
|
|
|
Debt securities issued by the US government and its agencies |
|
$ |
13,948 |
|
|
$ |
29,744 |
|
Auction rate securities |
|
|
76,195 |
|
|
|
81,450 |
|
Corporate debt securities |
|
|
|
|
|
|
1,800 |
|
|
|
|
|
|
|
|
Total investments in debt securities |
|
$ |
90,143 |
|
|
$ |
112,994 |
|
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
11,948 |
|
|
$ |
110,985 |
|
Long-term investments |
|
|
78,195 |
|
|
|
2,009 |
|
|
|
|
|
|
|
|
Total investments in debt securities |
|
$ |
90,143 |
|
|
$ |
112,994 |
|
|
|
|
|
|
|
|
Approximate fair value of investments in debt securities |
|
$ |
90,186 |
|
|
$ |
113,029 |
|
|
|
|
|
|
|
|
As of June 28, 2008, Intevacs investment portfolio included $77.8 million par value in
auction rate securities (ARS). All of the ARS are student loan structured issues, where the loans
have been originated under the U.S. Department of Educations Federal Family Education Loan Program
(FFELP). The principal and interest are 97-98% reinsured by the U.S. Department of Education, the
collateral ratios range from 103% to 113%, and there have been no changes to the AAA rating of the
securities. Beginning in mid-February 2008, these ARS failed auction due to sell orders exceeding
buy orders, primarily driven by the decision of the investment banks to not continue participating
in the auctions. As of this date, all of the holdings have experienced at least 5 failed auctions.
The investments in ARS will not be accessible until a successful auction occurs, they are
restructured into a more liquid security, a buyer is found outside of the auction process, or the
underlying securities have matured.
As a basis for considering market participant assumptions in fair value measurements, SFAS
No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used
to measure fair value into three broad levels. The fair value hierarchy gives the highest priority
to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). Due to the lack of actively traded market data or other
observable inputs, the value of Intevacs ARS and the resulting unrealized loss was determined
using Level 3 hierarchical inputs. These inputs include managements assumptions of pricing by
market participants, including assumptions about risk. In accordance with SFAS No. 157, the
impairment amount was arrived at through a model which compared the expected rate of return on
Intevacs ARS to similar other rates of return which an investor would demand in the market. The
securities were discounted over a three-year period, which is reflective of the length of time
anticipated to take the ARS to become liquid. Comparing the rate of return generated by the ARS
portfolio to the rate of return an investor would demand in the market resulted in a valuation of
98% for the ARS investments. The reclassification of these securities from current assets to
long-term assets was deemed appropriate, as management believes that the ARS market will not become
liquid within the next year. Potentially, it could take until the final maturity of the underlying
notes (ranging from 23 years to 49 years) to realize these investments recorded value. Management
currently believes these securities are not permanently impaired, primarily due to the government
guarantee of the underlying securities and Intevacs ability to hold these securities for the
foreseeable future.
Based on the valuation model and an analysis of other-than-temporary impairment factors,
Intevac wrote down the ARS investments to an estimated fair value of $76.8 million at March 29,
2008. This write-down resulted in a temporary impairment charge of $1.6 million, which is reflected
as unrealized loss within other comprehensive income. Intevac reviews impairments associated with
the above in accordance with Emerging Issues Task Force (EITF) 03-01 and FSP SFAS 115-1 and
124-1, The Meaning of Other-Than-Temporary-Impairment and Its
12
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Application to Certain Investments, to determine the classification of the impairment as
temporary or other-than-temporary. A temporary impairment charge results in an unrealized loss
being recorded in the other comprehensive income component of stockholders equity. Such an
unrealized loss does not reduce net income for the applicable accounting period, because the loss
is not viewed as other-than-temporary.
The following table presents the changes in Level 3 instruments measured on a recurring basis
for the three and six months ended June 28, 2008. The majority of Intevacs Level 3 balances
consist of investment securities classified as available-for-sale with changes in fair value
recorded in equity.
Changes in Level 3 instruments (in thousands):
|
|
|
|
|
Investment securities at January 1, 2008 |
|
$ |
81,450 |
|
Net unrealized gains and losses included in earnings |
|
|
|
|
Net unrealized gains and losses included in other comprehensive income |
|
|
(1,567 |
) |
Purchases and settlements |
|
|
(3,100 |
) |
|
|
|
|
Investment securities at March 29, 2008 |
|
|
76,783 |
|
|
|
|
|
Net unrealized gains and losses included in earnings |
|
|
|
|
Net unrealized gains and losses included in other comprehensive income |
|
|
12 |
|
Purchases and settlements |
|
|
(600 |
) |
|
|
|
|
Investment securities at June 28, 2008 |
|
$ |
76,195 |
|
|
|
|
|
Net change in unrealized gains and losses relating to instruments
still held at June 28, 2008 |
|
$ |
1,555 |
|
|
|
|
|
9. Borrowing Facility
On March 5, 2008, Intevac entered into an agreement with Citigroup Global Markets Inc (Citi)
for a secured revolving loan facility. This loan facility is secured by Intevacs Auction Rate
Securities held at Citi. Approximately $20 million of credit is currently available pursuant to the
loan facility. The interest rate on the loan facility is Prime minus 1.5 percent. No amounts were
outstanding under this credit facility at June 28, 2008.
13
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Net Income (loss) Per Share
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for
diluted earnings
per share income
(loss) available
to common
stockholders |
|
$ |
(937 |
) |
|
$ |
11,552 |
|
|
$ |
626 |
|
|
$ |
21,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
weighted-average shares |
|
|
21,691 |
|
|
|
21,396 |
|
|
|
21,669 |
|
|
|
21,345 |
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options (1) |
|
|
|
|
|
|
750 |
|
|
|
446 |
|
|
|
822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
|
|
|
|
750 |
|
|
|
446 |
|
|
|
822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
adjusted
weighted-average shares and assumed conversions |
|
|
21,691 |
|
|
|
22,146 |
|
|
|
22,115 |
|
|
|
22,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Potentially dilutive securities, consisting of shares issuable upon exercise of employee
stock options and weighted-average unamortized compensation expense, are excluded from the
calculation of diluted EPS when their effect is anti-dilutive. The weighted average number of
employee stock options excluded for the three-month periods ended June 28, 2008 and June 30,
2007 was 2,592,022 and 455,217, respectively, and the number of employee stock options
excluded for the six-month periods ended June 28, 2008 and June 30, 2007 was 1,603,924 and
352,534, respectively. |
11. Segment Reporting
Intevacs two reportable segments are: Equipment and Intevac Photonics. Effective in the
second quarter of 2008, Intevac renamed the Imaging Instrumentation segment to Intevac Photonics.
Intevacs chief operating decision-maker has been identified as the President and CEO, who reviews
operating results to make decisions about allocating resources and assessing performance for the
entire Company. Segment information is presented based upon Intevacs management organization
structure as of June 28, 2008 and the distinctive nature of each segment. Future changes to this
internal financial structure may result in changes to the reportable segments disclosed.
Each reportable segment is separately managed and has separate financial results that are
reviewed by Intevacs chief operating decision-maker. Each reportable segment contains closely
related products that are unique to the particular segment. Segment operating profit is determined
based upon internal performance measures used by the chief operating decision-maker.
Intevac derives the segment results from its internal management reporting system. The
accounting policies Intevac uses to derive reportable segment results are substantially the same as
those used for external reporting purposes. Management measures the performance of each reportable
segment based upon several metrics, including orders, net revenues and operating income. Management
uses these results to evaluate the performance of, and to
14
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
assign resources to, each of the reportable segments. Intevac manages certain operating
expenses separately at the corporate level. Intevac allocates certain of these corporate expenses
to the segments in an amount equal to 3% of net revenues. Segment operating income excludes
interest income/expense and other financial charges and income taxes according to how a particular
reportable segments management is measured. Management does not consider the unallocated costs in
measuring the performance of the reportable segments.
The Equipment segment designs, manufactures and markets magnetic media sputtering equipment to
the hard disk drive industry and offers leading-edge, high-productivity etch systems to the
semiconductor industry. The majority of Intevacs revenue is currently derived from the Equipment
segment and Intevac expects that the majority of its revenues for the next several years will
continue to be derived from the Equipment segment.
The Intevac Photonics segment develops compact, cost-effective, high-sensitivity
digital-optical products for the capture and display of low-light images and the optical analysis
of materials. Intevac provides sensors, cameras and systems for commercial applications in the
inspection, medical, scientific and security industries and for government applications such as
night vision and long-range target identification.
Information for each reportable segment for the three and six months ended June 28, 2008 and
June 30, 2007 is as follows:
Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 28, |
|
|
June 30 |
|
|
June 28 |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Equipment |
|
$ |
25,730 |
|
|
$ |
68,519 |
|
|
$ |
52,703 |
|
|
$ |
140,965 |
|
Intevac Photonics |
|
|
6,402 |
|
|
|
3,586 |
|
|
|
12,604 |
|
|
|
7,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net revenues |
|
$ |
32,132 |
|
|
$ |
72,105 |
|
|
$ |
65,307 |
|
|
$ |
148,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit & Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 28, |
|
|
June 30 |
|
|
June 28 |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Equipment |
|
$ |
(633 |
) |
|
$ |
15,842 |
|
|
$ |
(137 |
) |
|
$ |
30,831 |
|
Intevac Photonics |
|
|
(1,070 |
) |
|
|
(1,515 |
) |
|
|
(1,891 |
) |
|
|
(3,115 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit (loss) |
|
|
(1,703 |
) |
|
|
14,327 |
|
|
|
(2,028 |
) |
|
|
27,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated costs |
|
|
(995 |
) |
|
|
(987 |
) |
|
|
(1,811 |
) |
|
|
(1,299 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
|
|
(2,698 |
) |
|
|
13,340 |
|
|
|
(3,839 |
) |
|
|
26,417 |
|
Interest income and other, net |
|
|
806 |
|
|
|
1,538 |
|
|
|
2,217 |
|
|
|
2,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
(1,892 |
) |
|
$ |
14,878 |
|
|
$ |
(1,622 |
) |
|
$ |
29,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total assets for each reportable segment as of June 28, 2008 and December 31, 2007 are as
follows:
Assets
|
|
|
|
|
|
|
|
|
|
|
June 28, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Equipment |
|
$ |
50,202 |
|
|
$ |
31,814 |
|
Intevac Photonics |
|
|
26,087 |
|
|
|
25,609 |
|
|
|
|
|
|
|
|
Total segment assets |
|
|
76,289 |
|
|
|
57,423 |
|
Cash and investments |
|
|
116,103 |
|
|
|
140,667 |
|
Deferred income taxes |
|
|
10,149 |
|
|
|
7,349 |
|
Other current assets |
|
|
2,897 |
|
|
|
4,162 |
|
Common property, plant and equipment |
|
|
3,819 |
|
|
|
3,964 |
|
Other assets |
|
|
1,554 |
|
|
|
1,848 |
|
|
|
|
|
|
|
|
Consolidated total assets |
|
$ |
210,811 |
|
|
$ |
215,413 |
|
|
|
|
|
|
|
|
12. Income Taxes
Intevacs effective income tax rate for the three and six months ended June 28, 2008 was 50.5%
and 138.6%, respectively. Intevacs effective income tax rate for the three and six months ended
June 30, 2007 was 22.4% and 26.9%, respectively. The effective tax rate differs from the
applicable statutory rates due primarily to the utilization of deferred and current credits, the
effect of permanent differences and the geographical composition of Intevacs worldwide earnings.
The quarterly effective rate is computed by separately applying an estimated U.S. tax rate to U.S.
earnings and an estimated foreign tax to foreign earnings to arrive at an overall effective tax
rate for the quarter in accordance with FASB Interpretation No. 18 Accounting for Income Taxes in
Interim Periods, an interpretation of APB opinion No. 28. Intevacs effective tax rate is highly
dependent on the availability of tax credits and the geographic composition of Intevacs worldwide
earnings.
Intevac is subject to income taxes in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation
of the related tax laws and regulations and require significant judgment to apply. With few
exceptions, Intevac is no longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations by tax authorities for the years before 2000.
13. Contingencies
From time to time, Intevac may have certain contingent liabilities that arise in the ordinary
course of its business activities. Intevac accounts for contingent liabilities when it is probable
that future expenditures will be made and such expenditures can be reasonably estimated.
As described in previous filings, on July 7, 2006, Intevac filed a patent infringement lawsuit
against Unaxis USA, Inc., a wholly owned subsidiary of OC Oerlikon Balzers Ltd. (Oerlikon) and its
affiliates, Unaxis Balzers AG and Unaxis Balzers, Ltd., in the United States District Court for the
Central District of California. On July 14, 2008, as part of the acquisition of certain assets of
Oerlikon which is described below, Intevac entered into a settlement agreement which dismissed all
claims in the litigation.
16
INTEVAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Subsequent Event
On July 14, 2008, Intevac purchased certain assets purchase assets of Oerlikons magnetic
media equipment business in Switzerland for an undisclosed amount. Intevacs acquisition of
Oerlikons magnetic media equipment assets and intellectual property enables Intevac to utilize
Oerlikons developed technology and product solutions on Intevac systems. The acquisition will be
reported in the Equipment segment.
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements, which involve risks
and uncertainties. Words such as believes, expects, anticipates and the like indicate
forward-looking statements. These forward looking statements include comments related to Intevacs
shipments, projected revenue recognition, product costs, gross margin, operating expenses, interest
income, income taxes, cash balances and financial results in 2007; projected customer requirements
for Intevacs new and existing products, and when, and if, Intevacs customers will place orders
for these products; Intevacs ability to proliferate its technology into major military weapons
programs and to develop and introduce commercial imaging products; and the timing of delivery
and/or acceptance of the systems and products that comprise Intevacs backlog for revenue; legal
proceedings; and internal controls. Intevacs actual results may differ materially from the results
discussed in the forward-looking statements for a variety of reasons, including those set forth
under Risk Factors and in other documents filed from time to time with the Securities and
Exchange Commission, including Intevacs Annual Report on Form 10-K filed in March 2008, Form
10-Qs and Form 8-Ks.
Overview
Intevac provides manufacturing equipment and solutions to the hard disk drive and
semiconductor industries as well as sensitive electro-optical devices used in high-performance
digital cameras for military and commercial applications. Intevacs customers and potential
customers include manufacturers of hard disk drives, semiconductor chips and wafers, and liquid
crystal displays, as well as medical, scientific and security companies and the U.S. government and
its contractors. Intevac reports two segments: Equipment and Intevac Photonics. Effective in the
second quarter of 2008, Intevac renamed the Imaging Instrumentation segment to Intevac Photonics.
Product development and manufacturing activities occur in North America and Asia. Intevacs
equipment and service products are highly technical and, with the exception of Japan, are sold
primarily through a direct sales force.
Intevacs results are driven primarily by worldwide demand for hard disk drives, which in turn
depends on end-user demand for personal computers, enterprise data storage, streaming video,
personal audio and video players and video game platforms. Intevacs business is subject to
cyclical industry conditions, as demand for manufacturing equipment and services can change
depending on supply and demand for hard disk drives, chips, and other electronic devices, as well
as other factors, such as global economic conditions and technological advances in fabrication
processes. Intevac believes it entered into a cycle of depressed sales in early 2008.
The following table presents certain significant measurements for the three and six months
ended June 28, 2008 and June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 28, |
|
June 30, |
|
% |
|
June 28, |
|
June 30, |
|
% |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
(in thousands, except percentages) |
Net revenues |
|
$ |
32,132 |
|
|
$ |
72,105 |
|
|
|
(55.4 |
)% |
|
$ |
65,307 |
|
|
$ |
148,479 |
|
|
|
(56.0 |
)% |
Gross margin |
|
$ |
13,133 |
|
|
$ |
30,827 |
|
|
|
(57.4 |
)% |
|
$ |
28,444 |
|
|
$ |
63,609 |
|
|
|
(55.3 |
)% |
Gross margin percent |
|
|
40.9 |
% |
|
|
42.8 |
% |
|
|
(1.9 |
)% |
|
|
43.6 |
% |
|
|
42.8 |
% |
|
|
0.8 |
% |
Net income (loss) |
|
$ |
(937 |
) |
|
$ |
11,552 |
|
|
|
(108.1 |
)% |
|
$ |
626 |
|
|
$ |
21,397 |
|
|
|
(97.1 |
)% |
Earnings (loss) per
diluted share |
|
$ |
(0.04 |
) |
|
$ |
0.52 |
|
|
|
(107.7 |
)% |
|
$ |
0.03 |
|
|
$ |
0.97 |
|
|
|
(96.9 |
)% |
Net sales decreased during the second quarter and first six months of fiscal 2008 primarily
due to lower equipment sales to disk manufacturers due to slowing worldwide demand, partially
offset by increased imaging sales. During the first half of 2008, a major disk manufacturer
redeployed legacy Intevac equipment which had previously been decommissioned instead of purchasing
new equipment.
18
Net income for the second quarter and the first six months of fiscal 2008 decreased compared
to the same periods in the prior year due to lower net sales, partially offset by lower operating
expenses. The decrease in operating expenses was principally due to continuing focus on operating
efficiency and cost controls.
Intevac®, LIVAR®, D-STAR®, Lean
Etchtm, 200 Lean®, AccuLubertm,
ExamineRtm, and MOSIR®, among others, are our trademarks.
Results of Operations
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 28, |
|
|
June 30, |
|
|
% |
|
|
June 28, |
|
|
June 30, |
|
|
% |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
(in thousands, except percentages) |
|
Equipment |
|
$ |
25,730 |
|
|
$ |
68,519 |
|
|
|
(62.4 |
)% |
|
$ |
52,703 |
|
|
$ |
140,965 |
|
|
|
(62.6 |
)% |
Intevac Photonics |
|
|
6,402 |
|
|
|
3,586 |
|
|
|
78.5 |
% |
|
|
12,604 |
|
|
|
7,514 |
|
|
|
67.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
32,132 |
|
|
$ |
72,105 |
|
|
|
(55.4 |
)% |
|
$ |
65,307 |
|
|
$ |
148,479 |
|
|
|
(56.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues consist primarily of sales of equipment used to manufacture thin-film disks,
related equipment and system components, flat panel equipment, technology license fees, contract
research and development related to the development of electro-optical sensors, cameras and systems
and low light imaging products.
Equipment revenues for the three and six months ended June 28, 2008 decreased over the same
periods in the prior year as a result of lower sales of disk sputtering systems, disk equipment
technology upgrades and spare parts. During the second quarter of fiscal 2008, Intevac recognized
revenue on the initial Gen II 200 Lean system, Intevacs next-generation disk sputtering system.
Intevac recognized revenue on four 200 Lean systems in the three months ended June 28, 2008 as
compared to twelve 200 Lean systems in the three months ended June 30, 2007. Intevac recognized
revenue on six 200 Lean systems in the six months ended June 28, 2008 as compared to twenty-five
200 Lean systems in the six months ended June 30, 2007. Intevac expects Equipment revenues in the
second half of 2008 will be significantly lower than the comparable period of 2007, due to a
significant reduction in revenue from technological upgrades and spare parts.
Intevac Photonics revenues for the three and six months ended June 28, 2008 increased over
the same periods in the prior year which was the result of increased contract research and
development work and product sales. Intevac Photonics revenues for the three months ending June 28,
2008 consisted of $4.0 million of research and development contract revenue and $2.4 million of
product sales as compared $2.5 million of research and development contract revenue and $1.1
million of product sales for the three months ended June 30, 2007. Intevac Photonics revenues for
the six months ending June 28, 2008 consisted of $8.2 million of research and development contract
revenue and $4.4 million of product sales as compared $5.3 million of research and development
contract revenue and $2.2 million of product sales for the six months ended June 30, 2007. The
increase in product revenues for all periods presented resulted from higher sales of digital night
vision camera modules and commercial products. Product revenue included contributions from DeltaNu
and Creative Display Systems, both of which were acquired in 2007. The increase in contract
research and development revenue was the result of a higher volume of contracts and incremental
revenue generated from contract close-outs. Substantial growth in future Intevac Photonics
revenues is dependent on proliferation of Intevacs technology into major military weapons
programs, the ability to obtain export licenses for foreign customers, obtaining production
subcontracts for these programs, and development and sale of commercial products.
Intevacs backlog of orders at June 28, 2008 was $27.7 million, as compared to $34.2 million
at December 31, 2007 and $57.5 million at June 30, 2007. The $27.7 million of backlog at June 28,
2008 consisted of $21.5 million of Equipment backlog and $6.2 million of Intevac Photonics backlog.
Backlog at June 28, 2008 includes four 200 Lean
19
systems, compared to two at December 31, 2007 and
four at June 30, 2007. Lower backlog at June 28, 2008 compared to June 30, 2007 is due to a
significant reduction in orders for technological upgrades and spare parts.
International sales decreased by 60.9% to $24.7 million for the three months ended June 28,
2008 from $63.2 million for the three months ended June 30, 2007 and by 61.4% to $51.1 million for
the six months ended June 28, 2008 from $132.5 million for the six months ended June 30, 2007.
International revenues include products shipped to overseas operations of U.S. companies. The
decrease in international sales was primarily due to a decrease in net revenues from disk
sputtering systems, disk equipment technology upgrades and spare parts. Substantially all of
Intevacs international sales are to customers in Asia. International sales constituted 77% of net
revenues for the three months ended June 28, 2008 and 88% of net revenues for the three months
ended June 30, 2007. International sales constituted 78% of net revenues for the six months ended
June 28, 2008 and 89% of net revenues for the six months ended June 30, 2007.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 28, |
|
June 30, |
|
% |
|
June 28, |
|
June 30, |
|
% |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
(in thousands, except percentages) |
Equipment gross profit |
|
$ |
10,898 |
|
|
$ |
29,433 |
|
|
|
(63.0 |
)% |
|
$ |
23,606 |
|
|
$ |
60,778 |
|
|
|
(61.2 |
)% |
% of Equipment net
revenues |
|
|
42.4 |
% |
|
|
43.0 |
% |
|
|
(0.6 |
)% |
|
|
44.8 |
% |
|
|
43.1 |
% |
|
|
1.67 |
% |
Intevac Photonics
gross profit |
|
$ |
2,235 |
|
|
$ |
1,394 |
|
|
|
60.3 |
% |
|
$ |
4,838 |
|
|
$ |
2,831 |
|
|
|
70.9 |
% |
% of Intevac
Photonics net revenues |
|
|
34.9 |
% |
|
|
38.9 |
% |
|
|
(4.0 |
)% |
|
|
38.4 |
% |
|
|
37.7 |
% |
|
|
0.7 |
% |
Total gross profit |
|
$ |
13,133 |
|
|
$ |
30,827 |
|
|
|
(57.4 |
)% |
|
$ |
28,444 |
|
|
$ |
63,609 |
|
|
|
(55.3 |
)% |
% of net revenues |
|
|
40.9 |
% |
|
|
42.8 |
% |
|
|
(1.9 |
)% |
|
|
43.6 |
% |
|
|
42.8 |
% |
|
|
0.8 |
% |
Cost of net revenues consists primarily of purchased materials and costs attributable to
contract research and development, and also includes fabrication, assembly, test and installation
labor and overhead, customer-specific engineering costs, warranty costs, royalties, provisions for
inventory reserves and scrap. Cost of net revenues for the three and six months ended June 28, 2008
included $204,000 and $453,000, respectively, of equity-based compensation expense. Cost of net
revenues for the three and six months ended June 30, 2007 included $189,000 and $362,000,
respectively, of equity-based compensation expense.
Equipment gross profit was 42.4% in the three months ended June 28, 2008 compared to 43.0% in
the three months ended June 30, 2007 and improved to 44.8% in the six months ended June 28, 2008
from 43.1% in the six months ended June 30, 2007. Fluctuations in Equipment gross profit in
absolute dollars for the three and six months ended June 28, 2008 to the comparable 2007 periods
were due primarily to reduced revenues, lower factory absorption, and product mix, partially offset
by cost reduction programs. Higher Equipment gross profit as a percentage of net revenues for the
first six months of fiscal 2008 as compared to the first six months of fiscal 2007 was due
primarily to product mix. Gross profit for the Equipment segment in absolute dollars and as a
percentage of net revenues in 2008 is expected to be lower than in 2007, primarily as a result of a
reduction in volume. Gross profit in the Equipment segment will vary depending on a number of
additional factors, including product mix, product cost, system configuration and pricing, factory
utilization, and provisions for excess and obsolete inventory.
Intevac Photonics gross profit was 34.9% in the three months ended June 28, 2008 compared to
38.9% in the three months ended June 30, 2007 and improved to 38.4% in the six months ended June
28, 2008 from 37.7% in the six months ended June 30, 2007. Fluctuations in gross profit reflected
increased operating costs from recently-acquired businesses, yield and product mix. Lower Intevac
Photonics gross profit as a percentage of net revenues in the second quarter of fiscal 2008 as
compared to the second quarter of fiscal 2007 reflected unabsorbed factory costs in Creative
Display Systems which was acquired in the fourth quarter of fiscal 2007. Higher Intevac Photonics
gross profit for the first six months of fiscal 2008 as compared to the first six months of fiscal
2007 reflected changes in product mix to
20
higher-margin product shipments. Gross profit in absolute
dollars and as a percentage of net revenues for the Intevac Photonics segment in 2008 is expected
to improve over 2007, primarily as a result of the projected increase in product sales, which
typically carry higher gross margins.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 28, |
|
June 30, |
|
% |
|
June 28, |
|
June 30, |
|
% |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
(in thousands, except percentages) |
Research and
development expense |
|
$ |
8,418 |
|
|
$ |
9,648 |
|
|
|
(12.8 |
)% |
|
$ |
17,806 |
|
|
$ |
21,840 |
|
|
|
(18.5 |
)% |
% of net revenues |
|
|
26.2 |
% |
|
|
13.4 |
% |
|
|
|
|
|
|
27.3 |
% |
|
|
14.7 |
% |
|
|
|
|
Research and development expense consists primarily of prototype materials, salaries and
related costs of employees engaged in ongoing research, design and development activities for disk
sputtering equipment, semiconductor equipment and imaging products. Research and development
expense for the three and six months ended June 28, 2008 included $463,000 and $929,000,
respectively, of equity-based compensation expense. Research and development expense for the three
and six months ended June 30, 2007 included $448,000 and $950,000, respectively, of equity-based
compensation expense.
Research and development spending decreased in both Equipment and in Intevac Photonics during
the three and six months ended June 28, 2008 as compared to same periods in 2007. The decrease in
Equipment spending was due primarily to a reduction in charges to development projects for
purchased parts and other materials, and, to a lesser extent, a reduction in accruals for bonus and
employee profit sharing plans. The decrease in Intevac Photonics research and development spending
was due primarily to labor being directed to research and development contracts, under which the
labor is reflected as cost of net revenues. Engineering headcount increased from 133 at June 30,
2007 to 152 at June 28, 2008. Research and development spending is expected to decrease in 2008 due
primarily to a reduction in expenditures related to the initial development of Intevacs Lean
EtchTM product line.
Research and development expenses do not include costs of $2.4 million and $4.9 million for
the three and six months ended June 28, 2008, respectively, which are related to contract research
and development and included in cost of net revenues. Research and development expenses do not
include costs of $1.4 million and $2.9 million for the three and six months June 30, 2007,
respectively, which are related to contract research and development and included in cost of net
revenues.
Selling, general and administrative.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 28, |
|
June 30, |
|
% |
|
June 28, |
|
June 30, |
|
% |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
(in thousands, except percentages) |
Selling, general
and administrative
expense |
|
$ |
7,413 |
|
|
$ |
7,839 |
|
|
|
(5.4 |
)% |
|
$ |
14,477 |
|
|
$ |
15,352 |
|
|
|
(5.7 |
)% |
% of net revenues |
|
|
23.1 |
% |
|
|
10.9 |
% |
|
|
|
|
|
|
22.2 |
% |
|
|
10.3 |
% |
|
|
|
|
Selling, general and administrative expense consists primarily of selling, marketing, customer
support, financial and management costs and also includes production of customer samples, travel,
liability insurance, legal and professional services and bad debt expense. All domestic sales and
international sales of disk sputtering products in Asia, with the exception of Japan, are typically
made by Intevacs direct sales force, whereas sales in Japan of disk sputtering products and other
products are typically made by Intevacs Japanese distributor, Matsubo, who provides services such
as sales, installation, warranty and customer support. Intevac also has subsidiaries in Singapore
and in Hong Kong, along with field offices in Japan, Malaysia, Korea and Shenzhen, China to support
its equipment
21
customers in Asia. Selling, general and administrative expense for the three and six
months ended June 28, 2008 included $976,000 and $1.9 million, respectively, of equity-based
compensation expense. Selling, general and administrative expense for the three and six months
ended June 30, 2007 included $748,000 and $1.4 million, respectively, of equity-based compensation
expense.
The decrease in selling, general and administrative spending in the three and six months ended
June 28, 2008 as compared to the same periods in the prior year was primarily the result of
decreases in costs related to business development, customer service and support in the Equipment
segment, a reduction in legal expenses associated with the Unaxis litigation and a reduction in
accruals for bonus and employee profit sharing plans, partially offset by the added expense
associated with the two companies acquired in 2007. Intevacs selling, general and administrative
headcount increased from 95 at June 30, 2007 to 119 at June 28, 2008. Selling, general and
administrative expenses are expected to increase in 2008 over the amount spent in 2007 due
primarily to a projected increase in costs related to customer service and support for the
Equipment segment, increased operating costs from recently-acquired businesses, and the addition of
key business development personnel in the Intevac Photonics segment. This will be partially offset
by lower provisions for employee profit sharing and bonus plans, resulting from Intevacs
expectations of losses in 2008.
Interest income and other, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 28, |
|
June 30, |
|
% |
|
June 28, |
|
June 30, |
|
% |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
(in thousands, except percentages) |
Interest income and
other, net |
|
$ |
806 |
|
|
$ |
1,538 |
|
|
|
(47.6 |
)% |
|
$ |
2,217 |
|
|
$ |
2,858 |
|
|
|
(22.4 |
)% |
Interest income and other, net consists primarily of interest and dividend income on
investments and foreign currency gains and losses. The decrease in the three and six months ended
June 28, 2008 was driven by a lower average balance of investments and foreign currency losses.
Interest income and other, net is expected to decrease in 2008 due to the sale of a real estate
investment in the fourth quarter of 2007 and a reduction in interest income due primarily to a
reduction in interest rates.
Provision for income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 28, |
|
June 30, |
|
% |
|
June 28, |
|
June 30, |
|
% |
|
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
(in thousands, except percentages) |
Provision (benefit)
for income taxes |
|
$ |
(955 |
) |
|
$ |
3,326 |
|
|
|
(128.7 |
)% |
|
$ |
(2,248 |
) |
|
$ |
7,878 |
|
|
|
(128.5 |
)% |
Intevacs effective income tax rate for the three and six months ended June 28, 2008 was 50.5%
and 138.6%, respectively. Intevacs effective income tax rate for the three and six months ended
June 30, 2007 was of 22.4% and 26.9%, respectively. The effective tax rate differs from the
applicable statutory rates due primarily to the utilization of deferred and current credits, the
effect of permanent differences and the geographical composition of Intevacs worldwide earnings.
The quarterly effective rate is computed by separately applying an estimated U.S. tax rate to U.S.
earnings and an estimated foreign tax to foreign earnings to arrive at an overall effective tax
rate for the quarter in accordance with FASB Interpretation No. 18 Accounting for Income Taxes in
Interim Periods, an interpretation of APB opinion No. 28. Intevacs effective tax rate is highly
dependent on the availability of tax credits and the geographic composition of Intevacs worldwide
earnings.
22
Liquidity and Capital Resources
At June 28, 2008, Intevac had $116.1 million in cash, cash equivalents, and investments
compared to $140.7 million at December 31, 2007. During the first six months of 2008, cash and cash
equivalents decreased by $1.7 million, due primarily to the cash used by operating activities,
purchase of fixed assets and a scheduled payment to the owners of DeltaNu, LLC, which was only
partially offset by the net sale of investments.
Operating activities used cash of $20.0 million in the first six months of 2008 and provided
cash of $17.3 million during the six months ended June 30, 2007. The decrease in cash provided by
operating activities was due primarily to the reduction in net income in the first six months of
2008, an increase in accounts receivable, and a decrease in accrued payroll during the first six
months of 2008.
Accounts receivable totaled $29.1 million at June 28, 2008, compared to $14.1 million at
December 31, 2007. The increase of $15.0 million in the receivable balance was due primarily to the
200 Lean systems recognized as revenue in the second quarter. Total net inventories increased to
$25.7 million at June 28, 2008, compared to $22.1 million at December 31, 2007. Accounts payable
decreased by $1.5 to $6.2 million at June 28, 2008. Accrued payroll and related liabilities
decreased by $3.6 million during the six months ended June 28, 2008 due primarily to lower bonuses
and profit sharing payments. Other accrued liabilities declined by $542,000 to $4.9 million at June
28, 2008. Customer advances decreased by $482,000 during the first six months of 2008, as
liquidations related to revenue recognition were slightly higher than new advances billed to
Intevacs customers.
Investing activities in the first six months of 2008 generated cash of $19.2 million. Proceeds
from sales and maturities of investments, net of purchases, totaled $21.5 million. Capital
expenditures for the six months ended June 28, 2008 were $2.3 million.
Financing activities in the first six months of 2008 used cash of $1.1 million. Intevac
generated $940,000 during the six months ended June 28, 2008 from the sale of Intevac common stock
to Intevacs employees through Intevacs employee benefit plans. Intevac made a scheduled payment
of $2.0 million to the owners of DeltaNu, LLC, which Intevac acquired in the first quarter of 2007.
Subsequent to the second fiscal quarter of 2008, Intevac acquired certain assets of OC
Oerlikon Balzers Ltd. for an undisclosed amount. For additional information, see Note 14 of Notes
to Condensed Consolidated Financial Statements.
Intevac has generated operating income for the last three fiscal years, after incurring annual
operating losses from 1998 through 2004. Intevac currently expects to incur an operating loss in
2008, due to the reduction in Equipment revenue as compared to 2007.
As of June 28, 2008, Intevac had $78 million par value invested in auction rate securities
(ARS). During the quarter ended March 29, 2008, Intevac recorded an unrealized loss of $1.6
million due to the failure of the auctions associated with these securities. Intevac has determined
this reduction in fair value to be temporary. Refer to Note 8 of Notes to Condensed Consolidated
Financial Statements and Item 1A Risk Factors for further details regarding Intevacs investments
in ARS.
Intevac has entered into a line of credit with Citigroup Global Markets Inc. under which
approximately $20 million is available. Intevac intends to use this line to help secure its ability
to fund cash requirements until Intevac is able to liquidate its ARS holdings.
Intevac believes that its existing cash, cash equivalents, short-term investments and credit
facility will be sufficient to meet its cash requirements for the foreseeable future. Intevac
intends to undertake approximately $5 to $7 million in capital expenditures during the remainder of
2008.
23
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States of America (US GAAP) requires management to
make judgments, assumptions and estimates that affect the amounts reported. Intevacs significant
accounting policies are described in Note 2 to the consolidated financial statements included in
Item 8 of Intevacs Annual Report on Form 10-K. Certain of these significant accounting policies
are considered to be critical accounting policies, as defined below.
A critical accounting policy is defined as one that is both material to the presentation of
Intevacs financial statements and requires management to make difficult, subjective or complex
judgments that could have a material
effect on Intevacs financial conditions and results of operations. Specifically, critical
accounting estimates have the following attributes: 1) Intevac is required to make assumptions
about matters that are highly uncertain at the time of the estimate; and 2) different estimates
Intevac could reasonably have used, or changes in the estimate that are reasonably likely to occur,
would have a material effect on Intevacs financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be determined with
certainty. Intevac bases its estimates on historical experience and on various other assumptions
believed to be applicable and reasonable under the circumstances. These estimates may change as new
events occur, as additional information is obtained and as Intevacs operating environment changes.
These changes have historically been minor and have been included in the consolidated financial
statements as soon as they become known. In addition, management is periodically faced with
uncertainties, the outcomes of which are not within its control and will not be known for prolonged
periods of time. Many of these uncertainties are discussed in the section below entitled Risk
Factors. Based on a critical assessment of Intevacs accounting policies and the underlying
judgments and uncertainties affecting the application of those policies, management believes that
Intevacs consolidated financial statements are fairly stated in accordance with US GAAP, and
provide a meaningful presentation of Intevacs financial condition and results of operation.
For further information about Intevacs critical accounting policies, see the discussion of
critical accounting policies in Intevacs 2007 Form 10-K. Management believes that there has been
no significant change during the six months ended June 28, 2008 to the items identified as critical
accounting policies in Intevacs 2007 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk. Intevacs exposure to market risk for changes in interest rates relates
primarily to its investment portfolio. Intevac does not use derivative financial instruments in
Intevacs investment portfolio. Intevac places its investments with high quality credit issuers
and, by policy, limit the amount of credit exposure to any one issuer. Investments typically
consist of commercial paper, auction rate securities and debt instruments issued by the U.S.
government and its agencies.
24
The table below presents principal amounts and related weighted-average interest rates by year
of maturity for Intevacs investment portfolio at June 28, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
2008 |
|
2009 |
|
2010 |
|
Beyond |
|
Total |
|
Value |
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate amounts |
|
$ |
13,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,917 |
|
|
$ |
13,917 |
|
Weighted-average rate |
|
|
2.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate amounts |
|
$ |
11,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,948 |
|
|
$ |
11,991 |
|
Weighted-average rate |
|
|
4.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate amounts |
|
|
|
|
|
$ |
2,000 |
|
|
|
|
|
|
|
|
|
|
$ |
2,000 |
|
|
$ |
2,000 |
|
Weighted-average rate |
|
|
|
|
|
|
4.43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
76,195 |
|
|
$ |
76,195 |
|
|
$ |
76,195 |
|
Weighted-average rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.13 |
% |
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
25,865 |
|
|
$ |
2,000 |
|
|
|
|
|
|
$ |
76,195 |
|
|
$ |
104,060 |
|
|
$ |
104,103 |
|
In the first six months of 2008, Intevacs Auction Rate Securities have experienced multiple
failed auctions. Based on Intevacs valuation model and an analysis of other-than-temporary
impairment factors, the Company wrote down its ARS investments to an estimated fair value of $76.8
million at March 29, 2008. This write-down resulted in a temporary impairment charge of $1.6
million, which is reflected as an unrealized loss within other comprehensive income.
Management reviews impairments associated with the above in accordance with Emerging Issues Task
Force (EITF) 03-01 and FSP SFAS 115-1 and 124-1, The Meaning of Other-Than-Temporary-Impairment
and Its Application to Certain Investments, to determine the classification of the impairment as
temporary or other-than-temporary. A temporary impairment charge results in an unrealized loss
being recorded in the other comprehensive income component of stockholders equity. Such an
unrealized loss does not reduce net income for the applicable accounting period because the loss is
not viewed as other-than-temporary.
Foreign exchange risk. From time to time, Intevac enters into foreign currency forward
exchange contracts to economically hedge certain of Intevacs anticipated foreign currency
transaction, translation and re-measurement exposures. The objective of these contracts is to
minimize the impact of foreign currency exchange rate movements on Intevacs operating results. At
June 28, 2008, Intevac had no foreign currency forward exchange contracts.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures.
Intevac maintains a set of disclosure controls and procedures that are designed to ensure that
information relating to Intevac, Inc. required to be disclosed in periodic filings under the
Securities Exchange Act of 1934, or Exchange Act, is recorded, processed, summarized and reported
in a timely manner under the Exchange Act. In connection with the filing of this Form 10-Q for the
quarter ended June 28, 2008, as required under Rule 13a-15(b) of the Exchange Act, an evaluation
was carried out under the supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of Intevacs disclosure
controls and procedures as of the end of the period covered by this quarterly report. Based on this
evaluation, Intevacs Chief Executive Officer and Chief Financial Officer concluded that Intevacs
disclosure controls and procedures were effective as of June 28, 2008.
Attached as exhibits to this Quarterly Report are certifications of the CEO and the CFO, which
are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended
(Exchange Act). This Controls and Procedures section includes the information concerning the
controls evaluation referred to in the certifications,
25
and it should be read in conjunction with
the certifications for a more complete understanding of the topics presented.
Definition of Disclosure Controls
Disclosure Controls are controls and procedures designed to ensure that information required
to be disclosed in Intevacs reports filed under the Exchange Act, such as this Quarterly Report,
is recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms. Disclosure Controls are also designed to ensure that
such information is accumulated and communicated to Intevacs management, including the CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure. Intevacs Disclosure
Controls include components of Intevacs internal control over financial reporting, which consists
of control processes designed to provide reasonable assurance regarding the reliability of
Intevacs financial reporting and the preparation of financial statements in accordance with
generally accepted accounting principles in the U.S. To the extent that components of Intevacs
internal control over financial reporting are included within Intevacs Disclosure Controls, they
are included in the scope of Intevacs quarterly controls evaluation.
Limitations on the Effectiveness of Controls
Intevac management, including the CEO and CFO, do not expect that Intevacs Disclosure
Controls or its internal control over financial reporting will prevent all error and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also
be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is based in part on
certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions or deterioration in the degree of
compliance with policies or procedures. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.
Changes in internal controls over financial reporting
There were no changes in Intevacs internal controls over financial reporting that occurred
during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or
are reasonably likely to materially affect, Intevacs internal control over financial reporting.
26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Patent Infringement Complaint against Unaxis
As previously described, on July 7, 2006, Intevac filed a patent infringement lawsuit against
Unaxis USA, Inc., a wholly owned subsidiary of OC Oerlikon Balzers Ltd. (Oerlikon) and its
affiliates, Unaxis Balzers AG and Unaxis Balzers, Ltd. in the United States District Court for the
Central District of California. On July 14, 2008, as part of the acquisition of certain assets of
Oerlikon, Intevac entered into a settlement agreement which dismissed all claims in the litigation.
Other Legal Matters
From time to time, Intevac is involved in claims and legal proceedings that arise in the
ordinary course of business. We expect that the number and significance of these matters will
increase as our business expands. Any claims or proceedings against us, whether meritorious or not,
could be time consuming, result in costly litigation, require significant amounts of management
time, result in the diversion of significant operational resources, or require us to enter into
royalty or licensing agreements which, if required, may not be available on terms favorable to us
or at all. We are not presently party to any lawsuit or proceeding that, in our opinion, is likely
to seriously harm our business.
Item 1A. Risk Factors
The industries we serve are cyclical, volatile and unpredictable.
The majority of our revenue is derived from the sale of equipment used to manufacture
commodity products such as disk drives and semiconductors. This subjects us to business cycles, the
timing, length and volatility of which can be difficult to predict. When demand for commodity
products exceeds capacity, then demand for new capital equipment such as ours tends to be
amplified. Conversely, when supply of commodity products exceeds demand, then demand for new
capital equipment such as ours tends to be depressed. For example, sales of systems for magnetic
disk production were severely depressed from mid-1998 until mid-2003 and grew rapidly from 2004
through 2006. The number of new systems delivered or scheduled for delivery in the second half of
2007 was significantly lower than the number of systems delivered in the first half of the year,
and we are projecting that new system shipments will be significantly lower in 2008 than 2007. We
cannot predict with any certainty when these cycles will begin or end.
Our equipment represents only a portion of the capital expenditure that our customers incur
when they upgrade or add production capacity. Accordingly, our customers generally commit to make
large capital expenditures, far in excess of the cost of our systems alone, when they decide to
purchase our systems. The magnitude of these capital expenditures requires our customers to have
access to large amounts of capital. The magnetic disk and semiconductor manufacturing industries
have made significant additions to their production capacity in the last few years. Our customers
may not be willing or able to continue this level of capital investment, especially during a
downturn in the overall economy, the hard disk drive industry, or the semiconductor industry.
We must effectively manage our resources and production capacity to meet rapidly changing
demand. Our business experiences rapid growth and contraction, which stresses our infrastructure,
internal systems and managerial resources. During periods of increasing demand for our products, we
must have sufficient manufacturing capacity and inventory to meet customer demand; attract, retain
and motivate a sufficient number of qualified individuals; and effectively manage our supply chain.
During periods of decreasing demand for our products, we must be able to align our cost structure
with prevailing market conditions; motivate and retain key employees and effectively manage our
supply chain.
27
Sales of our equipment are primarily dependent on our customers upgrade and capacity expansion
plans and whether our customers select our equipment.
We have no control over our customers upgrade and capacity expansion plans, and we cannot be
sure they will select, or continue to select, our equipment when they upgrade or expand their
capacity. The sales cycle for our equipment systems can be a year or longer, involving individuals
from many different areas of the Company and numerous product presentations and demonstrations for
our prospective customers. Our sales process also commonly includes production of samples,
customization of our product and installation of evaluation systems in the factories of our
prospective customers. We do not enter into long-term contracts with our customers, and until an
order is actually submitted by a customer there is no binding commitment to purchase our systems.
Intevac Photonics business is also subject to long sales cycles because many of its products, such
as our military imaging products, often must be designed into the customers end products, which
are often complex state-of-the-art products. These development cycles are often multi-year, and our
sales are contingent on our customers successfully integrating our product into their product,
completing development of their product and then obtaining production orders for their product from
the U.S. government or its allies.
Sales of new manufacturing systems are also dependent on obsolescence and replacement of the
installed base of our customers existing equipment with newer, more capable equipment. If upgrades
are developed that extend the useful life of the installed base of legacy systems, then we tend to
sell more upgrade products for the legacy systems and fewer new systems, which can significantly
reduce total revenue. For example, during 2007 and 2008 some of our 200 Lean customers decided to
use legacy systems for the production of first generation perpendicular media, which delayed the
replacement of such legacy systems with new 200 Lean systems.
Our 200 Lean customers also experience competition from companies that produce alternative
storage technologies like flash memory, which offer smaller size, lower power consumption and more
rugged designs. If alternative technologies, such as flash memory, replace hard disk drives as a
primary method of digital storage, then demand for our hard disk manufacturing products would
decrease.
We are exposed to risks associated with a highly concentrated customer base.
Historically, a significant portion of our revenue in any particular period has been
attributable to sales of our disk sputtering systems to a limited number of customers. In 2007, one
of our customers accounted for 31% of total revenues, and four customers in aggregate accounted for
90% of total revenues. The same four customers, in aggregate, accounted for 31% of our net accounts
receivable at December 31, 2007. This concentration of customers can lead to extreme variability
in revenue and financial results from period to period. For example, over the last eight quarters,
our revenues per quarter have fluctuated between $16.8 million and $95.9 million.
Industry consolidation can limit the number of potential customers for our products. For
example, Seagate acquired Maxtor in 2006 and Western Digital acquired Komag in 2007. The
concentration of our customer base may enable our customers to demand pricing and other terms
unfavorable to Intevac, and makes us more vulnerable to changes in demand by a given customer.
Orders from a relatively limited number of manufacturers have accounted for, and will likely
continue to account for, a substantial portion of our revenues. The loss of one of these large
customers, or delays in purchasing by them, could have a material and adverse effect on our
revenues.
Our growth depends on development of technically advanced new products and processes.
We have invested heavily, and continue, to invest, in the development of new products,
especially our new Lean Etch system. Our success in developing and selling new products depends
upon a variety of factors, including our ability to: predict future customer requirements, make
technological advances, achieve a low total cost of ownership for our products, introduce new
products on schedule, manufacture products cost-effectively including transitioning production to
volume manufacturing; commercialize and attain customer acceptance of our products; and achieve
acceptable and reliable performance of our new products in the field. Our new product decisions and
development commitments must anticipate continuously evolving industry requirements significantly
in advance of sales. In addition we must successfully expand into new or related markets,
including the semiconductor market for
28
our Lean Etch system, correctly assessing the size of the
markets, developing cost effective products to address the markets, and establishing effective
sales and support of the new products.
Rapid technological change in the hard disk drive, semiconductor and imaging markets require
us to rapidly develop new technically advanced products. Our future success depends in part on our
ability to develop and offer new products with improved capabilities and to continue to enhance our
existing products. If new products have reliability or quality problems, our performance may be
impacted by reduced orders, higher manufacturing costs, delays in acceptance and payment for new
products and additional service and warranty expenses.
Our operating results fluctuate significantly from quarter to quarter, which can lead to
volatility in the price of our common stock.
Over the last eight quarters, our quarterly revenues has fluctuated between $16.8 million and
$95.9 million and our operating income (loss) as a percentage of revenues has fluctuated between
approximately (42.3%) and 23.2% of revenues. Over the same period, the price of our common stock
has fluctuated between $10.14 and $30.57 per share.
We anticipate that our revenues, operating margins and common stock price will continue to
fluctuate for a variety of reasons, including: (1) changes in the demand, due to seasonality,
cyclicality and other factors in the markets, for computer systems, storage subsystems and consumer
electronics containing disks our customers produce with our systems; (2) delays or problems in the
introduction and acceptance of our new products, or delivery of existing products; (3) timing of
orders, acceptance of new systems by our customers or cancellation of those orders; (4) new
products, services or technological innovations by our competitors or us; (5) changes in our
manufacturing costs and operating expense; (6) changes in general economic, political, stock market
and industry conditions; and (7) failure of our operating results to meet the expectations of
investment research analysts or investors.
Any of these, or other factors, could lead to volatility and/or a rapid change in the trading
price of our common shares. In the past, securities class action litigation has been instituted
against companies following periods of volatility in the market price of their securities. Any such
litigation, if instituted against Intevac could result in substantial costs and diversion of
management.
The liquidity of our auction rate securities is impaired, which could impact our ability to meet
cash requirements and require additional debt financing.
At June 28, 2008, we held $78 million of auction rate securities. The market for these
securities has historically been highly liquid, even though the auction rate securities that we
hold have underlying maturities ranging from 23 to 40 years. The liquidity was achieved through
auctions, which occurred every 7 or 28 days depending on the security, in which the interest paid
on each security was reset to current market rates. We never intended to hold these securities to
maturity, but rather to use the auction feature to sell the securities as needed to provide
liquidity. Since February 2008, all of these auction rate securities have failed auction. The
auction rate securities will continue to be illiquid until a successful auction process is
reinstated, they are restructured into a more liquid security, or a buyer is found outside of the
auction process. We do not know when, or if, this will occur. All of the auction rate securities
held by us are student loan structured issues, originated under the U.S. Department of Educations
Federal Family Education Loan Program with principal and interest 97% 98% reinsured by the U.S.
Department of Education. All of the auction rate securities continue to be rated AAA, but there is
no assurance that AAA ratings will continue in the future. We have reclassified all of these
securities from short-term to long-term investments and recorded a temporary impairment charge of
$1.6 million. If: (1) the issuers of the auction rate securities are unable to successfully resume
auctions; or (2) the issuers do not redeem the auction rate securities; or (3) a liquid market for
the auction rate securities does not develop; or (4) the U.S. Department of Education fails to
support its guaranty of the obligations; or (5) these or any other valuation metrics or processes
change, then the Intevac may be required to further adjust the carrying value of the auction rate
securities and/or record an other-than-temporary impairment charge.
29
In order to increase its liquidity we entered into of credit with Citigroup Global Markets
Inc., secured by $58 million of our auction rate securities. At June 28, 2008, approximately $20
million of credit is available pursuant to the loan facility. If we are unable to maintain the line
of credit, or if the interest rate of the line of credit is prohibitive or the amount of the line
of credit is insufficient, we could experience difficulties in meeting its cash requirements until
the market for the auction rate securities becomes liquid again and we could have to seek
additional debt funding to finance its operations.
We operate in an intensely competitive marketplace and our competitors have greater resources than
we do.
In the market for our disk sputtering systems, we have experienced competition from
competitors such as Anelva Corporation, which is a subsidiary of Canon, which has sold substantial
numbers of systems worldwide. In the market for semiconductor equipment, we expect to experience
competition from competitors such as Applied Materials, LAM Research and Tokyo Electron, Ltd. In
the market for our military imaging products, we experience competition from companies such as ITT
Industries, Inc., Northrop Grumman Corporation and BAE. In the markets for our commercial imaging
products, we compete with companies such as Andor, E2V, Hamamatsu, Texas Instruments and Roper
Scientific for sensor and camera products, and with companies such as Ahura, B&W Tek, Horiba -
Jobin Yvon, InPhotonics, Ocean Optics, Renishaw, and Smiths Detection for portable Raman
spectrometer products. Our competitors have substantially greater financial, technical, marketing,
manufacturing and other resources than we do, especially in the semiconductor equipment market
where we have not previously offered a product. We cannot ensure that our competitors will not
develop enhancements to, or future generations of, competitive products that offer superior price
or performance features. Likewise, we cannot ensure that new competitors will not enter our markets
and develop such enhanced products. Moreover, competition for our customers is intense, and our
competitors have historically offered substantial pricing concessions and incentives to attract our
customers or retain their existing customers.
We may not be able to obtain export licenses from the U.S. government permitting delivery of our
products to international customers.
Many of our products, and especially Intevac Photonics products require, export licenses from
U.S. Government agencies under the Export Administration Act, the Trading with the Enemy Act of
1917, the Arms Export Act of 1976 and the International Traffic in Arms Regulations. This could
limit the potential market for some of our products. We can give no assurance that we will be
successful in obtaining all the licenses necessary to export our products. Recently, heightened
government scrutiny of export licenses for defense related products has resulted in lengthened
review periods for our license applications. Exports to countries, which are not considered by the
U.S. Government to be allies, are likely to be prohibited, and even sales to U.S. allies may be
limited. Failure to obtain export licenses or delays in obtaining, or revocation of previously
issued licenses would prevent us from selling the affected products outside the United States and
could subject us to fines or other penalties.
The Intevac Photonics business is dependent on U.S. government contracts, which are subject to
fixed pricing, immediate termination and a number of procurement rules and regulations.
We sell many of our imaging products and services directly to the U.S. government, as well as
to prime contractors for various U.S. government programs. Our revenues from government contracts
totaled $14.1 million, $10.2 million, and $6.9 million in 2007, 2006, and 2005, respectively.
Funding of multi-year government programs is subject to congressional appropriations, and there is
no guarantee that the U.S. government will make further appropriations. Sales to the U.S.
government and its prime contractors may also be affected by changes in procurement policies,
budget considerations and political developments in the United States or abroad. The loss of
funding for a government program would result in a loss of future revenues attributable to that
program. The influence of any of these factors, which are beyond our control, could negatively
impact our results of operations.
A significant portion of our U.S. government revenue is derived from fixed-price development
and production contracts. Under fixed-price contracts, unexpected increases in the cost to develop
or manufacture a product, whether due to inaccurate estimates in the bidding process, unanticipated
increases in material costs, reduced production volumes, inefficiencies or other factors, are borne
by us. We have experienced cost overruns in the past that have
30
resulted in losses on certain
contracts, and may experience additional cost overruns in the future. We are required to recognize
the total estimated impact of cost overruns in the period in which they are first identified. Such
cost overruns could have a material adverse effect on our results of operations.
Generally, government contracts contain provisions permitting termination, in whole or in
part, without prior notice at the governments convenience upon the payment of compensation only
for work done and commitments made at the time of termination. We cannot ensure that one or more of
the government contracts under which we, or our customers,
operate will not be terminated under these circumstances. Also, we cannot ensure that we, or our
customers, would be able to procure new government contracts to offset the revenues lost as a
result of any termination of existing contracts, nor can we ensure that we, or our customers, will
continue to remain in good standing as federal contractors.
As a U.S. government contractor we must comply with specific government rules and regulations
and are subject to routine audits and investigations by U.S. government agencies. If we fail to
comply with these rules and regulations, the results could include: (1) reductions in the value of
our contracts; (2) reductions in amounts previously billed and recognized as revenue; (3) contract
modifications or termination; (4) the assessment of penalties and fines; and (5) suspension or
debarment from government contracting or subcontracting for a period of time or permanently.
Changes to our effective tax rate affect our results of operations.
As a global company, we are subject to taxation in the United States and various other
countries. Significant judgment is required to determine and estimate worldwide tax liabilities.
Our future effective tax rate could be affected by: (1) changes in tax laws; (2) the allocation of
earnings to countries with differing tax rates; (3) changes in worldwide projected annual earnings
in current and future years, (4) accounting pronouncements; or (5) changes in the valuation of our
deferred tax assets and liabilities. Although we believes our tax estimates are reasonable, there
can be no assurance that any final determination will not be different from the treatment reflected
in our historical income tax provisions and accruals, which could result in additional payments by
Intevac.
Our success depends on international sales and the management of global operations.
In 2007, approximately 82% of our revenues came from regions outside the United States.
Substantially all of our international sales are to customers in Asia, which includes products
shipped to overseas operations of U.S. companies. We currently have manufacturing facilities in
California, Wyoming and Singapore and international customer support offices in Singapore, China,
Malaysia, Korea and Japan. We expect that international sales will continue to account for a
significant portion of our total revenue in future years. Certain of our suppliers are also
located outside the United States.
Managing our global operations presents challenges including, but not limited to, those
arising from: (1) global trade issues; (2) variations in protection of intellectual property and
other legal rights in different countries; (3) concerns of U.S. governmental agencies regarding
possible national commercial and/or security issues posed by growing manufacturing business in
Asia; (4) fluctuation of interest rates, raw material costs, labor and operating costs, and
exchange rates, including the weakening relative position of the U.S. dollar; (5) variations in the
ability to develop relationships with suppliers and other local businesses; (6) changes in the
laws and regulations of the United States, including export restrictions, and other countries, as
well as their interpretation and application; (7) the need to provide technical and spares support
in different locations; (8) political and economic instability; (9) cultural differences; (10)
varying government incentives to promote development; (11) shipping costs and delays; (12) adverse
conditions in credit markets; (13) variations in tariffs, quotas, tax codes and other market
barriers; and (14) barriers to movement of cash.
We must regularly assess the size, capability and location of our global infrastructure and
make appropriate changes to address these issues.
31
Our success is dependent on recruiting and retaining a highly talented work force.
Our employees are vital to our success, and our key management, engineering and other
employees are difficult to replace. We generally do not have employment contracts with our key
employees. Further, we do not maintain key person life insurance on any of our employees. The
expansion of high technology companies worldwide has increased demand and competition for qualified
personnel, and has made companies increasingly protective of prior employees. It may be difficult
for us to locate employees who are not subject to non-competition agreements and other
restrictions.
The majority of our U.S. operations are located in California where the cost of living and of
recruiting employees is high. Additionally, our operating results depend, in large part, upon our
ability to retain and attract qualified management, engineering, marketing, manufacturing, customer
support, sales and administrative personnel. Furthermore, we compete with industries, such as the
hard disk drive and semiconductor industries, for skilled employees. Failure to retain key
personnel, or to attract, assimilate or retain additional highly qualified employees to meet our
needs in the future, could have a material and adverse effect our business, financial condition and
results of operations.
We are dependent on certain suppliers for parts used in our products.
We are a manufacturing business. Purchased parts constitute the largest component of our
product cost. Our ability to manufacture depends on the timely delivery of parts, components and
subassemblies from suppliers. We obtain some of the key components and sub-assemblies used in our
products from a single supplier or a limited group of suppliers. If any of our suppliers fail to
deliver quality parts on a timely basis, we may experience delays in manufacturing, which could
result in delayed product deliveries, increased costs to expedite deliveries or develop alternative
suppliers, or require redesign of our products to accommodate alternative suppliers.
Our business depends on the integrity of our intellectual property rights
The success of our business depends upon the integrity of our intellectual property rights,
and we cannot ensure that: (1) any of our pending or future patent applications will be allowed or
that any of the allowed applications will be issued as patents or will issue with claims of the
scope we sought; (2) any of our patents will not be invalidated, deemed unenforceable, circumvented
or challenged; (3) the rights granted under our patents will provide competitive advantages to us;
(4) other parties will not develop similar products, duplicate our products or design around our
patents; or (5) our patent rights, intellectual property laws or our agreements will adequately
protect our intellectual property or competitive position.
From
time to time, we have received claims that we are infringing third parties intellectual
property rights or seeking to invalidate our rights. We cannot ensure that third parties will not
in the future claim that we have infringed current or future patents, trademarks or other
proprietary rights relating to our products. Any claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or require us to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us.
We could be involved in litigation.
From time to time we may be involved in litigation of various types, including litigation
alleging infringement of intellectual property rights and other claims. For example, in July 2006,
Intevac filed a patent infringement lawsuit against Unaxis USA, Inc. and its affiliates Unaxis
Balzers AG and Unaxis Balzers, Ltd. alleging infringement by Unaxis of a patent relating to our 200
Lean system. See Part II, Item I of this Form 10-Q for further information regarding this lawsuit,
which was dismissed in July 2008. Litigation is expensive, subjects us to the risk of significant
damages and requires significant management time and attention and could have a material and
adverse effect on our business, financial condition and results of operations.
Difficulties in integrating past or future acquisitions could adversely affect our business.
We have completed a number of acquisitions during our operating history. For example, in 2007,
we acquired
32
certain assets of DeltaNu, LLC and certain assets of Creative Display Systems, LLC. We
have spent and will likely continue to spend significant resources identifying and acquiring
businesses and in 2008 acquired certain assets of OC Oerlikon Balzers Ltd. Acquisitions involve
numerous risks including: (1) difficulties in integrating the operations, technologies and products
of the acquired companies; (2) the diversion of our managements attention from other business
concerns; and (3) the potential loss of key employees of the acquired companies. Failure to achieve
the anticipated benefits of these and any future acquisitions or to successfully integrate the
operations of the companies we acquire could have a material and adverse effect on our business,
financial condition and results of operations. Any future acquisitions could also result in
potentially dilutive issuance of equity securities, acquisition-
or divestiture-related write-offs or the assumption of debt and contingent liabilities.
We use hazardous materials and are subject to risks of non-compliance with environmental and
safety regulations.
We are subject to a variety of governmental regulations relating to the use, storage,
discharge, handling, emission, generation, manufacture, treatment and disposal of toxic or
otherwise hazardous substances, chemicals, materials or waste. If we fail to comply with current or
future regulations, such failure could result in suspension of our operations, alteration of our
manufacturing process, or substantial civil penalties or criminal fines against us or our officers,
directors or employees. Additionally, these regulations could require us to acquire expensive
remediation or abatement equipment or to incur substantial expenses to comply with them.
Business interruptions could adversely affect our operations.
Our operations are vulnerable to interruption by fire, earthquake or other natural disaster,
quarantines or other disruptions associated with infectious diseases, national catastrophe,
terrorist activities, war, disruptions in our computing and communications infrastructure due to
power loss, telecommunications failure, human error, physical or electronic security breaches and
computer viruses, and other events beyond our control. We do not have a fully implemented detailed
disaster recovery plan. Despite our implementation of network security measures, our tools and
servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized
tampering with our computer systems and tools located at customer sites. Political instability
could cause us to incur increased costs in transportation, make such transportation unreliable,
increase our insurance costs and cause international currency markets to fluctuate. This same
instability could have the same effects on our suppliers and their ability to timely deliver their
products. In addition, we do not carry sufficient business interruption insurance to compensate us
for all losses that may occur, and any losses or damages incurred by us could have a material
adverse effect on our business and results of operations. For example, we self-insure earthquake
risks, because we believe this is the prudent financial decision based on the high cost of the
limited coverage available in the earthquake insurance market. An earthquake could significantly
disrupt our operations, most of which are conducted in California. It could also significantly
delay our research and engineering effort on new products, most of which is also conducted in
California. We take steps to minimize the damage that would be caused by an earthquake, but there
is no certainty that our efforts will prove successful in the event of an earthquake.
We are required to evaluate our internal control over financial reporting under Section 404 of the
Sarbanes-Oxley Act of 2002, and any adverse results from such evaluation could result in a loss of
investor confidence in our financial reports and have an adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management must perform
evaluations of our internal control over financial reporting. Beginning in 2004, our Form 10-K has
included a report by management of their assessment of the adequacy of such internal control.
Additionally, our independent registered public accounting firm must publicly attest to the
effectiveness of our internal control.
We have completed the evaluation of our internal controls over financial reporting as required
by Section 404 of the Sarbanes-Oxley Act. Although our assessment, testing, and evaluation resulted
in our conclusion that as of December 31, 2007, our internal controls over financial reporting were
effective, we cannot predict the outcome of our testing in future periods. Ongoing compliance with
this requirement is complex, costly and time-consuming. If: (1) Intevac fails to maintain effective
internal control over financial reporting, (2) our management does not timely
33
assess the adequacy
of such internal control; or (3) our independent registered public accounting firm does not deliver
an unqualified opinion as to the effectiveness of our controls, then we could be subject to: (1)
restatement of previously reported financial results, (2) regulatory sanctions and (3) the publics
perception of Intevac may decline, which could have a material and adverse effect on our business,
financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security-Holders
Intevacs annual meeting of stockholders was held May 15, 2008. The following actions were
taken at this meeting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abstentions |
|
|
Affirmative |
|
Negative |
|
Votes |
|
and Broker |
|
|
Votes |
|
Votes |
|
Withheld |
|
Non-Votes |
(a) Election of Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Norman H. Pond |
|
|
20,200,592 |
|
|
|
|
|
|
|
422,062 |
|
|
|
|
|
Kevin Fairbairn |
|
|
20,319,850 |
|
|
|
|
|
|
|
302,804 |
|
|
|
|
|
David S. Dury |
|
|
20,138,398 |
|
|
|
|
|
|
|
484,256 |
|
|
|
|
|
Stanley J. Hill |
|
|
20,136,736 |
|
|
|
|
|
|
|
458,918 |
|
|
|
|
|
Robert Lemos |
|
|
20,136,604 |
|
|
|
|
|
|
|
486,050 |
|
|
|
|
|
Ping Yang |
|
|
20,320,178 |
|
|
|
|
|
|
|
302,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) Proposal to approve an amendment to the 2004
Equity Incentive Plan to increase the number
of shares reserved for issuance thereunder
by 500,000 shares |
|
|
17,114,226 |
|
|
|
880,890 |
|
|
|
|
|
|
|
2,627,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Ratification of Grant Thornton LLP as
independent public accountants for the fiscal year
ending December 31, 2008 |
|
|
20,372,662 |
|
|
|
241,872 |
|
|
|
|
|
|
|
8,120 |
|
Item 5. Other Information
None.
34
Item 6. Exhibits
The following exhibits are filed herewith:
|
|
|
|
|
Exhibit |
Number |
|
Description |
|
|
|
31.1
|
|
Certification of President and Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Vice President, Finance and Administration, Chief Financial
Officer, Treasurer and Secretary Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
|
|
32.1
|
|
Certification Pursuant to U.S.C. 1350 adopted Pursuant to Section 906 of the
Sarbanes- Oxley Act of 2002. |
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
INTEVAC, INC.
|
|
Date: August 7, 2008 |
By: |
/s/ KEVIN FAIRBAIRN
|
|
|
|
Kevin Fairbairn |
|
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer) |
|
|
|
|
|
Date: August 7, 2008 |
By: |
/s/ JEFFREY ANDRESON
|
|
|
|
Jeffrey Andreson |
|
|
|
Vice President, Finance and Administration,
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer) |
|
|
36