INTEVAC INC - Quarter Report: 2015 April (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(MARK ONE)

For the quarterly period ended April 4, 2015

OR

For the transition period from                      to                     

Commission file number 0-26946

INTEVAC, INC.

(Exact name of registrant as specified in its charter)

3560 Bassett Street

Santa Clara, California 95054

(Address of principal executive office, including Zip Code)

Registrant’s 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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    x  No

On May 1, 2015, 22,832,388 shares of the Registrant’s Common Stock, $0.001 par value, were outstanding.

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INTEVAC, INC.

INDEX

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PART I. FINANCIAL INFORMATION

INTEVAC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

Note: Amounts as of January 3, 2015 are derived from the January 3, 2015 audited consolidated financial statements.

See accompanying notes.

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INTEVAC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes.

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INTEVAC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

See accompanying notes.

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INTEVAC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In the opinion of management, the unaudited interim condensed consolidated financial statements of Intevac, Inc. and its subsidiaries (Intevac or the Company) included herein have been prepared on a basis consistent with the January 3, 2015 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 Intevac’s Annual Report on Form 10-K for the fiscal year ended January 3, 2015 (“2014 Form 10-K”). Intevac’s results of operations for the three months ended April 4, 2015 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 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.

In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-02, “Consolidations (Topic 810): Amendments to the Consolidation Analysis”, which amends current consolidation guidance including changes to both the variable and voting interest models used by companies to evaluate whether an entity should be consolidated. The amendments in this ASU will be effective for Intevac in the first quarter of fiscal 2016, with early adoption permitted. The adoption of this ASU will not have any effect on our financial position, results of operations or cash flows.

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20),” which simplifies income statement presentation by eliminating the concept of extraordinary items. This ASU will be effective for Intevac in the first quarter of fiscal 2016, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of this ASU will not have any effect on our financial position, results of operations or cash flows.

Inventories are stated at the lower of average cost or market and consist of the following:

Finished goods inventory consists primarily of completed systems at customer sites that are undergoing installation and acceptance testing and evaluation inventory.

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

At April 4, 2015, Intevac had equity-based awards outstanding under the 2012 Equity Incentive Plan and the 2004 Equity Incentive Plan (the “Plans”) and the 2003 Employee Stock Purchase Plan (the “ESPP”). Intevac’s stockholders approved all of these plans. The Plans permit the grant of incentive or non-statutory stock options, restricted stock, stock appreciation rights, restricted stock units (“RSUs” also referred to as “performance units”) and performance shares.

The ESPP provides that eligible employees may purchase Intevac’s 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 interval. 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. Under the terms of the ESPP, employees can choose to have up to 15% of their base earnings withheld to purchase Intevac common stock.

Compensation Expense

The effect of recording equity-based compensation for the three-month periods ended April 4, 2015 and March 29, 2014 was as follows:

Equity-based compensation expense is based on awards ultimately expected to vest and such amount has been reduced for estimated forfeitures. Forfeitures were estimated based on Intevac’s historical experience, which Intevac believes to be indicative of Intevac’s future experience.

Stock Options and ESPP

The fair value of stock options and ESPP awards is estimated at the grant date using the Black-Scholes option valuation model. The determination of fair value of stock options and ESPP awards on the date of grant using an option-pricing model is affected by Intevac’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual employee stock option exercise behavior.

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Option activity as of April 4, 2015 and changes during the three months ended April 4, 2015 were as follows:

Intevac issued 201,000 shares under the ESPP during the three months ended April 4, 2015.

Intevac estimated the weighted-average fair value of stock options and employee stock purchase rights using the following weighted-average assumptions:

The computation of the expected volatility assumptions used in the Black-Scholes calculations for new stock option grants and purchase rights is based on the historical volatility of Intevac’s stock price, measured over a period equal to the expected term of the stock option 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 Intevac’s history of not paying dividends and the assumption of not paying dividends in the future.

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

RSUs

A summary of the RSU activity is as follows:

RSUs are converted into shares of Intevac common stock upon vesting on a one-for-one basis. RSUs typically are scheduled to vest over four years. Vesting of RSUs is subject to the grantee’s continued service with Intevac. The compensation expense related to these awards is determined using the fair market value of Intevac common stock on the date of the grant, and the compensation expense is recognized over the vesting period. In fiscal 2015 and fiscal 2014, the annual bonus for certain participants in the Company’s annual incentive plan will be settled with RSUs with one year vesting. The Company accrued for the payment of bonuses at the expected company-wide payout percentage amount at April 4, 2015 and March 29, 2014, which amounts were less than the target bonus amounts for each participant. The bonus accrual is classified as a liability until the number of shares is determined on the date the awards are granted, at which time the Company classifies the awards into equity. In February 2015, the annual bonus for certain participants was settled with RSUs with one year vesting, 29 participants were granted stock awards to receive 133,000 shares of common stock with a weighted average grant date fair value of $6.85 per share. The Company recorded equity-based compensation expense related to the annual incentive plans of $(51,000) and $161,000 for the three months ended April 4, 2015 and March 29, 2014, respectively.

Performance-based RSUs (“performance-based awards”) granted in fiscal 2013 to certain executive officers are also subject to the achievement of specified performance goals. These performance-based awards become eligible to vest only if performance goals are achieved and then actually will vest only if the grantee remains employed by Intevac through each applicable vesting date. The fair value of these performance-based awards is estimated on the date of grant and assumes that the specified performance goals will be achieved. If the goals are achieved, these awards vest over a specified remaining service period, provided that the grantee remains employed by Intevac through each scheduled vesting date. If the performance goals are not met, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost of each award is reflected over the service period and is reduced for estimated forfeitures. For performance-based awards granted during fiscal 2013, the performance goals require the achievement of targeted revenues and adjusted annual operating profit levels measured at the end of two and three-year periods. In early 2015, the Compensation Committee assessed performance against the goals following the completion of the 2-year performance period for Tranche 1 and determined that 5,532 shares of the awards became earned and therefore eligible for time-based vesting.

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Details of finite-lived intangible assets by segment as of April 4, 2015, are as follows.

Total amortization expense of finite-lived intangibles for the three months ended April 4, 2015 was $213,000.

As of April 4, 2015, future amortization expense is expected to be as follows.

In connection with the acquisition of Solar Implant Technologies, Inc. (“SIT”), Intevac agreed to pay to the selling shareholders in cash a revenue earnout on Intevac’s net revenue from commercial sales of certain products over a specified period up to an aggregate of $9.0 million. Intevac estimated the fair value of this contingent consideration on April 4, 2015 based on probability-based forecasted revenues reflecting Intevac’s own assumptions concerning future revenue from such products. As of April 4, 2015, payments made associated with the revenue earnout obligation have not been significant.

The fair value measurement of contingent consideration is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Any change in fair value of the contingent consideration subsequent to the acquisition date is recognized in operating income within the statement of operations. The following table represents a reconciliation of the change in the fair value measurement of the contingent consideration liability for the three-month periods ended April 4, 2015 and March 29, 2014:

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The following table displays the balance sheet classification of the contingent consideration liability account at April 4, 2015 and at January 3, 2015:

The following table represents the quantitative range of the significant unobservable inputs used in the calculation of fair value of the continent consideration liability as of April 4, 2015. Significant increases or decreases in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement.

Intevac provides for the estimated cost of warranty when revenue is recognized. Intevac’s warranty is per contract terms and for its disk manufacturing, PV manufacturing and display cover panel manufacturing systems the warranty typically ranges between 12 and 24 months from customer acceptance. For systems sold through a distributor, Intevac offers a 3 month warranty. The remainder of any warranty period is the responsibility of the distributor. During this 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. Intevac uses estimated repair or replacement costs along with its historical warranty experience to determine its warranty obligation. Intevac generally provides a twelve month warranty on its Photonics’ products. The provision for the estimated future costs of warranty is based upon historical cost and product performance experience. Intevac exercises judgment in determining the underlying estimates.

On the condensed consolidated balance sheets, 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 statements of operations.

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The following table displays the activity in the warranty provision account for the three-month periods ended April 4, 2015 and March 29, 2014:

The following table displays the balance sheet classification of the warranty provision account at April 4, 2015 and at January 3, 2015:

Officer and Director Indemnifications

As permitted or required under Delaware law and to the maximum extent allowable under that law, Intevac has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving, at Intevac’s request in such capacity. These indemnification obligations are valid as long as the director or officer acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments Intevac could be required to make under these indemnification obligations is unlimited; however, Intevac has a director and officer insurance policy that mitigates Intevac’s exposure and enables Intevac to recover a portion of any future amounts paid. As a result of Intevac’s insurance policy coverage, Intevac believes the estimated fair value of these indemnification obligations is not material.

Other Indemnifications

As is customary in Intevac’s industry, many of Intevac’s contracts provide remedies to certain third parties such as defense, settlement, or payment of judgments for intellectual property claims related to the use of its products. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.

Letters of Credit

As of April 4, 2015, we had letters of credit and bank guarantees outstanding totaling $1.8 million, including the standby letter of credit outstanding under the Santa Clara, California facility lease and a banker’s guarantee which guarantees customer advances under a customer contract.

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Cash and cash equivalents, short-term investments and long-term investments consist of:

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The following table provides the fair market value of Intevac’s investments with unrealized losses that are not deemed to be other-than temporarily impaired as of April 4, 2015.

The contractual maturities of available-for-sale securities at April 4, 2015 are presented in the following table.

All prices for the fixed maturity securities including U.S. Treasury and agency securities, commercial paper, corporate bonds and municipal bonds are received from independent pricing services utilized by Intevac’s outside investment manager. This investment manager performs a review of the pricing methodologies and inputs utilized by the independent pricing services for each asset type priced by the vendor. In addition, on at least an annual basis, the investment manager conducts due diligence visits and interviews with each pricing vendor to verify the inputs

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

utilized for each asset class. The due diligence visits include a review of the procedures performed by each vendor to ensure that pricing evaluations are representative of the price that would be received to sell a security in an orderly transaction. Any pricing where the input is based solely on a broker price is deemed to be a Level 3 price. Intevac uses the pricing data obtained from its outside investment manager as the primary input to make its assessments and determinations as to the ultimate valuation of the above-mentioned securities and has not made, during the periods presented, any material adjustments to such inputs.

The following table represents the fair value hierarchy of Intevac’s available-for-sale securities measured at fair value on a recurring basis as of April 4, 2015.

The Company uses foreign currency forward contracts to mitigate variability in gains and losses generated from the re-measurement of certain monetary assets and liabilities denominated in foreign currencies and to offset certain operational exposures from the impact of changes in foreign currency exchange rates. These derivatives are carried at fair value with changes recorded in interest income and other, net in the consolidated statements of operations. Changes in the fair value of these derivatives are largely offset by re-measurement of the underlying assets and liabilities. Cash flows from such derivatives are classified as operating activities. The derivatives have original maturities of approximately 30, 60, 210 and 240 days.

The following table summarizes the Company’s outstanding derivative instruments on a gross basis as recorded in its condensed consolidated balance sheets as of April 4, 2015 and January 3, 2015:

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Stock Repurchase Program

On November 21, 2013, Intevac’s Board of Directors approved a stock repurchase program authorizing up to $30.0 million in repurchases. At April 4, 2015, $17.0 million remains available for future stock repurchases under the repurchase program.

The following table summarizes Intevac’s stock repurchases:

Intevac records treasury stock purchases under the cost method using the first-in, first-out (FIFO) method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid in capital. If Intevac reissues treasury stock at an amount below its acquisition cost and additional paid in capital associated with prior treasury stock transactions is insufficient to cover the difference between the acquisition cost and the reissue price, this difference is recorded against retained earnings.

Accumulated Other Comprehensive Income

The changes in accumulated other comprehensive income by component for the three months ended April 4, 2015 and March 29, 2014, are as follows.

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The following table sets forth the computation of basic and diluted loss per share:

Potentially dilutive common shares consist of shares issuable upon exercise of employee stock options and vesting of RSUs and are excluded from the calculation of diluted EPS when their effect would be anti-dilutive.

Intevac’s two reportable segments are: Thin-film Equipment and Photonics. Effective in the first quarter of 2015, Intevac renamed the Equipment segment Thin-film Equipment. Intevac’s 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 Intevac’s management organization structure as of April 4, 2015 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 Intevac’s 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 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 segment’s management is measured. Management does not consider impairment charges, gains and losses on divestitures and sales of intellectual property, and unallocated costs in measuring the performance of the reportable segments.

The Thin-film Equipment segment designs, develops and markets vacuum process equipment solutions for high-volume manufacturing of small substrates with precise thin-film properties for hard drive, solar cell and cell phone manufacturers as well as other adjacent thin-film deposition applications.

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The 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 government applications such as night vision and long-range target identification.

Information for each reportable segment for the three months ended April 4, 2015 and March 29, 2014 is as follows:

Net Revenues

Operating Loss

Total assets for each reportable segment as of April 4, 2015 and January 3, 2015 are as follows:

Assets

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

During the first quarter of fiscal 2015, Intevac substantially completed implementation of the 2015 cost reduction plan (the “Plan”), which was intended to reduce expenses and reduce its workforce by 3 percent. The cost of implementing the Plan was reported under cost of net revenues and operating expenses in the condensed consolidated statements of operations. Substantially all cash outlays in connection with the Plan occurred in the first quarter of fiscal 2015. Implementation of the Plan is expected to reduce salary, wages and other employee-related expenses by approximately $1.4 million on an annual basis.

During the first half of fiscal 2014, Intevac substantially completed implementation of the 2014 cost reduction plan (the “2014 Plan”), which was intended to reduce expenses and reduce its workforce by 6 percent. The cost of implementing the 2014 Plan was reported under cost of net revenues and operating expenses in the condensed consolidated statements of operations. Substantially all cash outlays in connection with the Plan occurred in the first half of fiscal 2014. Implementation of the 2014 Plan is expected to reduce salary, wages and other employee-related expenses by approximately $2.1 million on an annual basis. As of April 4, 2015, activities related to the 2014 Plan were complete.

The changes in restructuring reserves associated with the Plans for the three months ended April 4, 2015 and March 29, 2014 are as follows:

Intevac recorded an income tax provision of $33,000 for the three months ended April 4, 2015 and an income tax benefit of $130,000 for the three months ended March 29, 2014. The income tax provisions for the three month periods are based upon estimates of annual income (loss), annual permanent differences and statutory tax rates in the various jurisdictions in which Intevac operates. Intevac did not recognize a benefit on the U.S. net operating loss for the three month periods ended April 4, 2015 and March 29, 2014 due to having full valuation allowances on the U.S. deferred tax assets. Intevac did not recognize a benefit on the Singapore net operating loss for the three months ended April 4, 2015 due to having full valuation allowances on the Singapore deferred tax assets. Intevac’s tax rate differs from the applicable statutory rates due primarily to establishment of a valuation allowance, the utilization of deferred and current credits and the effect of permanent differences and adjustments of prior permanent differences. Intevac’s future effective income tax rate depends on various factors including, the level of Intevac’s projected earnings, the geographic composition of worldwide earnings, tax regulations governing each region, net operating loss carryforwards, availability of tax credits and the effectiveness of Intevac’s tax planning strategies. Management carefully monitors these factors and timely adjusts the effective income tax rate.

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INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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.

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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 Intevac’s shipments, projected revenue recognition, product costs, gross margin, operating expenses, interest income, income taxes, cash balances and financial results in 2015 and beyond; projected customer requirements for Intevac’s new and existing products, and when, and if, Intevac’s customers will place orders for these products; Intevac’s ability to proliferate its Photonics technology into major military programs and to develop and introduce commercial imaging products; the timing of delivery and/or acceptance of the systems and products that comprise Intevac’s backlog for revenue and the Company’s ability to achieve cost savings. Intevac’s 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 we file from time to time with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed on February 17, 2015, and our periodic Form 10-Q’s and Form 8-K’s.

Overview

Intevac provides process manufacturing equipment solutions to the hard disk drive industry and offers high-productivity, thin-film processing systems to the PV industry and to adjacent markets for thin-film deposition applications including the display cover panel market. Intevac also provides sensors, cameras and systems for government applications such as night vision and long-range target identification. Intevac’s customers include manufacturers of hard disk drives, PV cells and cell phones as well as the U.S. government and its agencies and contractors. Intevac reports two segments: Thin-film Equipment and Photonics. Effective in the first quarter of 2015, Intevac renamed the Equipment segment Thin-film Equipment.

Product development and manufacturing activities occur in North America and Asia. Intevac has field offices in Asia to support its equipment customers. Intevac’s equipment and service products are highly technical and are sold primarily through Intevac’s direct sales force. Intevac also sells its products through distributors in Japan and China.

Intevac’s results are driven by worldwide demand for hard disk drives, which in turn depends on the growth in digital data creation and storage, the rate of areal density improvements, the end-user demand for personal computers, enterprise data storage, including on-line, cloud storage and near-line applications, personal audio and video players and video game platforms that include such drives. Demand for Intevac’s equipment is impacted by Intevac’s customers’ relative market share positions and production capacity needs. Intevac continues to execute its strategy of equipment diversification into new markets by introducing new products for PV solar cell manufacturing and most recently a thin-film PVD application for protective coating for display cover panel manufacturing. Intevac believes that expansion into these markets will result in incremental equipment revenues for Intevac and decrease Intevac’s dependence on the hard disk drive industry. Intevac’s equipment 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, PV cells, and cell phones as well as other factors such as global economic conditions and technological advances in fabrication processes.

The following table presents certain significant measurements for the three months ended April 4, 2015 and March 29, 2014:

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Net revenues increased during the first quarter of fiscal 2015 compared to the same period in the prior year primarily due to higher equipment sales and higher Photonics product sales, offset in part by lower Photonics technology development contracts. Thin-film Equipment recognized revenue on one 200 Lean system in both the first quarter of fiscal 2015 and fiscal 2014. Thin-film Equipment also recognized revenue on the first VERTEX™ coating system for display cover panels in the first quarter of fiscal 2015.The net loss for the first quarter of fiscal 2015 decreased compared to the same period in the prior year due to higher revenues and improved gross margins offset in part by slightly higher operating expenses as the Company made incremental investments in research and development (“R&D”).

In fiscal 2015, although Intevac expects positive growth for media unit shipments, Intevac expects that our hard disk drive customers’ media production capacity will continue to exceed demand and the company therefore expects that shipments of Intevac equipment to hard disk drive manufacturers will be approximately at the same levels as 2014. In 2015, Intevac expects higher sales of new thin-film equipment products as Intevac delivers the initial production shipments of our coating system for display cover panels and as solar cell manufacturers begin to adopt new vacuum technologies in the manufacturing of solar cells. For fiscal 2015, Intevac expects that Photonics business levels will be about the same levels as 2014 as Photonics continues to deliver production shipments of the pilot night vision systems for the Apache helicopter.

Intevac’s trademarks, include the following: “200 Lean^®,” “AccuLuber™,” “EBAPS^®,” “ENERGi™,” “I-Port™,” “LithoPrime™,” “LIVAR^®,” “INTEVAC MATRIX™,” “MicroVista^®,” “NightVista^®,” “Night Port™” and “INTEVAC VERTEX™”.

Results of Operations

Net revenues

Thin-film Equipment revenue for both the three months ended April 4, 2015 and March 29, 2014 included revenue recognized for one 200 Lean system, disk equipment technology upgrades and spare parts. Thin-film Equipment revenue for the three months ended April 4, 2015 included the first VERTEX coating system for display cover panels. Thin-film Equipment revenue for both the three months ended April 4, 2015 and March 29, 2014 did not include any sales of solar tools.

Photonics revenue for the three months ended April 4, 2015 increased over the same period in the prior year as a result of increased product sales offset in part by lower contract R&D work. The increase in product sales resulted from the ramp in production deliveries for the Apache pilot night viewing camera during 2014.

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Backlog

Thin-film Equipment backlog at April 4, 2015 included one PV deposition system and one PV implant system. Thin-film Equipment backlog at January 3, 2015 included one 200 Lean system, one PV deposition system, one PVD coating system for display cover panels and one PV implant system. Thin-film Equipment backlog at March 29, 2014 included one PV deposition system and one PVD coating system for display cover panels.

Revenue by geographic region

International sales include products shipped to overseas operations of U.S. companies. U.S. sales in both 2015 and 2014 included the delivery of a 200 Lean system to a U.S. factory of a U.S. customer. The increase in sales to the U.S. region in 2015 versus 2014 reflected higher sales of pilot night vision cameras for the Apache helicopter and higher camera sales to another U.S. customer. The increase in sales to the Asia region in 2015 versus 2014 was primarily due to the sale of the first VERTEX coating system for display cover panels. The decrease in sales to the Europe region in 2015 versus 2014 was primarily due to lower sales of Photonics’ digital night-vision cameras to a NATO customer.

Gross profit

Cost of net revenues consists primarily of purchased materials and costs attributable to contract R&D, and also includes fabrication, assembly, test and installation labor and overhead, customer-specific engineering costs, warranty costs, royalties, provisions for inventory reserves and scrap.

Thin-film Equipment gross margin was 28.5% in the three months ended April 4, 2015 and increased from 22.2% in the three months ended March 29, 2014. The improvement in margins was due to higher factory absorption and lower excess and obsolete inventory charges. Gross margins in the Thin-film Equipment business will vary depending on a number of factors, including revenue levels, product mix, product cost, system configuration and pricing, factory utilization, and provisions for excess and obsolete inventory.

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Photonics gross margin was 42.1% in the three months ended April 4, 2015 and increased from 35.2% in the three months ended March 29, 2014 due primarily to a change in product mix to higher-margin product sales.

Research and development

Research and development spending increased in Thin-film Equipment and in Photonics during the three months ended April 4, 2015 as compared to the three months ended March 29, 2014. The increase in Thin-film Equipment spending was due primarily to increased PV development associated with a JDP with a customer, offset in part by cost containment efforts. The increase in Photonics spending was due primarily to lower billable contract R&D efforts. Research and development expenses do not include costs of $1.4 million and $2.5 million for the three-month periods ended April 4, 2015 and March 29, 2014, respectively, which are related to customer-funded contract R&D programs at Photonics and therefore included in cost of net revenues.

Selling, general and administrative

Selling, general and administrative expense consists primarily of selling, marketing, customer support, financial and management costs. Selling, general and administrative expenses for the three months ended April 4, 2015 were flat compared to the three months ended March 29, 2014. Lower variable compensation program expense and savings from cost reduction initiatives, were offset by increased equity compensation expense. Selling, general and administrative spending in the three months ended March 29, 2014 also included professional service costs associated with a contested Board of Directors election.

Cost reduction plans

During the first quarter of fiscal 2015, Intevac substantially completed implementation of the 2015 cost reduction plan (the “Plan”), which was intended to reduce expenses and reduce its workforce by 3 percent. The total cost of implementing the Plan was $148,000 of which $81,000 was reported under cost of net revenues and $67,000 was reported under operating expenses. Substantially all cash outlays in connection with the Plan occurred in the first quarter of fiscal 2015. Implementation of the Plan is expected to reduce salary, wages and other employee-related expenses by approximately $1.4 million on an annual basis.

During the first quarter of fiscal 2014, Intevac substantially completed implementation of the 2014 cost reduction plan (the “2014 Plan”), which was intended to reduce expenses and reduce its workforce by 5 percent. The total cost of implementing the 2014 Plan was $227,000 of which $43,000 was reported under cost of net revenues and $184,000 was reported under operating expenses. Substantially all cash outlays in connection with the 2014 Plan occurred in the first quarter of fiscal 2014. As of April 4, 2015, activities related to the 2014 Plan were complete.

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Interest income and other, net

Interest income and other, net in the three months ended April 4, 2015 included $53,000 of interest income on investments, various other income of $6,000 and $20,000 of foreign currency gains. Interest income and other, net in the three months ended March 29, 2014 included $47,000 of interest income on investments, various other income of $22,000 and $4,000 of foreign currency gains. The increase in interest income in the three months ended April 4, 2015 resulted from higher interest rates offset in part by lower invested balances.

Income tax benefit

Intevac recorded an income tax provision of $33,000 for the three months ended April 4, 2015 and an income tax benefit of $130,000 for the three months ended March 29, 2014. The income tax provisions for the three month periods are based upon estimates of annual income (loss), annual permanent differences and statutory tax rates in the various jurisdictions in which Intevac operates. Intevac did not recognize a benefit on the U.S. net operating loss for either of the three month periods ended April 4, 2015 and March 29, 2014 due to having full valuation allowances on the U.S. deferred tax assets. Intevac did not recognize a benefit on the Singapore net operating loss for the three months ended April 4, 2015 due to having full valuation allowances on the Singapore deferred tax assets. Intevac’s tax rate differs from the applicable statutory rates due primarily to establishment of a valuation allowance, the utilization of deferred and current credits and the effect of permanent differences and adjustments of prior permanent differences. Intevac’s future effective income tax rate depends on various factors including, the level of Intevac’s projected earnings, the geographic composition of worldwide earnings, tax regulations governing each region, net operating loss carryforwards, availability of tax credits and the effectiveness of Intevac’s tax planning strategies. Management carefully monitors these factors and timely adjusts the effective income tax rate.

Liquidity and Capital Resources

At April 4, 2015, Intevac had $61.5 million in cash, cash equivalents, and investments compared to $68.6 million at January 3, 2015. During the first three months of 2015, cash, cash equivalents and investments decreased by $7.1 million due primarily to cash used by operating activities, repurchases of common stock and purchases of fixed assets partially offset by cash received from the sale of Intevac common stock to Intevac’s employees through Intevac’s employee benefit plans.

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Cash, cash equivalents and investments consist of the following:

Operating activities used cash of $2.0 million during the first three months of 2015 and of $4.4 million during the first three months of 2014. The decrease in cash used by operating activities was due primarily to a smaller net loss, decreases in working capital during the first three months of 2015 and lower bonus payments as fiscal 2014 bonuses were primarily settled in RSUs.

Accounts receivable totaled $11.6 million at April 4, 2015 compared to $12.1 million at January 3, 2015. Net inventories totaled $19.0 million at April 4, 2015 compared to $19.2 million at January 3, 2015. Accounts payable totaled $4.8 million at April 4, 2015 compared to $4.6 million at January 3, 2015. Other accrued liabilities decreased to $5.1 million at April 4, 2015 compared to $8.3 million at January 3, 2015. Other accrued liabilities at January 3, 2015 included $4.3 million of deferred revenue associated with two completed systems at customer sites that were undergoing installation and acceptance testing and an accrual of $2.1 million for unsettled trades for purchases of investments at January 3, 2015. Other accrued liabilities at April 4, 2015 included $2.9 million of deferred revenue associated with a completed system at a customer site that is undergoing installation and acceptance testing. Customer advances decreased from $2.6 million at January 3, 2015 to $2.4 million at April 4, 2015.

Investing activities used cash of $394,000 during the first three months of 2015. Proceeds from sales of investments net of purchases totaled $524,000. Capital expenditures for the three months ended April 4, 2015 were $918,000.

Financing activities in the first three months of 2015 used cash of $2.0 million. The sale of Intevac common stock to Intevac’s employees through Intevac’s employee benefit plans generated cash $834,000. Cash used to repurchase shares of common stock under the Company’s stock repurchase program totaled $2.8 million for the three months ended April 4, 2015.

Intevac’s investment portfolio consists principally of investment grade money market mutual funds, U.S. Treasury and agency securities, commercial paper, municipal bonds and corporate bonds. Intevac regularly monitors the credit risk in its investment portfolio and takes measures, which may include the sale of certain securities, to manage such risks in accordance with its investment policies.

As of April 4, 2015, approximately $6.4 million of cash and cash equivalents and $780,000 of restricted cash were domiciled in foreign tax jurisdictions. Intevac expects a significant portion of these funds to remain off shore in the short term. If the Company chose to repatriate these funds to the United States, it would be required to accrue and pay additional taxes on any portion of the repatriation where no United States income tax had been previously provided.

Intevac believes that its existing cash, cash equivalents and investments will be sufficient to meet its cash requirements for the foreseeable future. Intevac intends to undertake approximately $7.0 million to $8.0 million in capital expenditures during the remainder of 2015.

Off-Balance Sheet Arrangements

Off-balance sheet firm commitments relating to outstanding letters of credit amounted to approximately $1.8 million as of April 4, 2015. We do not maintain any other off-balance sheet arrangements, transactions, obligations, or other relationships that would be expected to have a material current or future effect on the consolidated financial statements.

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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. Intevac’s significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of Intevac’s Annual Report on Form 10-K filed on February 17, 2015. 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 Intevac’s financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on Intevac’s 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 Intevac’s 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 Intevac’s 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 Intevac’s accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that Intevac’s consolidated financial statements are fairly stated in accordance with US GAAP, and provide a meaningful presentation of Intevac’s financial condition and results of operation.

For further information about Intevac’s other critical accounting policies, see the discussion of critical accounting policies in Intevac’s 2014 Form 10-K. Management believes that there has been no significant change during the three months ended April 4, 2015 to the items identified as critical accounting policies in Intevac’s 2014 Form 10-K.

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Interest rate risk. Intevac’s exposure to market risk for changes in interest rates relates primarily to its investment portfolio. Intevac does not use derivative financial instruments in Intevac’s investment portfolio. The Company has adopted an investment policy and established guidelines relating to credit quality, diversification and maturities of its investments in order to preserve principal and maintain liquidity. All investment securities in Intevac’s portfolio have an investment grade credit rating. Investments typically consist of commercial paper, obligations of the U.S. government and its agencies, corporate debt securities and municipal bonds.

The table below presents principal amounts and related weighted-average interest rates by year of expected maturity for Intevac’s investment portfolio at April 4, 2015.