Edgar Filing: INTEVAC INC

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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(MARK ONE)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2011

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

incorporation or organization)

(IRS Employer Identification No.)

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. þ 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). þ 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):


Large accelerated filer ¨		Accelerated filer þ		Non-accelerated filer ¨ (Do not check if a smaller reporting company)			Smaller reporting company ¨

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

On November 1, 2011, 23,080,356 shares of the Registrant’s Common Stock, $0.001 par value, were outstanding.

INTEVAC, INC.

INDEX


No.		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets		3
	Condensed Consolidated Statements of Operations		4
	Condensed Consolidated Statements of Cash Flows		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		26
Item 4.	Controls and Procedures		27

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		28
Item 1A.	Risk Factors		28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		36
Item 3.	Defaults Upon Senior Securities		36
Item 4.	(Removed and Reserved)		36
Item 5.	Other Information		36
Item 6.	Exhibits		36
SIGNATURES			37

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

INTEVAC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	October 1, 2011		December 31, 2010
	(Unaudited)
	(In thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	27,933	$	109,520
Short-term investments		45,437		4,994
Trade, note and other accounts receivable, net of allowances of $41 at October 1, 2011 and of $55 at December 31, 2010		16,289		25,911
Inventories		19,754		20,671
Prepaid expenses and other current assets		6,957		6,630
Deferred income tax assets		3,572		3,124

Total current assets		119,942		170,850
Property, plant and equipment, net		14,829		13,918
Long-term investments		48,686		22,866
Goodwill		18,389		18,389
Other intangible assets, net of amortization of $2,209 at October 1, 2011 and $1,801 at December 31, 2010		6,577		6,984
Deferred income taxes and other long-term assets		24,674		18,764

Total assets	$	233,097	$	251,771


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	5,454	$	5,562
Accrued payroll and related liabilities		5,367		11,365
Other accrued liabilities		9,411		11,104
Customer advances		4,746		4,867

Total current liabilities		24,978		32,898
Other long-term liabilities		10,780		11,630
Stockholders’ equity:
Common stock, $0.001 par value		23		23
Additional paid-in capital		145,510		139,824
Accumulated other comprehensive income		431		255
Retained earnings		51,375		67,141

Total stockholders’ equity		197,339		207,243
Total liabilities and stockholders’ equity	$	233,097	$	251,771

Note: Amounts as of December 31, 2010 are derived from the December 31, 2010 audited consolidated financial statements.

See accompanying notes to the condensed consolidated financial statements.

INTEVAC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended						Nine Months Ended
	October 1, 2011			October 2, 2010			October 1, 2011			October 2, 2010
	(Unaudited)
	(In thousands, except per share amounts)

Net revenues:
Systems and components	$	17,788		$	59,404		$	59,012		$	152,282
Technology development		1,533			5,223			5,317			14,085

Total net revenues		19,321			64,627			64,329			166,367
Cost of net revenues:
Systems and components		10,693			31,776			36,747			84,103
Technology development		1,110			3,267			3,547			9,168

Total cost of net revenues		11,803			35,043			40,294			93,271

Gross profit		7,518			29,584			24,035			73,096
Operating expenses:
Research and development		8,612			7,063			25,914			20,618
Selling, general and administrative		6,979			7,148			20,372			21,273

Total operating expenses		15,591			14,211			46,286			41,891

Income (loss) from operations		(8,073	)		15,373			(22,251	)		31,205
Interest income and other, net		140			(84	)		438			379

Income (loss) before income taxes		(7,933	)		15,289			(21,813	)		31,584
Provision for (benefit from) income taxes		(1,817	)		2,110			(6,047	)		4,638

Net income (loss)	$	(6,116	)	$	13,179		$	(15,766	)	$	26,946


Net income (loss) per share:
Basic	$	(0.27	)	$	0.59		$	(0.69	)	$	1.21
Diluted	$	(0.27	)	$	0.58		$	(0.69	)	$	1.18

Weighted average common shares outstanding:
Basic		22,951			22,383			22,843			22,288
Diluted		22,951			22,887			22,843			22,931

See accompanying notes to the condensed consolidated financial statements.

INTEVAC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine months ended
	October 1, 2011			October 2, 2010
	(Unaudited)
	(In thousands)
Operating activities
Net income (loss)	$	(15,766	)	$	26,946
Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by (used in) operating activities:
Depreciation and amortization		4,109			4,396
Net amortization of investment premiums and discounts		982			—
Loss on sale of investments		283			—
Equity-based compensation		3,061			2,413
Change in the fair value of acquisition-related contingent consideration		917			—
Deferred income taxes		(6,619	)		3,032
Loss (gain) on disposal of equipment		(109	)		163
Changes in operating assets and liabilities		3,080			2,875

Total adjustments		5,704			12,879

Net cash and cash equivalents provided by (used in) operating activities		(10,062	)		39,825
Investing activities
Purchases of investments		(99,599	)		(3,093	)
Proceeds from sales and maturities of investments		32,338			68,050
Proceeds from sale of equipment		241			—
Purchases of leasehold improvements and equipment		(4,744	)		(5,419	)

Net cash and cash equivalents provided by (used in) investing activities		(71,764	)		59,538
Financing activities
Payment of acquisition-related contingent consideration		(2,389	)		—
Net proceeds from issuance of common stock		2,625			1,820

Net cash and cash equivalents provided by financing activities		236			1,820
Effect of exchange rate changes on cash		3			68

Net increase (decrease) in cash and cash equivalents		(81,587	)		101,251
Cash and cash equivalents at beginning of period		109,520			17,592

Cash and cash equivalents at end of period	$	27,933		$	118,843

See accompanying notes to the condensed consolidated financial statements.

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

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 December 31, 2010 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 December, 31, 2010 (2010 Form 10-K). Intevac’s results of operations for the three and nine months ended October 1, 2011 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.

2. New Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that allows entities to first assess qualitatively whether it is necessary to perform the two-step goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step goodwill impairment test is required. An entity has the unconditional option to bypass the qualitative assessment and proceed directly to performing the first step of the goodwill impairment test. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. Intevac does not expect the adoption of these provisions to have a significant effect on its consolidated financial statements.

In June 2011, the FASB issued authoritative guidance that amends the presentation requirements for comprehensive income in financial statements. The guidance requires entities to report components of comprehensive income either as part of a single continuous statement of comprehensive income that would combine the components of net income and other comprehensive income, or in a separate, but consecutive, statement following the statement of income. The guidance is effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively. Intevac does not expect the adoption of these provisions to have a significant effect on its consolidated financial statements.

In May 2011, the FASB issued authoritative guidance that amends the existing requirements for fair value measurement and disclosure. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for measurement of the fair value of financial assets and liabilities as well as instruments classified in stockholders’ equity. The guidance is effective for interim and annual periods beginning after December 15, 2011. Intevac does not expect the adoption of these provisions to have a significant effect on its consolidated financial statements.

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

3. Inventories

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


	October 1,		December 31,
	2011		2010
	(In thousands)
Raw materials	$	12,175	$	13,370
Work-in-progress		3,482		5,295
Finished goods		4,097		2,006

	$	19,754	$	20,671

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

4. Equity-Based Compensation

At October 1, 2011, Intevac had equity-based awards outstanding under the 2004 Equity Incentive Plan (the “2004 Plan”) and the 2003 Employee Stock Purchase Plan (the “ESPP”). Intevac’s 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 three months ended October 1, 2011, Intevac granted 4,500 stock options with an estimated total grant-date fair value of $18,000. Of this amount, estimated awards of $5,000 are not expected to vest. During the three months ended October 2, 2010, Intevac granted 77,000 stock options with an estimated total grant-date fair value of $385,000. Of this amount, estimated awards of $98,000 are not expected to vest. During the nine months ended October 1, 2011, Intevac granted 545,000 stock options with an estimated total grant-date fair value of $3.3 million. Of this amount, estimated awards of $773,000 are not expected to vest. During the nine months ended October 2, 2010, Intevac granted 672,000 stock options with an estimated total grant-date fair value of $4.4 million. Of this amount, estimated awards of $1.1 million are not expected to vest.

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. During the three and nine months ended October 1, 2011, Intevac granted purchase rights with an estimated total grant-date fair value of $478,000 and $1.8 million, respectively. During the three and nine months ended October 2, 2010, Intevac granted purchase rights with an estimated total grant-date fair value of $4,900 and $53,000, respectively.

Compensation Expense

The effect of recording equity-based compensation for the three and nine months ended October 1, 2011 and October 2, 2010 was as follows:


	Three Months Ended						Nine Months Ended
	October 1, 2011			October 2, 2010			October 1, 2011			October 2, 2010
	(In thousands)
Equity-based compensation by type of award:
Stock options	$	729		$	764		$	2,221		$	2,107
Employee stock purchase plan		286			66			840			306

Total equity-based compensation		1,015			830			3,061			2,413
Tax effect on equity-based compensation		(261	)		(266	)		(823	)		(768	)

Net effect on net income (loss)	$	754		$	564		$	2,238		$	1,645

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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 our 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 expected term of the awards, and actual employee stock option exercise behavior.

The weighted-average estimated fair value of employee stock options granted during the three months ended October 1, 2011 and October 2, 2010 was $3.99 per share and $5.04 per share, respectively. The weighted-average estimated fair value of employee stock options granted during the nine months ended October 1, 2011 and October 2, 2010 was $6.10 per share and $6.59 per share, respectively. The weighted-average estimated fair value of employee stock purchase rights granted pursuant to the ESPP during the three months ended October 1, 2011 and October 2, 2010 were $3.60 and $3.27 per share, respectively. The weighted-average estimated fair value of employee stock purchase rights granted pursuant to the ESPP during the nine months ended October 1, 2011 and October 2, 2010 was $4.84 and $4.63 per share, respectively. 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:


	Three Months Ended						Nine Months Ended
	October 1, 2011			October 2, 2010			October 1, 2011			October 2, 2010
Stock Options:
Expected volatility		64.87	%		67.62	%		64.70	%		67.90	%
Risk free interest rate		0.84	%		1.22	%		1.77	%		1.67	%
Expected term of options (in years)		4.50			4.50			4.76			4.51
Dividend yield		None			None			None			None


	Three Months Ended						Nine Months Ended
	October 1, 2011			October 2, 2010			October 1, 2011			October 2, 2010
Stock Purchase Rights:
Expected volatility		48.87	%		52.60	%		51.63	%		55.20	%
Risk free interest rate		0.19	%		0.12	%		0.44	%		0.41	%
Expected term of purchase rights (in years)		1.85			0.50			1.36			0.73
Dividend yield		None			None			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 Intevac’s 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 Intevac’s 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 Intevac’s historical experience, which Intevac believes to be indicative of Intevac’s future experience.

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

5. Business Combination, Goodwill and Purchased Intangible Assets, Net

On November 19, 2010, Intevac acquired the outstanding shares of Solar Implant Technologies, Inc. (“SIT”), a privately-owned, development stage company, which was focused on creating an ion implant module to be used in the manufacturing of photovoltaic cells. Intevac’s primary reasons for this acquisition were to complement its existing product offerings and to provide opportunities for future growth. The preliminary aggregate purchase price was $12.4 million, which consisted of an initial cash payment totaling $2.7 million and a contingent consideration obligation with a fair value of $9.7 million payable in cash. In connection with the acquisition, Intevac acquired $4.0 million of in process research and development (“IPR&D”), $43,000 of tangible assets, and $10.5 million of goodwill and assumed $703,000 of tangible liabilities. Intevac also recorded an $827,000 net deferred tax liability to reflect the tax impact of the identified intangible assets that will not generate tax deductible amortization expense net of the future tax benefit of acquired net operating loss carryforwards. The value attributable to IPR&D has been capitalized as an indefinite-lived intangible asset. Goodwill is attributable to estimated synergies arising from the acquisition and other intangible assets that do not qualify for separate recognition. Goodwill is not deductible for tax purposes.

In connection with the acquisition of SIT, Intevac agreed to pay up to an aggregate of $7.0 million in cash to the selling shareholders if certain milestones are achieved over a specified period. Intevac estimated the fair value of this contingent consideration to be in the amount of $5.6 million based on the probability that certain milestones would be met and the payments would be made on the targeted dates outlined in the acquisition agreement. On July 21, 2011, Intevac made $2.4 million in payments to the selling shareholders for achievement of the first milestone.

In connection with the acquisition of SIT, Intevac also agreed to pay 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 in cash to the selling shareholders. Intevac estimated the fair value of this contingent consideration to be in the amount of $4.1 million based on probability-based forecasted revenues reflecting Intevac’s own assumptions concerning future revenue of SIT. A change in the estimated probabilities of revenue achievement could have a material effect on the statement of operations and balance sheets in the period of change.

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 and nine months ended October 1, 2011 (in thousands):


	Three Months Ended			Nine Months Ended
	October 1, 2011
	(In thousands)
Beginning balance	$	10,430		$	9,857
Changes in fair value		344			917
Cash payment made		(2,389	)		(2,389	)

Ending balance	$	8,385		$	8,385

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 October 1, 2011 and at December 31, 2010:


	October 1,		December 31,
	2011		2010
	(In thousands)
Other accrued liabilities	$	3,715	$	4,234
Other long-term liabilities		4,670		5,623

Total acquisition-related contingent consideration	$	8,385	$	9,857

Prior to the acquisition, Intevac had an equity interest in SIT with a cost basis of $94,000 that was accounted for under the cost method. As a result of revaluing Intevac’s equity interest in SIT on the acquisition date, the Company recognized a gain of $481,000, which was included in other income, net, in the Consolidated Statement of Operations during the fourth quarter of fiscal 2010.

Intevac accounted for the acquisition of SIT as a business combination. Under business combination accounting, the assets and liabilities of SIT were recorded as of the acquisition date, at their respective fair values, and consolidated with the Company. The preliminary purchase price allocation is based on estimates of the fair value of assets acquired and liabilities assumed. Subsequent to the acquisition in the fourth quarter of fiscal 2010, Intevac paid in full $177,000 in notes payable to certain selling shareholders assumed upon the acquisition. The purchase price was allocated as follows:


(In thousands)
Current assets (including cash of $38)	$	40
Property, plant, and equipment		3
IPR&D		4,000
Goodwill		10,484
Long-term deferred tax assets		697

Total assets acquired		15,224

Notes payable to sellers		177
Current liabilities		526
Long-term deferred tax liabilities		1,524

Total liabilities assumed		2,227

Net assets acquired	$	12,997

The results of operations for SIT for periods prior to the acquisition were not material to Intevac’s Consolidated Statements of Operations and, accordingly, pro forma financial information has not been presented.

Goodwill and indefinite-life intangible assets are tested for impairment on an annual basis or more frequently upon the occurrence of circumstances that indicate that goodwill and indefinite-life intangible assets may be impaired. In the fourth quarter of fiscal 2010, Intevac performed its annual impairment analysis and the results of the analysis indicated that Intevac’s goodwill and purchased intangible assets with an indefinite useful life were not impaired. At October 1, 2011, Intevac had a total of $18.4 million of goodwill and $4.1 million of indefinite-life intangible assets. At October 1, 2011, $10.5 million of goodwill is attributed to the Equipment segment and $7.9 million of goodwill is attributed to the Intevac Photonics segment.

Total amortization expense of finite-lived intangibles for the three and nine months ended October 1, 2011 was

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

$136,000, and $408,000, respectively. As of October 1, 2011, future amortization expense is expected to be $136,000 for the remainder of 2011, $541,000 for 2012, $541,000 for 2013, $363,000 for 2014, $284,000 for 2015 and $592,000 thereafter. Intangible assets by segment are as follows: Equipment: $5.7 million and Intevac Photonics: $893,000.

6. Warranty

Intevac provides for the estimated cost of warranty when revenue is recognized. Intevac’s warranty is per contract terms and for its 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 Intevac 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.

The following table displays the activity in the warranty provision account for the three- and nine-month periods ended October 1, 2011 and October 2, 2010:


	Three Months Ended						Nine Months Ended
	October 1, 2011			October 2, 2010			October 1, 2011			October 2, 2010
	(In thousands)
Beginning balance	$	3,127		$	2,986		$	3,415		$	1,602
Expenditures incurred under warranties		(333	)		(970	)		(1,682	)		(2,084	)
Accruals for product warranties issued during the reporting period		247			1,132			1,246			3,485
Adjustments to previously existing warranty accruals		(25	)		231			37			376

Ending balance	$	3,016		$	3,379		$	3,016		$	3,379

The following table displays the balance sheet classification of the warranty provision account at October 1, 2011 and at December 31, 2010:


	October 1,		December 31,
	2011		2010
	(In thousands)
Other accrued liabilities	$	2,665	$	2,612
Other long-term liabilities		351		803

Total warranty provision	$	3,016	$	3,415

7. Guarantees

Officer and Director Indemnifications

As permitted or required under Delaware law and to the maximum extent allowable under that law, Intevac

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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 corporation 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 judgment 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.

8. Cash, Cash Equivalents and Investments

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


	October 1, 2011
	Amortized Cost		Unrealized Holding Gains		Unrealized Holding Losses		Fair Value
	(In thousands)
Cash and cash equivalents:
Cash	$	21,602	$	—	$	—	$	21,602
Money market funds		5,081		—		—		5,081
Commercial paper		1,250		—		—		1,250

Total cash and cash equivalents	$	27,933	$	—	$	—	$	27,933
Short-term investments:
Commercial paper	$	2,698	$	1	$	—	$	2,699
Corporate bonds and medium-term notes		16,366		4		16		16,354
FDIC insured corporate bonds		5,975		7		—		5,982
Municipal bonds		6,132		13		—		6,145
U.S. treasury and agency securities		7,503		4		—		7,507
Variable rate demand notes (“VRDNs”)		6,750		—		—		6,750

Total short-term investments	$	45,424	$	29	$	16	$	45,437
Long-term investments:
Corporate bonds and medium-term notes	$	26,013	$	29	$	136	$	25,906
FDIC insured corporate bonds		3,664		16		—		3,679
U.S. treasury and agency securities		13,984		75		—		14,059
Auction rate securities (“ARS”)		5,400		—		358		5,042

Total long-term investments	$	49,061	$	120	$	494	$	48,686

Total cash, cash equivalents, and investments	$	122,418	$	149	$	510	$	122,056

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


	December 31, 2010
	Amortized Cost		Unrealized Holding Gains		Unrealized Holding Losses		Fair Value
	(In thousands)
Cash and cash equivalents:
Cash	$	22,887	$	—	$	—	$	22,887
Commercial paper		2,999		—		1		2,998
Corporate bonds		1,259		—		—		1,259
Money market funds		82,376		—		—		82,376

Total cash and cash equivalents	$	109,521	$	—	$	1	$	109,520
Short-term investments:
Commercial paper	$	2,995	$	—	$	—	$	2,995
U.S. treasury and agency securities		1,999		—		—		1,999

Total short-term investments	$	4,994	$	—	$	—	$	4,994
Long-term investments:
U.S. treasury and agency securities	$	6,978	$	5	$	—	$	6,983
Corporate bonds and medium-term notes		5,615		—		5		5,610
ARS		10,900		—		627		10,273

Total long-term investments	$	23,493	$	5	$	632	$	22,866

Total cash, cash equivalents, and investments	$	138,008	$	5	$	633	$	137,380

The contractual maturities of available-for-sale securities at October 1, 2011 are presented in the following table.


	Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	41,904	$	41,909
Due after one through five years (1)		45,232		45,219
Due after ten years(2)		13,680		13,326

	$	100,816	$	100,454

(1)	Includes $575,000 in par value of VRDNs.

(2)	Includes $6.2 million in par value of VRDNs and $5.4 million in par value of ARS.

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 October 1, 2011.


	October 1, 2011
	In Loss Position for Less than 12 Months				In Loss Position for Greater than 12 Months
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(In thousands)
Corporate bonds and medium-term notes	$	24,813	$	152	$	—	$	—
ARS		—		—		5,042		358

	$	24,813	$	152	$	5,042	$	358

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

All prices for the fixed maturity securities including U.S. Treasury and agency securities, commercial paper, FDIC insured corporate bonds, corporate bonds, VRDNs 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 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.

VRDNs are long-term floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. Intevac’s VRDN portfolio is comprised of investments in many municipalities, which are secured by irrevocable letters of credit from major financial institutions or other highly rated companies that serve as the pledged liquidity source. Intevac can tender these VRDN securities for sale upon notice to the broker and receive payment for the tendered securities within seven days.

As of October 1, 2011, all of the Company’s Level 3 financial instruments consisted of ARS with an aggregate par value of $5.4 million that failed at auction. There was insufficient observable market information to determine fair value for these financial instruments. The Company estimated the fair values for these securities by incorporating assumptions that it believes market participants would use in their estimates of fair value. Some of these assumptions included credit quality, collateralization, final stated maturity, estimates of the probability of being called or becoming liquid prior to final maturity, redemptions of similar ARS, previous market activity for the same investment security, impact due to extended periods of maximum auction rates and valuation models. As a result of this review, the Company determined its ARS to have a temporary impairment of $358,000 as of October 1, 2011. The estimated fair value could change significantly based on future market conditions. The Company will continue to assess the fair value of its ARS for substantive changes in relevant market conditions, changes in its financial condition or other changes that may alter its estimates described above. Failed ARS represent approximately 4.1% of the Company’s total cash, cash equivalents and investments as of October 1, 2011. During the first nine months of 2011, Intevac participated in two tender offers, sold ARS with par values of $5.0 million, collected $4.7 million and recognized realized losses on the sales of $283,000.

The following table represents the fair value hierarchy of Intevac’s assets measured at fair value on a recurring basis as of October 1, 2011.


	Fair Value Measurements at October 1, 2011
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Money market funds	$	5,081	$	5,081	$	—	$	—
U.S. treasury and agency securities		21,566		8,039		13,527		—
FDIC insured corporate bonds		9,661		—		9,661		—
Commercial paper		3,949		—		3,949		—
Corporate bonds and medium-term notes		42,260		—		42,260		—
Municipal bonds		6,145		—		6,145		—
VRDNs		6,750		—		6,750		—
ARS		5,042		—		—		5,042

Total assets	$	100,454	$	13,120	$	82,292	$	5,042

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The following table presents the changes in Level 3 instruments measured on a recurring basis for the three and nine months ended October 1, 2011 and October 2, 2010. These balances consist of ARS classified as available-for-sale with changes in fair value recorded in stockholders’ equity.

Changes in Level 3 instruments (in thousands):


	Three Months Ended						Nine Months Ended
	October 1, 2011			October 2, 2010			October 1, 2011			October 2, 2010
	(In thousands)
Beginning balance	$	7,127		$	61,632		$	10,273		$	66,249
Net realized losses included in earnings		(133	)		—			(283	)		—
Net unrealized gains (losses) included in other comprehensive income		115			3,481			269			3,064
Proceeds from tender offers		(1,867	)		—			(4,717	)		—
Redemptions at par		(200	)		(54,850	)		(500	)		(59,050	)

Ending balance	$	5,042		$	10,263		$	5,042		$	10,263

9. Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income at October 1, 2011 and December 31, 2010 were as follows:


	October 1, 2011			December 31, 2010
	(In thousands)
Accumulated net unrealized holding loss on available-for-sale investments, net of tax	$	(235	)	$	(408	)
Foreign currency translation gains		666			663

Total accumulated other comprehensive income	$	431		$	255

The components of comprehensive income (loss) for the three and nine month periods ended October 1, 2011 and October 2, 2010 were as follows:


	Three Months Ended						Nine Months Ended
	October 1, 2011			October 2, 2010			October 1, 2011			October 2, 2010
	(In thousands)
Net income (loss)	$	(6,116	)	$	13,179		$	(15,766	)	$	26,946
Unrealized holding gains (losses) on available-for-sale investments, net of taxes
Decrease (increase) in unrealized holding losses		(46	)		3,481			267			3,064
Income tax benefit (expense)		16			(1,218	)		(94	)		(1,072	)

		(30	)		2,263			173			1,992
Foreign currency translation gains (losses)		(13	)		46			3			79

Total comprehensive income (loss)	$	(6,159	)	$	15,488		$	(15,590	)	$	29,017

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

10. Net Income (Loss) Per Share

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


	Three Months Ended					Nine Months Ended
	October 1, 2011			October 2, 2010		October 1, 2011			October 2, 2010
	(in thousands, except per share amounts)
Net income (loss)	$	(6,116	)	$	13,179	$	(15,766	)	$	26,946

Weighted-average shares — basic		22,951			22,383		22,843			22,288
Effect of dilutive potential common shares		—			504		—			643

Weighted-average shares — diluted		22,951			22,887		22,843			22,931

Net income (loss) per share — basic	$	0.27		$	0.59	$	0.69		$	1.21

Net income (loss) per share — diluted	$	0.27		$	0.58	$	0.69		$	1.18

Antidilutive shares based on employee awards excluded		3,024			2,293		1,589			1,668

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

11. Segment Reporting

Intevac’s two reportable segments are Equipment and Intevac Photonics. 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 October 1, 2011 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 and unallocated costs in measuring the performance of the reportable segments.

The Equipment segment designs, develops and markets manufacturing equipment and solutions to the hard disk drive industry and offers high-productivity technology solutions to the photovoltaic (“PV”) and semiconductor industries. Historically, the majority of Intevac’s revenue has been derived from the Equipment segment and Intevac expects that the majority of its revenues for at least 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

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

systems for government applications such as night vision and long-range target identification and for commercial applications in the inspection, law enforcement, scientific and medical industries.

Information for each reportable segment for the three and nine months ended October 1, 2011 and October 2, 2010 is as follows:

Net Revenues


	Three Months Ended				Nine Months Ended
	October 1, 2011		October 2, 2010		October 1, 2011		October 2, 2010
	(in thousands)
Equipment	$	12,384	$	55,868	$	42,379	$	141,453
Intevac Photonics		6,937		8,759		21,950		24,914

Total segment net revenues	$	19,321	$	64,627	$	64,329	$	166,367

Operating Income (Loss)


	Three Months Ended						Nine Months Ended
	October 1, 2011			October 2, 2010			October 1, 2011			October 2, 2010
	(in thousands)
Equipment	$	(5,358	)	$	16,878		$	(14,423	)	$	37,534
Intevac Photonics		(948	)		(876	)		(3,023	)		(3,501	)

Total segment operating income (loss)		(6,306	)		16,002			(17,446	)		34,033

Unallocated costs		(1,767	)		(629	)		(4,805	)		(2,828	)

Income (loss) from operations		(8,073	)		15,373			(22,251	)		31,205
Interest income and other, net		140			(84	)		438			379

Income (loss) before income taxes	$	(7,933	)	$	15,289		$	(21,813	)	$	31,584

Total assets for each reportable segment as of October 1, 2011 and December 31, 2010 are as follows:

Assets


	October 1, 2011		December 31, 2010
	(In thousands)
Equipment	$	49,064	$	57,130
Intevac Photonics		29,292		31,275

Total segment assets		78,356		88,405

Cash, cash equivalents and investments		122,056		137,380
Deferred income taxes		23,851		17,718
Other current assets		6,679		5,889
Common property, plant and equipment		1,427		1,803
Other assets		728		576

Consolidated total assets	$	233,097	$	251,771

INTEVAC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

12. Income Taxes

Intevac’s effective income tax rate for the three and nine months ended October 1, 2011 was 21.3% and 27.4%, respectively. Intevac’s effective income tax rate for the three and nine months ended October 2, 2010 was 13.7% and 14.5%, respectively. Intevac adjusts its effective income tax rate each quarter to be consistent with the estimated annual effective income tax rate. The effective income 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 Intevac’s worldwide earnings. Intevac’s effective income tax rate is highly dependent on the availability of tax credits and the geographic composition of Intevac’s worldwide earnings.

Intevac is subject to income taxes in the U.S. federal jurisdiction, and various state 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 not subject to U.S. federal, state and local, or international jurisdictions income tax examinations by tax authorities for the years before 2006. Tax years 1999 through 2006 are subject to income tax examinations by U.S. federal and California tax authorities to the extent of tax credit carry forwards remaining or utilized in an otherwise open year. During the first quarter of fiscal 2011, the California income tax examination for fiscal years ended 2005, 2006 and 2007 was completed. Due to an income tax refund generated by a carry-back claim, the Internal Revenue Service is currently conducting a review of the Company’s fiscal year 2009 tax return. Additionally, the Singapore Inland Revenue Authority is conducting an examination of the fiscal 2009 tax return of the Company’s wholly-owned subsidiary, Intevac Asia Pte. Ltd. Presently, there are no other active income tax examinations in the jurisdictions where Intevac operates.

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.

Item 2.

Management’s 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 Intevac’s shipments, projected revenue recognition, product costs, gross margin, operating expenses, interest income, income taxes, cash balances and financial results in 2011 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; legal proceedings; and internal controls. 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 25, 2011, 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, high-productivity process manufacturing equipment and inspection solutions to the photovoltaic (“PV”) industry and wafer handling platforms to the semiconductor industry. Intevac also provides sensors, cameras and systems for government applications such as night vision and long-range target identification and for commercial applications in the inspection, medical, scientific and security industries. Intevac’s customers include manufacturers of hard disk drives, semiconductor equipment, and PV cells as well as medical, scientific and security companies, law enforcement and the U.S. government and its agencies and contractors. Intevac reports two segments: Equipment and Intevac Photonics. During the fourth quarter of 2010, Intevac completed the acquisition of the outstanding shares of Solar Implant Technologies, Inc. (“SIT”), a privately-owned, development-stage company, creating a manufacturing module for PV applications.

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, with the exception of Japan, are sold primarily through a direct sales force. In Japan, sales are typically made by Intevac’s Japanese distributor, Matsubo.

Intevac’s results are driven by the combination of worldwide demand for hard disk drives, which in turn depends on end-user demand for personal computers, enterprise data storage, personal audio and video players and video game platforms and Intevac’s customers’ relative market share positions. Intevac continues to execute its equipment diversification strategy into new markets by introducing products for PV solar cell and semiconductor equipment manufacturing. Intevac believes that expansion into these new markets which are significantly larger than the hard disk drive deposition equipment market will result in incremental equipment revenues for Intevac and decrease Intevac’s dependence on the hard disk drive industry. Intevac’s 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, semiconductors, and PV cells, 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 and nine months ended October 1, 2011 and October 2, 2010:


	Three months ended									Nine months ended
	October 1, 2011			October 2, 2010			Change over prior period			October 1, 2011			October 2, 2010			Change over prior period
	(In thousands, except percentages and per share amounts)

Net revenues	$	19,321		$	64,627		$	(45,306	)	$	64,329		$	166,367		$	(102,038	)
Gross profit	$	7,518		$	29,584		$	(22,066	)	$	24,035		$	73,096		$	(49,061	)
Gross margin percent		38.9	%		45.8	%		(6.9) points			37.4	%		43.9	%		(6.5) points
Net income (loss)	$	(6,116	)	$	13,179		$	(19,295	)	$	(15,766	)	$	26,946		$	(42,712	)
Earnings (loss) per diluted share	$	(0.27	)	$	0.58		$	(0.85	)	$	(0.69	)	$	1.18		$	(1.87	)

Financial results for the third quarter and first nine months for fiscal 2011 declined over the same periods in the prior year as Intevac’s Equipment customers took delivery of fewer 200 Lean systems. Net revenues decreased during the third quarter and first nine months of fiscal 2011 primarily due to lower equipment sales to disk manufacturers and lower Intevac Photonics’ technology development contracts offset in part by higher Intevac Photonics product sales. Net income for the third quarter and first nine months of fiscal 2011 decreased compared to the same periods in the prior year due to lower net revenues and increased operating expenses from the inclusion of SIT which was acquired in the fourth quarter of fiscal 2010, offset in-part by the absence of variable compensation expenses and recognition of an income tax benefit. In the third quarter and nine months of fiscal 2011, the Company did not record compensation expense in association with its variable compensation programs as a result of being in a loss position.

Intevac expects its Equipment revenue for the fourth quarter of 2011 to be at the same level as the third quarter of 2011. Although hard drive customers are not expected to take delivery of any systems for capacity for the remainder of 2011, Intevac expects increased revenue from its new PV equipment products. Intevac expects Intevac Photonics’ revenues in the fourth quarter of 2011 to be at the same level as the third quarter of 2011.

Intevac’s trademarks, include the following: “200 Lean^®,” “AccuLuber™,” “Continuum™,” “DeltaNu^®,” “EBAPS^®,” “ExaminerR™,” “I-Port™,” “LEAN SOLAR™,” “LithoPrime™,” “LIVAR^®,” “MicroVista^®,” “NanoVista™,” “NightVista^®,” “Night Port™,” “PHARMA-ID™,” and “RAPID-ID™”.

Results of Operations

Net revenues


	Three months ended							Nine months ended
	October 1, 2011		October 2, 2010		Change over prior period			October 1, 2011		October 2, 2010		Change over prior period
	(In thousands)

Equipment	$	12,384	$	55,868	$	(43,484	)	$	42,379	$	141,453	$	(99,074	)
Intevac Photonics		6,937		8,759		(1,822	)		21,950		24,914		(2,964	)

Total net revenues	$	19,321	$	64,627	$	(45,306	)	$	64,329	$	166,367	$	(102,038	)

Net revenues consist primarily of sales of equipment used to manufacture thin-film disks, and, to a lesser extent, related equipment and system components; revenue from contract research and development related to the development of electro-optical sensors, cameras and systems; and sales of low-light imaging products and table-top and handheld Raman instruments.

Equipment revenue for the three and nine months ended October 1, 2011 decreased over the same periods in the prior year as a result of lower sales of disk sputtering systems, technology upgrades and spare parts. During the third quarter of 2011 Intevac recognized revenue on four AccuLuber^TM systems, disk equipment technology upgrades, and spare parts. During the third quarter of 2011 Intevac recognized the first revenue from its PV products. Intevac sold a LEAN SOLAR™ system whereby revenue is being recognized under the installment method of accounting over the next several years per the agreement with this customer. During the third quarter of 2010, Intevac recognized revenue on eight 200 Lean systems, disk equipment technology upgrades and spare parts. Equipment revenue for the nine months ended October 1, 2011 included revenue recognition for three 200 Lean systems, eight AccuLuber systems, three Continuum™ wafer handling systems, upgrades and spare parts. Equipment revenue for the nine months ended October 2, 2010 included revenue recognition for twenty-two 200 Lean systems, upgrades and spare parts. Long-term demand for hard disk drives is expected to increase driven by the need for corporations to replace and update employee computers, increased information technology spending, growth in digital storage, a declining growth rate in areal density improvements and the proliferation of personal computers into emerging economies. The number of systems needed to support this growth can vary from year to year and is dependent on the factors noted above.

Intevac Photonics revenue for the three and nine months ended October 1, 2011 decreased over the same periods in the prior year which was the result of decreased contract research and development work, offset in part by increased product sales. Intevac Photonics revenues for the three months ended October 1, 2011 consisted of $1.5 million of research and development contract revenue and $5.4 million of product sales as compared to $5.2 million of research and development contract revenue and $3.5 million of product sales for the three months ended October 2, 2010. Intevac Photonics revenues for the nine months ended October 1, 2011 consisted of $5.3 million of research and development contract revenue and $16.6 million of product sales as compared to $14.1 million of research and development contract revenue and $10.8 million of product sales for the nine months ended October 2, 2010. The increase in product revenue resulted from higher sales of digital night-vision and commercial products. The decrease in contract research and development revenue was the result of a lower volume of contracts as several of Intevac Photonics’ large development contracts were completed in 2010 and delays in U.S. government defense budget approvals. Intevac expects that in 2011, Intevac Photonics business levels will be down compared to fiscal 2010. Substantial growth in future Intevac Photonics revenues is dependent on proliferation of Intevac’s technology into major military programs, continued defense spending, the ability to obtain export licenses for foreign customers, obtaining production subcontracts for these programs, and development and sale of additional commercial products.

Intevac’s backlog of orders at October 1, 2011 was $26.2 million, compared to $46.7 million at December 31, 2010 and $64.9 million at October 2, 2010. The $26.2 million of backlog at October 1, 2011 consisted of $12.7 million of Equipment backlog and $13.5 million of Intevac Photonics backlog. The $46.7 million of backlog at December 31, 2010 consisted of $27.3 million of Equipment backlog and $19.4 million of Intevac Photonics backlog. Backlog at October 1, 2011 includes one LEAN SOLAR system and no 200 Lean systems as compared to two solar systems and two 200 Lean systems at December 31, 2010 and six 200 Lean systems at October 2, 2010.

International sales decreased by 75.1% to $12.4 million for the three months ended October 1, 2011 from $50.0 million for the three months ended October 2, 2010 and by 65.9% to $43.7 million for the nine months ended October 1, 2011 from $127.9 million for the nine months ended October 2, 2010. International sales 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, upgrades and spare parts. Substantially all of Intevac’s international sales are to customers in Asia. International sales constituted 64.4% of net revenues for the three months ended October 1, 2011 and 77.3% of net revenues for the three months ended October 2, 2010. International sales constituted 67.9% of net revenues for the nine months ended October 1, 2011 and 76.9% of net revenues for the nine months ended October 2, 2010. The mix of domestic versus international sales will change from period to period depending on the location of Intevac’s largest customers in each period.

Gross profit


	Three months ended									Nine months ended
	October 1, 2011			October 2, 2010			Change over prior period			October 1, 2011			October 2, 2010			Change over prior period
	(In thousands, except percentages)

Equipment gross profit	$	5,556		$	27,271		$	(21,715	)	$	17,763		$	66,686		$	(48,923	)
% of Equipment net revenues		44.9	%		48.8	%					41.9	%		47.1	%
Intevac Photonics gross profit	$	1,962		$	2,313		$	(351	)	$	6,272		$	6,410		$	(138	)
% of Intevac Photonics net revenues		28.3	%		26.4	%					28.6	%		25.7	%
Total gross profit	$	7,518		$	29,584		$	(22,066	)	$	24,035		$	73,096		$	(49,061	)
% of net revenues		38.9	%		45.8	%					37.4	%		43.9	%

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.

Equipment gross margin was 44.9% in the three months ended October 1, 2011 compared to 48.8% in the three months ended October 2, 2010 and was 41.9% in the nine months ended October 1, 2011 compared to 47.1% in the nine months ended October 2, 2010. The lower gross margin was due primarily to lower revenues and lower factory utilization, partially offset by changes in product mix. Gross margins in the Equipment business will vary depending on a number of factors, including product mix, product cost, system configuration and pricing, factory utilization, and provisions for excess and obsolete inventory.

Intevac Photonics gross margin was 28.3% in the three months ended October 1, 2011 compared to 26.4% in the three months ended October 2, 2010 and was 28.6% in the nine months ended October 1, 2011 compared to 25.7% in the nine months ended October 2, 2010. The improvement in gross margin resulted primarily from favorable product mix to higher margin product sales, lower warranty costs and inventory reserves, and manufacturing cost reductions offset in part by lower revenues, and lower margins on contract research and development.

Research and development


	Three months ended						Nine months ended
	October 1, 2011		October 2, 2010		Change over prior period		October 1, 2011		October 2, 2010		Change over prior period
	(In thousands)

Research and development expense	$	8,612	$	7,063	$	1,549	$	25,914	$	20,618	$	5,296

Equipment research and development spending increased during the three and nine months ended October 1, 2011 as compared to the same periods in the prior year due primarily to increased PV development and the inclusion of SIT which was acquired in the fourth quarter of fiscal 2010. Research and development spending in Intevac Photonics increased during the three and nine months ended October 1, 2011 as compared to the same periods in the prior year due primarily to a lower volume of billable contract research and development efforts. Research and development expenses do not include costs of $1.1 million and $3.5 million for the three and nine months ended October 1, 2011 respectively, $3.3 million and $9.2 million for the three and nine months ended October 2, 2010, respectively, which are related to Intevac Photonics contract research and development and included in cost of net revenues.

Selling, general and administrative


	Three months ended							Nine months ended
	October 1, 2011		October 2, 2010		Change over prior period			October 1, 2011		October 2, 2010		Change over prior period
	(In thousands)

Selling, general and administrative expense	$	6,979	$	7,148	$	(169	)	$	20,372	$	21,273	$	(901	)

Selling, general and administrative expense consists primarily of selling, marketing, customer support, financial and management costs. The decrease in selling, general and administrative spending in the three and nine months ended October 1, 2011 compared to the three and nine months ended October 2, 2010 was primarily the result of the suspension of variable compensation accruals offset in part by acquisition-related charges and increased equity compensation expense. Selling, general and administrative expense for the three and nine months ended October 1, 2011 includes $344,000 and $917,000, respectively, in charges associated with the change in the fair value of the contingent consideration obligations related to the SIT acquisition. Selling, general and administrative spending in the nine months ended October 2, 2010 included legal expenses associated with the successful resolution of the auction rate securities (“ARS”) arbitration which was completed in the third quarter of fiscal 2010.

Interest income and other, net


	Three months ended							Nine months ended
	October 1, 2011		October 2, 2010			Change over prior period		October 1, 2011		October 2, 2010		Change over prior period
	(In thousands)

Interest income and other, net	$	140	$	(84	)	$	224	$	438	$	379	$	59

Interest income and other, net consists primarily of interest income on investments and foreign currency gains and losses. The increase in interest and other income in the three months ended October 1, 2011 resulted from higher interest from higher investment balances and foreign currency gains. The increase in interest and other income in the nine months ended October 1, 2011 resulted from a gain on sale of fixed assets and lower foreign currency losses, offset in part by lower interest rates. Interest income and other for the three and nine months ended October 1, 2011 is net of $133,000 and $283,000, respectively, in realized losses on the sale of ARS that were sold to the issuers at less than par value as part of tender offers.

Income tax provision (benefit)


	Three months ended								Nine months ended
	October 1, 2011			October 2, 2010		Change over prior period			October 1, 2011			October 2, 2010		Change over prior period
	(In thousands)

Income tax provision (benefit)	$	(1,817	)	$	2,110	$	(3,927	)	$	(6,047	)	$	4,638	$	(10,685	)

Intevac enjoys a tax holiday in Singapore through the tax years ending in 2015. The tax holiday provides a

lower income tax rate on certain classes of income and the agreement requires that certain thresholds of business investment and employment levels be met in Singapore in order to maintain this holiday.

Liquidity and Capital Resources

At October 1, 2011, Intevac had $122.0 million in cash, cash equivalents, and investments compared to $137.4 million at December 31, 2010. During the first nine months of 2011, cash, cash equivalents and investments decreased by $15.3 million due primarily to cash used by operating activities, payment of acquisition-related contingent consideration 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.

Cash, cash-equivalents and investments consist of the following:


	October 1, 2011		December 31, 2010
	(In thousands)
Cash and cash equivalents	$	27,933	$	109,520
Short-term investments		45,437		4,994
Long-term investments		48,686		22,866

Total cash, cash equivalents and investments	$	122,056	$	137,380

Operating activities used cash of $10.1 million during the first nine months of 2011 and generated cash of $39.8 million during the first nine months of 2010. The decrease in cash generated by operating activities was due primarily to the net loss and changes in working capital during the first nine months of 2011.

Accounts receivable totaled $16.3 million at October 1, 2011, compared to $25.9 million at December 31, 2010. The decrease of $9.6 million in the receivable balance was due to collections and lower revenue levels. Total net inventories decreased to $19.8 million at October 1, 2011, compared to $20.7 million at December 31, 2010 due to system shipments. Accrued payroll and related liabilities decreased by $6.0 million during the nine months ended October 1, 2011 primarily related to the payment for prior year bonuses and profit sharing.

Investing activities in the first nine months of 2011 used cash of $71.8 million. Purchases of investments net of proceeds from sales of investments totaled $67.3 million. Capital expenditures for the nine months ended October 1, 2011 were $4.7 million.

Financing activities in the first nine months of 2011 generated cash of $236,000. Intevac generated cash of $2.6 million from the sale of Intevac common stock to Intevac’s employees through Intevac’s employee benefit plans. In connection with the acquisition of SIT, Intevac agreed to pay up to an aggregate of $7.0 million in cash to the selling shareholders if certain milestones are achieved over a specified period. On July 21, 2011, Intevac made $2.4 million in payments to the selling shareholders of SIT for achievement of the first milestone.

Intevac’s investment portfolio consists principally of investment grade money market mutual funds, FDIC insured corporate bonds, U.S. Treasury and agency securities, commercial paper, municipal bonds, corporate bonds and variable rate demand notes (“VRDNs”). 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 October 1, 2011, Intevac’s available-for-sale securities included $5.4 million par value of auction rate securities (“ARS”), less a temporary valuation adjustment of $358,000 to reflect their current lack of liquidity. Management believes that the impairment of the ARS investments is temporary. Due to current market conditions, these investments have experienced failed auctions beginning in mid-February 2008. These failed auctions result in a lack of liquidity in the securities, but do not affect the underlying collateral of the securities. Intevac does not anticipate that any potential lack of liquidity in these ARS will affect its ability to finance its operations and planned capital expenditures. Intevac continues to monitor efforts by the financial markets to find alternative means for restoring the liquidity of these investments. These investments are classified as non-current assets until Intevac has better visibility as to when their liquidity will be restored. The classification and valuation of these securities will continue to be reviewed quarterly. During the first nine months of 2011, Intevac participated in two tender offers, sold ARS with par values of $5.0 million, collected $4.7 million and recognized realized losses on the sales of $283,000. Additionally, during the first nine months of 2011, $500,000 of ARS were redeemed at par.

As described in Note 8 of Notes to Condensed Consolidated Financial Statements, the fair value of the ARS was estimated at $5.0 million using discounted cash flow models. The estimates of future cash flows are based on certain key assumptions, such as discount rates appropriate for the type of asset and risk, which are significant unobservable inputs. There was insufficient observable market information for the ARS held by Intevac to determine the fair value. Therefore Level 3 fair values were estimated for these securities by incorporating assumptions that market participants would use in their estimates of fair value. Some of these assumptions included credit quality, collateralization, final stated maturity, estimates of the probability of being called or becoming liquid prior to final maturity, redemptions of similar ARS, previous market activity for the same investment security, impact due to extended periods of maximum auction rates and valuation models.

As of October 1, 2011, approximately $13.5 million of cash and cash equivalents and $18.0 million of investments 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 $3.0 to $4.0 million in capital expenditures during the remainder of 2011.

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 25, 2011. 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 2010 Form 10-K. Management believes that there has been no significant change during the nine months ended October 1, 2011 to the items identified as critical accounting policies in Intevac’s 2010 Form 10-K.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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. Intevac places its investments with high quality credit issuers and, by policy, limits the amount of credit exposure to any one issuer. Investments typically consist of commercial paper, FDIC insured corporate bonds, obligations of the U.S. government and its agencies, corporate debt securities, municipal bonds, VRDNs and ARS.

The table below presents principal amounts and related weighted-average interest rates by year of expected maturity for Intevac’s investment portfolio at October 1, 2011.


	2011			2012			2013			2014		2015		Beyond			Total		Fair Value
	(In thousands, except percentages)
Cash equivalents
Fixed rate amounts	$	1,250			—			—			—		—		—		$	1,250	$	1,250
Weighted-average rate		0.22	%		—			—			—		—		—
Variable rate amounts	$	5,081			—			—			—		—		—		$	5,081	$	5,081
Weighted-average rate		0.08	%		—			—			—		—		—
Short-term investments
Fixed rate amounts	$	7,363		$	29,765			—			—		—		—		$	37,128	$	37,137
Weighted-average rate		1.46	%		3.58	%		—			—		—		—
Variable rate amounts	$	7,746		$	550			—			—		—		—		$	8,296	$	8,300
Weighted-average rate		0.37	%		0.35	%		—			—		—		—
Long-term investments
Fixed rate amounts		—		$	27,129		$	16,532			—		—	$	5,400		$	49,061	$	48,686
Weighted-average rate		—			2.48	%		3.08	%		—		—		0.42	%
Total investment portfolio	$	21,440		$	57,444		$	16,532			—		—	$	5,400		$	100,816	$	100,454

At October 1, 2011, Intevac held investments in ARS. With the liquidity issues experienced in global credit and capital markets, Intevac’s ARS have experienced multiple failed auctions. Intevac continues to earn interest at the maximum contractual rate for each security. The estimated values of the ARS held by Intevac are no longer at par. As of October 1, 2011, Intevac had $5.0 million in ARS in the Condensed Consolidated Balance Sheet, which is net of an unrealized loss of $358,000. The unrealized loss is included in other comprehensive income, as the decline in value is deemed to be temporary due primarily to Intevac’s ability and intent to hold these securities long enough to recover

their values and that it is more likely than not that Intevac would not be required to sell these ARS before recovery in their par values.

Intevac continues to monitor the market for ARS and consider its impact (if any) on the fair market value of its investments. If the current market conditions continue, or the anticipated recovery in market values does not occur, Intevac may be required to record additional unrealized losses or record an impairment charge in 2011.

Based on Intevac’s ability to access its cash, its expected operating cash flows, and other sources of cash, Intevac does not anticipate that the lack of liquidity of these investments will affect Intevac’s ability to operate its business in the ordinary course.

Foreign exchange risk. From time to time, Intevac enters into foreign currency forward exchange contracts to hedge certain of its 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 Intevac’s operating results. At October 1, 2011, 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 October 1, 2011, 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 Intevac’s disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, Intevac’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 1, 2011.

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 Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications, 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 our 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 Commission’s rules and forms. Disclosure Controls are also designed to ensure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls include components of our internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our 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 our internal control over financial reporting are included within our Disclosure Controls, they are included in the scope of our quarterly controls evaluation.

Limitations on the effectiveness of controls

Intevac’s management, including the CEO and CFO, does not expect that Intevac’s Disclosure Controls or Intevac’s 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 system’s 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 Intevac 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 our 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, Intevac’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, Intevac is involved in claims and legal proceedings that arise in the ordinary course of business. Intevac expects that the number and significance of these matters will increase as Intevac’s 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. Intevac is not presently a party to any lawsuit or proceeding that, in Intevac’s opinion, is likely to seriously harm Intevac’s business.

Item 1A. Risk Factors

The following factors could materially affect Intevac’s business, financial condition or results of operations and should be carefully considered in evaluating the Company and its business, in addition to other information presented elsewhere in this report.

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 technology products such as disk drives. We have also entered markets to sell equipment used to manufacture commodity technology products such as semiconductor devices and photovoltaic (“PV”) solar cells. This subjects us to business cycles, the timing, length and volatility of which can be difficult to predict. When demand for commodity technology products exceeds production capacity, then demand for new capital equipment such as ours tends to be amplified. Conversely, when supply of commodity technology 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, followed by a downturn in the cycle in late 2007 which continued through 2009. The number of new systems delivered declined sequentially in 2007, 2008 and 2009. The number of new systems delivered increased in 2010 as customers increased their production capacity in response to increased demand for digital storage. Intevac does not expect to ship any 200 Lean systems for capacity additions for the remainder of 2011 as the hard disk drive industry is not expected to add the same level of capacity experienced in 2010. 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 making 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, semiconductor and solar cell manufacturing industries have from time to time made significant additions to their production capacity. Our customers generally reduce their level of capital investment during downturns in the overall economy, or during a downturn in their industries.

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.

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 Intevac and numerous product presentations and demonstrations for our prospective customers. Our sales process also commonly includes production of samples, customization of our products, 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 systems, then we tend to sell more upgrade products and fewer new systems, which can significantly reduce total revenue. For example, some of our 200 Lean customers continue to use legacy systems for the production of perpendicular media, which delayed the replacement of such 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. We expect that in the future, new personal computing devices and products will be developed, some of which, such as Internet appliances, tablet computing devices, netbooks or mobile phones with advanced capabilities, or “smartphones”, may not contain a disk drive. Products using alternative technologies, such as flash memory, optical storage and other storage technologies, are becoming increasingly common and could become a significant source of competition to particular applications of the products of our 200 Lean customers, which could adversely affect our results of operations. If alternative technologies, such as flash memory, replace hard disk drives as a significant method of digital storage, then demand for our hard disk manufacturing products would decrease.

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 experience competition from Canon Anelva, which has sold a substantial number of systems worldwide. In the market for semiconductor wafer handling equipment we are attempting to enter a market with several large established competitors including Brooks Automation and Genmark Automation as well as competition from internally developed products at Applied Materials and Tokyo Electron. Intevac is attempting to enter the PV equipment market, and faces competition from large established competitors

including Applied Materials, Veeco Instruments, Centrotherm Photovoltaics, Meyer Burger Roth & Rau AG, Varian Semiconductor Equipment Associates, Von Ardenne and cell module manufacturers that are internally developing manufacturing equipment that may be sold externally in the future. In the market for our military imaging products we experience competition from companies such as ITT Industries and BAE Systems. In the markets for our commercial imaging products we compete with companies such as Andor, Dalsa, E2V, Hamamatsu, Texas Instruments and Roper Industries for sensor and camera products, and with companies such as Ahura, B&W Tek, GE Security, Horiba–Jobin Yvon, Ocean Optics, Renishaw, Thermo Scientific and Smiths Detection for Raman spectrometer products. Our competitors have substantially greater financial, technical, marketing, manufacturing and other resources than we do, especially in the semiconductor and photovoltaic equipment markets where we have not previously offered products. 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 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. This concentration of customers as well as the customers’ specific capacity plans and market share shifts can lead to extreme variability in revenue and financial results from period to period.

Industry consolidation can limit the number of potential customers for our products. Seagate acquired Maxtor in 2006 and announced in 2011 that it will acquire Samsung’s hard disk drive business. Western Digital acquired Komag in 2007, Hoya’s magnetic media operations in 2010 and announced in 2011 that it will acquire Hitachi Global Storage Technology. 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, such as our 200 Lean Gen II system, our Continuum wafer handling product, our LEAN SOLAR systems for PV applications, our digital night-vision products, our Raman system products and our near-eye display products. 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 are attempting to expand into new or related markets, including the semiconductor market for wafer fabrication equipment and the PV market. Our expansion into the PV market is dependent upon the success of our customers’ development plans, some of which are start-ups and in their preliminary stages of development, as well as their ability to raise capital to fund their future development and capacity expansion. To date we have not recognized material revenue from such products. Failure to correctly assess the size of the markets, to successfully develop cost effective products to address the markets or to establish effective sales and support of the new products would have a material adverse effect on future revenues and profits.

Rapid technological change in our served markets requires 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.

Our quarterly revenues and common stock price have fluctuated significantly. 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) any 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 time and attention.

Adverse economic conditions and volatility and disruption of the capital and credit markets may negatively impact our revenues and our ability to access financing.

Economic conditions worldwide have contributed to decreased spending by our customers and a slowdown in the hard disk drive industry. These factors have adversely impacted our operating results in prior periods and have caused us to be cautious about our future outlook. Our customers continue to remain cautious about the sustainability of the recovery. Negative macroeconomic and global recessionary factors, further volatility or disruption in the capital and credit markets or further uncertainty or weakening in key markets could negatively impact spending for our products and may materially adversely affect our business, operating results and financial condition.

In addition, while we intend to finance operations with existing cash and cash flow from operations, if necessary, we may require financing to support our continued operations. Due to the existing uncertainty in the capital and credit markets, our access to capital may not be available on terms acceptable to us or at all.

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, 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 or the International Traffic in Arms Regulations. These regulations 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. Heightened government scrutiny of export licenses for defense related products has resulted in lengthened review periods for our license applications. Exports to countries that 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 comply with export control laws, including identification and reporting of all exports and re-exports of controlled technology or exports made without correct license approval or improper license use could result in severe penalties and revocation of licenses. Failure to obtain export licenses, delays in obtaining licenses, or revocation of previously issued licenses would prevent us from selling the affected products outside the United States and could negatively impact our results of operations.

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. The U.S government is considering significant changes to defense spending and other programs. We cannot predict the impact of potential changes in priorities due to military

transformation and planning and/or the nature of war-related activity on existing, follow-on or replacement programs. A shift of government priorities to programs in which we do not participate and/or reductions in funding for or the termination of programs in which we do participate, unless offset by other programs and opportunities, could have a material adverse effect on our financial position, results of operations, or cash flows.

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, particularly given the U.S. government’s recent focus on spending in other areas. 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. For example, if the U.S. government is less focused on defense spending or there is a decrease in hostilities, demand for our products could decrease. 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 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 government’s 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 believe 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.

Intevac enjoys a tax holiday in Singapore through the tax years ending in 2015. The tax holiday provides a lower income tax rate on certain classes of income and the agreement requires that certain thresholds of business investment and employment levels be met in Singapore in order to maintain this holiday. We may lose our eligibility for such benefits if, among other things, applicable requirements are not met or if Intevac incurs net losses for which it cannot claim a deduction. Loss of these tax benefits could result in our income in Singapore being taxed at the statutory rate of 17% instead of the agreed Pioneer Tax Holiday rate of 0%. A loss of all or part of these tax benefits would adversely affect our results of operations and cash flows.

We booked significant tax benefits in 2008, 2009 and the first nine months of 2011 based on management’s belief that we could both carryback losses and tax credits to years Intevac paid income taxes and carryforward losses and tax credits to future years where we would generate taxable income. Intevac will need to generate approximately $71 million of taxable income in the United States in order to realize the Federal deferred tax assets recorded as of October 1, 2011. If our expectations of future income are incorrect, we could be required to establish a valuation allowance against some or all of the deferred tax assets.

Our success depends on international sales and the management of global operations.

The majority of our revenues come from regions outside the United States. Most 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, and Malaysia. 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.

We may be subject to additional impairment charges due to potential declines in the fair value of our assets.

As a result of our acquisitions, we have significant goodwill and intangible assets on our balance sheet. We test goodwill and intangible assets for impairment on a periodic basis as required, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The events or changes that could require us to test our goodwill and intangible assets for impairment include: a significant reduction in our stock price, and as a result market capitalization, changes in our estimated future cash flows, as well as changes in rates of growth in our industry or in any of our reporting units. In the fourth quarter of 2008, we recorded an impairment charge of $10.5 million for goodwill due to a decline in our market capitalization and certain purchased technology intangible assets due to lower revenue expectations. We will continue to evaluate the carrying value of our remaining goodwill and intangible assets and if we determine in the future that there is a potential further impairment in any of our reporting units, we may be required to record additional charges to earnings which could materially adversely affect our financial results and could also materially adversely affect our business. See Note 5 “Business Combination, Goodwill and Purchased Intangible Assets, Net” in the Notes to the Condensed Consolidated Financial Statements for additional information related to impairment of goodwill and intangible assets.

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. 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, semiconductor, and solar industries for skilled employees. Failure to retain existing 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 on 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 subassemblies 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. Some of our suppliers are thinly capitalized and may be vulnerable to failure given recent economic conditions.

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. 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 certain assets of DeltaNu, LLC and certain assets of Creative Display Systems, LLC, in 2008 we acquired certain assets of OC Oerlikon Balzers Ltd. and in 2010 we acquired the outstanding shares of Solar Implant Technologies, Inc. We have spent and may continue to spend significant resources identifying and pursuing future acquisition opportunities. Acquisitions involve numerous risks including: (1) difficulties in integrating the operations, technologies and products of the acquired companies; (2) the diversion of our management’s attention from other business concerns; and (3) the potential loss of key employees of the acquired companies. Failure to achieve the anticipated benefits of the prior 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 detailed disaster recovery plan. Despite our implementation of network security measures, our tools and servers may be 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 or 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 business interruptions, but there is no certainty that our efforts will prove successful.

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 over financial reporting.

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, 2010, 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 Intevac fails to maintain effective internal control over financial reporting; our management does not timely assess the adequacy of such internal control; or our independent registered public accounting firm does not deliver an unqualified opinion as to the effectiveness of our internal control over financial reporting, then we could be subject to restatement of previously reported financial results, regulatory sanctions and a decline in the public’s perception of Intevac, 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.

(Removed and Reserved)

Item 5.

Other Information

None.

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 Executive Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Secretary Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications Pursuant to U.S.C. 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document *

101.SCH		XBRL Taxonomy Extension Schema *

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document *

101.LAB		XBRL Taxonomy Extension Label Linkbase Document *

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document *

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.

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: November 1, 2011

/S/ KEVIN FAIRBAIRN

Kevin Fairbairn

President, Chief Executive Officer and Director

(Principal Executive Officer)