Vicor Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. Amounts are in U.S. dollars; financial statement amounts are in thousands except per-share data. Vicor designs and manufactures modular power components and systems and licenses technology for royalties.
Financial performance
- Revenue: $54.462 million, up 18.3% year over year and 13.3% sequentially from Q4 2016. Management attributed the annual increase mainly to higher bookings, particularly in VI Chip and Picor.
- Gross profit and margin: $23.652 million; gross margin was 43.4%, versus $19.316 million and 42.0% in Q1 2016. Higher revenue and production-volume absorption of manufacturing overhead supported the improvement.
- Operating results: Operating expenses were $25.030 million, up 1.2%. Operating loss improved to $1.378 million from $5.429 million. Net loss attributable to Vicor was $974,000, or $0.02 per share, compared with $5.351 million, or $0.14 per share.
- Cash flow and investment: Operating cash use was $1.347 million, compared with $834,000 in Q1 2016. Capital expenditures were $2.648 million, versus $1.887 million; cash and cash equivalents declined $3.343 million to $52.827 million.
- Liquidity and balance sheet: Current assets were $113.680 million and current liabilities $24.500 million, a 4.6:1 current ratio and $89.180 million of working capital. Total assets were $156.571 million and total liabilities $25.326 million. No interest-bearing debt is reported in the provided balance sheet.
- Other metrics: Backlog scheduled for shipment within 12 months was approximately $51.732 million, up from $48.371 million at year-end 2016. Inventory was $27.429 million, up $293,000 from year-end. Export sales were 63.2% of revenue, versus 59.1% a year earlier.
Changes and segment trends
- External segment revenue increased in VI Chip to $12.425 million from $7.340 million and in Picor to $4.502 million from $1.818 million; BBU revenue edged up to $37.535 million from $36.869 million. Growth in VI Chip and Picor was associated largely with 48-volt-to-point-of-load solutions. BBU bookings declined 5.4% year over year, while VI Chip and Picor bookings rose 109.3% and 53.1%, respectively.
- Operating performance improved but remained loss-making. Management said legacy-product demand remained weak amid macroeconomic uncertainty, while customer interest and bookings for newer products increased. Adoption cycles for new products have been longer than anticipated.
- Other income was $325,000 versus $75,000, including $198,000 of rental income from the former Westcor facility under a lease begun in Q2 2016.
Outlook, risks, and unusual items
- No quantified revenue, earnings, or margin guidance was provided. Management said it expects operating expenses, particularly engineering and sales, to remain relatively high as a percentage of revenue. Profitability depends on achieving sustained, higher-volume production to absorb fixed manufacturing costs.
- Management cited unpredictable customer orders and schedules, long sales cycles, macroeconomic weakness in legacy markets, and increased competition in the 48-volt datacenter opportunity. Component shortages and supply-chain disruptions could also affect production and results. Management believes cash and expected operating cash flows can fund planned operations and equipment purchases for the foreseeable future.
- Investment valuation risk: Vicor held a $3.0 million par-value auction-rate security, valued at $2.526 million and classified as long-term and Level 3. Auctions had failed since 2008; management expects recovery to take more than 12 months. Further market deterioration could cause additional losses or impairment. The security is student-loan-backed and U.S.-guaranteed; management said it did not expect the illiquidity to impair its operating plan.
- Litigation: SynQor’s patent-infringement case remained stayed pending patent-review proceedings and appeals. Oral arguments were scheduled for May 2, 2017. Vicor denied infringement and said it did not consider a loss probable; it could not estimate a possible loss amount or range.
- Capital expenditure commitments were approximately $2.734 million. A three-year warranty period began in 2017 for certain military-grade products sold after January 1. Management reported effective disclosure controls and no material change in internal control during the quarter; no material risk-factor changes from the 2016 Form 10-K were reported.
- Revenue recognition guidance effective for Vicor in 2018 will change treatment of shipments to stocking distributors: Vicor expects to recognize revenue upon sale to distributors, estimating returns and allowances, rather than deferring revenue until distributor resale. The financial impact was still under evaluation.
Investor verification points
- Track whether the higher backlog and 48-volt product bookings convert to shipments and sustained revenue, given management’s stated customer-scheduling volatility and extended sales cycles.
- Assess whether production volumes and gross-margin improvement are sufficient to cover fixed manufacturing costs and ongoing R&D and selling expenses.
- Review cash use, capital spending, and the approximately $2.734 million of committed expenditures against the $52.827 million cash balance.
- Monitor the failed auction-rate security’s valuation and liquidity, and the SynQor appeals and litigation exposure.
- Confirm the eventual financial and transition effects of the new distributor revenue-recognition standard.