VICOR CORP quarterly report, Q3 FY2015

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Vicor Corporation — Q3 2015 Form 10-Q

Reporting period: Three and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless stated otherwise. Vicor designs, manufactures and sells modular power components and power systems through its BBU, VI Chip and Picor segments.

Financial performance

  • Q3 revenue: $48.7 million, down 16.7% year over year and 13.3% sequentially. Q3 gross margin was $21.3 million, or 43.7% of revenue, versus 43.7% a year earlier and 47.2% in Q2 2015.
  • Q3 operating results: Operating loss was $2.2 million, compared with a $4.1 million loss in Q3 2014. Net income attributable to Vicor was $2.5 million, or $0.06 per diluted share, versus a $3.7 million loss, or $0.10 per share, a year earlier. Q3 net income included a $5.0 million gain on the sale of the GWS investment; without that gain, reported net income would not represent operating profitability.
  • Nine-month results: Revenue was $168.8 million, up 2.3%; gross margin was $76.7 million, or 45.4% of revenue, versus $71.0 million, or 43.0%. Operating income was $2.2 million versus an operating loss of $14.6 million. Net income attributable to Vicor was $6.7 million, or $0.17 per diluted share, versus a $13.9 million loss, or $0.36 per share; the 2015 result included the $5.0 million GWS gain.
  • Cash flow and investment: Nine-month operating cash flow was $12.9 million versus $1.5 million. Capital expenditures were $5.6 million; the company also received $5.0 million from the GWS investment sale. Cash and cash equivalents increased to $68.6 million from $55.2 million at year-end 2014.
  • Liquidity and balance sheet: Current assets were $122.5 million and current liabilities $22.0 million; working capital was $100.5 million and the current ratio 5.6:1. Total liabilities were $23.7 million and equity $139.6 million. The balance sheet provides no separate borrowings or debt balance.

Changes and segment trends

  • Q3 revenue declined across all segments: BBU down 10.6%, VI Chip down 41.8% and Picor down 29.2%. Management attributed the sharper VI Chip and Picor declines to reduced bookings from their major datacenter customer.
  • For the first nine months, VI Chip revenue rose 22.5% and Picor rose 102.6%, while BBU fell 4.5%. The nine-month gross margin improvement reflected increased VI Chip and Picor sales, a higher proportion of higher-margin Picor products, BBU pricing improvements and benefits from the Westcor manufacturing consolidation.
  • Operating expenses fell 20.8% in Q3 and 13.0% for the nine-month period, mainly due to lower legal expenses, including reduced SynQor litigation activity. R&D spending remained substantial at $10.1 million in Q3 and $31.2 million year to date.

Outlook, risks and unusual items

  • Management gave no numerical revenue or earnings guidance. It described the near-term outlook as uncertain: Q3 bookings were slightly above Q2 but materially below quarterly bookings from Q2 2014 through Q1 2015. Backlog was $43.3 million, up from $41.6 million in Q2 but down from $52.5 million a year earlier.
  • Management cited delays and shifting revenue timing from a transition to a new datacenter voltage-regulation standard, weak defense-electronics demand and economic uncertainty in some regions. Its strategic focus on fewer, higher-volume customers leaves Vicor exposed to demand swings among a limited number of early adopters; customer diversification may take time.
  • The $5.0 million GWS proceeds were received following Intersil’s acquisition of GWS. Vicor’s investment had previously been written down to zero, so the proceeds were recorded as a gain. Vicor may receive additional contingent consideration, but recognizability and amount were not established. The company also has indemnification obligations under the transaction; management considered a payment remote.
  • A $3.0 million-par failed auction-rate security was carried at $2.629 million as a long-term Level 3 investment, including a $371,000 unrealized loss. Management said it did not intend to sell and did not expect to be forced to sell, but further market or credit deterioration could lead to additional losses or impairment. It expects this illiquidity not to impair operations.
  • The SynQor patent case remains pending. Vicor disputes infringement and says a loss is not probable, but cannot estimate a possible loss or range. Certain patent claims were invalidated, while other validity challenges and litigation remain unresolved. Capital expenditure commitments were approximately $2.3 million.
  • Management said cash and expected operating cash flows should fund planned operations and equipment purchases for the foreseeable future. Disclosure controls were assessed as effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported.

Key facts for investors to verify

  1. How much of reported Q3 and year-to-date net income depends on the one-time $5.0 million GWS gain, versus recurring operating performance.
  2. Subsequent bookings, backlog and revenue trends, particularly at the major datacenter customer and across VI Chip and Picor.
  3. Recovery prospects and valuation assumptions for the failed auction-rate security, and any subsequent impairment or liquidity developments.
  4. Developments in the SynQor litigation, including potential financial exposure and timing of resolution.
  5. Whether cash generation, capital spending and customer diversification progress as management expects.