Vicor Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. Vicor designs and sells modular power components and power systems for markets including aerospace and defense, computing, industrial, telecommunications, and transportation.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $53.361 million | $46.865 million | $106.594 million | $88.811 million |
| Gross margin | $22.662 million; 42.5% | $18.461 million; 39.4% | $45.454 million; 42.6% | $35.068 million; 39.5% |
| Operating loss | $5.014 million | $6.982 million | $10.453 million | $15.478 million |
| Net loss attributable to Vicor | $4.835 million | $4.616 million | $10.213 million | $9.606 million |
| Loss per share | $0.13 | $0.12 | $0.26 | $0.24 |
- Q2 revenue increased 13.9% year over year and 0.2% sequentially. Six-month revenue rose 20.0%. Gross margin improved primarily from higher revenue and a greater proportion of higher-margin BBU products.
- For the six months, operating cash use was $2.221 million, versus $4.216 million in 2013. Investing cash use was $3.417 million, including $3.481 million of capital expenditures. Cash and cash equivalents declined $5.534 million to $50.805 million.
- At June 30, current assets were $112.823 million and current liabilities $22.851 million; working capital was $89.972 million and the current ratio was 4.9:1. The balance sheet reports no borrowings or other debt.
- Total assets were $158.274 million, total liabilities $25.300 million, and total equity $132.974 million. Inventory was $29.228 million, down $0.468 million from year-end.
Changes versus comparable periods
- Q2 operating loss narrowed year over year, but net loss attributable to Vicor increased modestly. For the first half, operating and pretax losses improved, while net loss worsened; 2013 included a $5.931 million income tax benefit, compared with a $0.017 million tax provision in 2014.
- Q2 revenue growth was led by BBU, up 19.1%; VI Chip revenue declined 30.5% as a major data-center customer transitioned product platforms; Picor revenue increased 109.5% from a lower base. Six-month revenue increased across all three product segments.
- Operating expenses rose 8.8% in Q2 and 10.6% for the first half. Higher legal fees associated with SynQor litigation were the principal SG&A driver: $2.162 million higher in Q2 and $5.158 million higher for the first half.
- Six-month capital expenditures increased to $3.481 million from $2.543 million. The prior-year period included $1.361 million of severance charges.
Outlook, risks, and unusual items
- Management provided no specific numerical revenue or earnings guidance. It said cash, cash equivalents, and expected operating cash flows should fund planned operations and capital equipment purchases for the foreseeable future. Backlog scheduled for shipment within 12 months was $45.648 million at quarter-end, up from $41.562 million at the end of Q1.
- Management cited macroeconomic weakness, soft defense and European demand, customer concentration, slower-than-expected adoption of new products, and the risk of demand swings from a relatively small number of early adopters. Q2 bookings fell 5.9% year over year but rose 14.6% sequentially.
- SynQor’s patent-infringement litigation remains a significant contingency. Vicor disputes the claims, does not consider a loss probable, and cannot estimate a possible loss amount. Legal costs materially increased operating expenses.
- Vicor held failed-auction securities with $6.0 million par value and estimated fair value of $4.904 million, classified as long-term. They carry a $1.096 million unrealized loss, including a $0.375 million estimated credit loss. Their valuation uses Level 3 assumptions; management warned further deterioration could cause additional losses or impairment.
- After U.S. sanctions announced July 16, 2014, Vicor reported $0.906 million of receivables from a distributor associated with sales to a sanctioned Russian end-customer. Management expected collection but said it would monitor collectability and trade-restriction compliance.
- A full valuation allowance applies to domestic deferred tax assets; the allowance was approximately $20.194 million. The Italian subsidiary received a preliminary tax audit report, with potential liability still under evaluation; management did not expect a material impact. The IRS examination of 2010–2011 returns was expected to close without material effect.
- The company had $0.909 million of capital expenditure commitments. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue growth and backlog convert into sustained orders, particularly given customer concentration and the VI Chip customer’s platform transition.
- Whether the 42.5% quarterly gross margin is sustainable as product mix and volumes change, and whether operating losses narrow despite elevated litigation and R&D costs.
- Cash burn, capital spending, and liquidity relative to the company’s operating plan; assess the extent to which auction-rate securities are unavailable for near-term use.
- Developments in SynQor litigation, including any potential financial exposure or changes in legal spending.
- Collectability of the Russia-related receivable and compliance with sanctions, along with any material outcomes from the Italian tax inspection.