Vicor Corporation — Q2 2011 Form 10-Q
Business context and reporting period. Vicor designs, manufactures and sells modular power components and power systems for markets including aerospace and defense, computing, industrial, telecommunications and transportation. This unaudited report covers the quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods unless noted. Export sales were approximately 59% of first-half revenue, up from 48%. The company announced a multi-tiered distribution model, including a new North American distribution partnership.
Financial performance
- Second quarter: Revenue was $65.4 million, up 14.0%; gross profit was $27.3 million, up 6.1%, while gross margin narrowed to 41.8% from 44.9%. Operating income was $4.4 million versus $4.6 million. Net income attributable to Vicor was $3.1 million, or $0.07 per diluted share, versus $4.7 million, or $0.11 per share.
- First half: Revenue was $135.9 million, up 24.5%; gross profit was $57.8 million, up 17.7%, while gross margin narrowed to 42.5% from 45.0%. Operating income rose to $10.8 million from $7.2 million. Net income attributable to Vicor was $7.1 million, or $0.17 per diluted share, versus $6.7 million, or $0.16 per share.
- Drivers and costs: V*I Chip drove most of the revenue growth, with first-half segment revenue increasing 232.1%; BBU revenue rose 5.9% and Picor rose 68.7%. Management attributed lower gross-margin percentages to a greater share of lower-margin V*I Chip products and, in Q2, lower Vicor Custom Power volume. First-half operating expenses rose 12.2%, including higher compensation and legal expenses.
- Cash flow and investment: First-half operating cash flow was $17.1 million, versus $4.5 million in 2010. Capital expenditures were $5.0 million. Cash and cash equivalents increased to $69.8 million from $49.3 million at year-end 2010.
- Liquidity and balance sheet: Current assets were $146.6 million and current liabilities $23.0 million; the current ratio was 6.4:1 and working capital was $123.6 million. Total liabilities shown were $26.5 million, including deferred revenue and income taxes payable; the filing reports no borrowings. Equity totaled $188.6 million.
- Other metrics: Inventory was $36.2 million, slightly above year-end. No cash dividends were paid in the first half, compared with $0.30 per share in first-half 2010. On July 22, the board approved a $0.15-per-share dividend, totaling approximately $6.3 million, payable August 31.
Material changes, outlook and risks
- Q2 revenue declined 7.2% sequentially, orders fell 16.2% from Q1, and the Q2 book-to-bill ratio was 0.85:1, versus 0.94:1 in Q1. Backlog fell to $64.9 million from $74.8 million at the end of Q1. Management cautioned that quarterly book-to-bill can be volatile and is not always a reliable indicator of future revenue.
- Management said cash, cash equivalents and expected operating cash flow should fund planned operations and capital equipment purchases for the foreseeable future. No specific revenue or earnings guidance was provided.
- Investment liquidity and valuation: Vicor held auction rate securities with $11.2 million par value and $9.6 million estimated fair value, classified as long-term and measured using Level 3 inputs. Management expected eventual recovery and did not anticipate a near-term effect on operations, but worsening markets or credit quality could require additional, potentially material impairment charges. A 1 percentage-point change in the modeled liquidity premium would change estimated fair value by approximately $0.4 million.
- Legal matters: SynQor sued Vicor alleging patent infringement and sought an injunction and unspecified damages; SynQor withdrew its preliminary-injunction motion in May. Vicor disputes the claims and plans to defend itself. Separately, an insurer appeal remains pending over a judgment of approximately $16.5 million related to the Ericsson settlement; no final, collectible judgment had been entered by June 30.
- Other exposures: Warranty reserves increased in part because of expected replacements of products with a component showing a higher-than-expected failure rate. A $10.4 million valuation allowance remains against certain deferred tax assets. Management reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether order trends, backlog and book-to-bill stabilize after the Q2 sequential declines.
- Whether V*I Chip growth can be sustained while improving consolidated gross-margin mix.
- Future auction rate security redemptions, fair-value assumptions and any additional impairment.
- Developments in the SynQor patent litigation and the appeal of the insurer judgment.
- Warranty replacement costs, capital spending and the cash impact of the announced dividend.