Vicor Corporation (VICOR) — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Amounts are in U.S. dollars; financial statement figures are in millions unless noted. Vicor designs and sells modular power components and power systems through its BBU, VI Chip, and Picor businesses.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $55.1 | $52.9 | $143.9 | $168.1 |
| Gross margin | $23.0 | $23.0 | $58.0 | $71.5 |
| Gross margin percentage | 41.7% | 43.4% | 40.3% | 42.6% |
| Operating income (loss) | $(1.4) | $0.3 | $(16.8) | $1.5 |
| Net income (loss) attributable to Vicor | $(0.9) | $0.2 | $(10.5) | $0.7 |
| EPS attributable to Vicor | $(0.02) | $0.00 | $(0.27) | $0.02 |
- Q3 revenue grew 4.0% year over year and 17.6% sequentially from Q2 2013. Nine-month revenue fell 14.4% year over year.
- Q3 gross margin dollars were essentially flat year over year, but margin percentage declined, which management attributed primarily to a higher mix of lower-margin VI Chip products. Nine-month gross margin fell 18.8%.
- Operating expenses were $24.3 million in Q3, up 7.4% year over year; nine-month expenses were $74.9 million, up 6.9%, including $1.36 million of first-quarter severance charges.
- Operating cash flow was a use of $2.7 million for the first nine months, versus a source of $14.3 million in the prior-year period. Capital expenditures were $4.0 million. Cash and cash equivalents declined $23.4 million to $61.2 million, including $17.1 million used for share purchases.
- At September 30, cash was $61.2 million, current assets $123.2 million, current liabilities $22.1 million, and working capital $101.1 million. The current ratio was 5.6, down from 8.3 at year-end 2012. The balance sheet reports no borrowings or other debt.
Changes, business drivers, and outlook
- Q3’s consolidated revenue increase reflected stronger VI Chip revenue, while BBU revenue declined. For the first nine months, revenue declined across BBU, VI Chip, and Picor. Management cited weaker defense-electronics spending, recession in Europe, slower-than-expected growth in some new-product opportunities, and customer concentration at VI Chip and Picor.
- Bookings increased 6.3% year over year in Q3 but fell 6.7% sequentially, primarily due to lower BBU bookings. Nine-month bookings rose 15.1% compared with the prior-year period. Backlog scheduled for shipment within 12 months was $53.9 million at Q3 end, versus $52.0 million at Q2 end.
- Management expected cash and cash generated from operations to fund planned operations and capital equipment purchases for the foreseeable future. The filing provides no specific revenue or earnings guidance. Management identified continued product development and planned manufacturing-equipment investment as priorities.
- Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Risks, contingencies, and unusual items
- Illiquid investments: Vicor held $6.0 million par value of failed auction-rate securities, carried at $5.0 million fair value as long-term investments. These are Level 3 valuations based on unobservable inputs; management estimated that a 1 percentage-point change in the liquidity premium could change fair value by about $0.3 million. Further market or credit deterioration could cause additional losses or impairment.
- Patent litigation: SynQor alleges Vicor products infringe patents and seeks, among other relief, damages and an injunction. Vicor disputes the claims and is defending the case; trial was scheduled for July 2014. Management did not expect current litigation or claims to materially affect financial position or results, but outcomes are uncertain.
- Taxes: The nine-month tax benefit was $6.3 million, reflecting deferred tax assets, a potential federal NOL carryback, and a $0.55 million research-credit benefit. Vicor maintained an $8.8 million valuation allowance, primarily against state deferred tax assets, and was monitoring whether federal deferred tax assets remained realizable. The IRS had begun audits of the 2010 and 2011 federal returns.
- Capital allocation and compensation: Two tender offers resulted in purchases of 3.27 million shares for $17.1 million. An employee/director option exchange covered options on 1.53 million shares, with associated stock-based compensation expense. The company also recorded $1.36 million of severance charges following February workforce reductions.
- Other identified risks include customer concentration, sustaining bookings and converting design wins into sales, product development and manufacturing execution, and the ability to protect intellectual property and defend litigation.
Important facts for investors to verify
- Whether the sequential revenue and bookings improvement continues, particularly given the Q3 decline in BBU bookings and nine-month revenue contraction.
- Whether VI Chip and Picor can sustain growth and reduce dependence on a limited number of customers.
- Cash-flow trends and the extent to which continued operating cash use, capital spending, and share repurchases affect liquidity.
- Valuation assumptions, liquidity, and potential further impairment of the failed auction-rate securities.
- Developments in the SynQor litigation and IRS audits, as well as the realizability of deferred tax assets.