Vicor Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless otherwise noted. Vicor designs, manufactures, and markets modular power components and systems, and licenses technology for royalties.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $53.227 | $48.664 | $152.195 | $168.800 |
| Gross margin | $25.923 (48.7%) | $21.286 (43.7%) | $69.710 (45.8%) | $76.687 (45.4%) |
| Operating income (loss) | $2.273 | $(2.218) | $(3.757) | $2.185 |
| Net income (loss) attributable to Vicor | $2.336 | $2.503 | $(3.559) | $6.679 |
| Diluted earnings (loss) per share | $0.06 | $0.06 | $(0.09) | $0.17 |
- Q3 revenue rose 9.4% year over year, primarily on higher bookings; it increased 0.5% sequentially from Q2 2016. Backlog scheduled for shipment within 12 months was $42.124 million, versus $41.674 million at Q2-end.
- For the nine-month period, revenue declined 9.8%. Gross-margin percentage improved slightly despite lower gross-margin dollars, reflecting product mix and lower inventory and warranty charges.
- Cash and cash equivalents were $55.066 million at September 30, down $7.914 million from year-end 2015. Nine-month operating cash flow was negative $1.584 million; investing cash flow was negative $6.384 million, including $6.368 million of capital additions.
- Current assets were $112.740 million and current liabilities $21.441 million; working capital was $91.299 million and the current ratio was 5.3:1. The balance sheet does not report borrowings or other debt.
- Inventory increased 13.3% to $26.562 million from December 31, 2015, mainly to support higher VI Chip and Picor bookings. Capital expenditure commitments were approximately $596,000.
Material changes and segment trends
- Q3 growth was concentrated in advanced-product segments: VI Chip revenue increased 99.3% and Picor increased 80.5% year over year, while BBU revenue declined 6.3%. VI Chip shipments were largely for 48-volt-to-point-of-load solutions.
- Nine-month revenue decreased 11.7% in BBU and 23.9% in Picor, while VI Chip increased 4.0%. Management attributed the overall decline mainly to weaker prior-period-comparable bookings and reduced BBU demand.
- Q3 operating results improved substantially year over year, with operating income of $2.273 million versus a $2.218 million loss. Nine-month results remained an operating loss.
- The 2015 nine-month comparison includes a $5.0 million after-tax gain on sale of the Great Wall Semiconductor investment, which had previously been written down to zero. This materially boosted 2015 net income and is not a recurring operating result.
Outlook, commentary, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management expects aggregate BBU demand to remain relatively flat until macroeconomic conditions improve, and says operating costs may remain high until legacy revenue recovers and advanced-product revenue grows sustainably.
- Management cited longer-than-expected sales cycles and delayed customer adoption of advanced products, including 48-volt datacenter solutions. It believes adoption opportunities remain promising but says customer, contract-manufacturer, and supplier timing is outside its control.
- Supplier delays affected first-quarter shipments but not the following two quarters; management cautioned that delays could again affect production. Customer bookings, particularly in VI Chip and Picor, remain unpredictable. Q3 bookings rose 6.9% overall, while BBU bookings fell 18.9%.
- Management said cash and expected operating cash flows should fund planned operations and equipment purchases for the foreseeable future. This is a forward-looking assessment, not a guarantee.
- Vicor reversed approximately $768,000 of previously recognized stock-based compensation in Q3 after determining that VI Chip performance targets would not be achieved before option expiration. The reversal reduced reported expenses and improved the period’s operating results.
- A $3.0 million-par failed-auction security was carried at $2.580 million as a Level 3 long-term investment, with a $420,000 unrealized loss. Management expects recovery may take more than 12 months; further market deterioration or credit changes could require additional impairment. Management said it did not expect the security’s illiquidity to impair execution of its operating plan.
- In the SynQor patent litigation, the case was stayed pending patent-review proceedings and appeals; decisions on appeals were not expected until 2017. Vicor said a loss was not probable, but it could not estimate a possible loss range. Management did not expect other current litigation or claims to materially affect results or financial position.
- Management reported no material change in previously disclosed risk factors and concluded disclosure controls were effective at a reasonable-assurance level.
Most important facts for investors to verify
- Whether increased VI Chip and Picor bookings convert into sustained shipments, revenue, and margins, and whether the 48-volt customer adoption cycle accelerates.
- Whether BBU demand stabilizes and supply-chain reliability and production volumes support gross margins.
- Whether operating cash flow improves, given nine-month cash use, continued capital investment, and the increase in inventory.
- Whether the stock-compensation reversal and the prior-year $5.0 million investment-sale gain are properly distinguished from recurring earnings.
- Whether the failed-auction security’s valuation and recoverability change, and how the SynQor appeals affect potential exposure.