Vicor Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unaudited results; comparisons are to the corresponding 2011 periods unless noted. Financial amounts below are in millions of dollars except per-share data.
Business context and results
Vicor designs and sells modular power components and power systems. Its segments are the Brick Business Unit (BBU), VI Chip and Picor. Management cited weak conditions in several markets, lower defense-electronics spending, slower-than-expected growth in some new product opportunities, and customer concentration at VI Chip and Picor.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $55.5 | $65.4 | $115.1 | $135.9 |
| Gross profit / margin | $24.1 / 43.5% | $27.3 / 41.8% | $48.6 / 42.2% | $57.8 / 42.5% |
| Operating income | $0.7 | $4.4 | $1.2 | $10.8 |
| Net income attributable to Vicor | $0.2 | $3.1 | $0.5 | $7.1 |
| Diluted earnings per share | $0.01 | $0.07 | $0.01 | $0.17 |
| Operating cash flow | Not separately provided for the quarter | $12.9 | $17.1 |
Q2 revenue fell 15.2% year over year and 7.0% sequentially. For the first half, revenue declined 15.3%; gross profit fell 15.9%. Q2 gross margin improved year over year, which Vicor attributed primarily to a greater share of higher-margin BBU products; first-half gross margin edged down from 42.5% to 42.2%. Operating expenses rose 2.1% in Q2 and 0.9% for the first half, so lower revenue materially compressed operating income. The first-half effective tax rate rose to 55.3% from 33.9%, partly reflecting lower expected pretax income, state taxes and unavailable federal R&D credits.
Financial position and liquidity
- Cash and cash equivalents were $82.2 million at June 30, up from $71.9 million at year-end 2011. Working capital was $127.6 million; the current ratio was 7.5:1.
- First-half operating cash flow was $12.9 million. Capital expenditures were $2.8 million, and cash increased by $10.3 million. The filing reports no interest-bearing debt on the presented balance sheet.
- Current liabilities were $19.6 million. Inventory declined 14.0% from year-end to $30.7 million, which management associated with efforts to manage raw materials amid reduced bookings.
- Vicor reported $9.1 million par value of auction-rate securities at an estimated fair value of $7.7 million, classified as long-term. These illiquid, Level 3-valued securities had $1.4 million of unrealized losses, including $0.3 million classified as credit loss. Management said it expected eventual recovery and did not expect the illiquidity to impair its operating plan, but further market deterioration could cause additional losses.
- The company paid cash dividends of $0.15 per share during the first half of 2012; none were reported for the first half of 2011. No shares were repurchased in the period.
Material changes and segment performance
- Q2 segment revenue decreased 6.6% at BBU, 38.2% at VI Chip and 65.1% at Picor. For the first half, decreases were 13.3%, 18.5% and 52.5%, respectively.
- First-half operating results showed BBU operating income of $14.5 million, offset by operating losses of $11.8 million at VI Chip and $1.1 million at Picor. VI Chip and Picor remained dependent on a limited number of customers.
- Backlog scheduled for shipment within 12 months was $42.2 million at Q2-end, down from $45.8 million at Q1-end. Q2 orders rose 1.7% sequentially but were 6.2% below Q2 2011; first-half bookings fell 3.1% compared with the second half of 2011.
Outlook, risks and unusual items
- Management expected revenue growth at VI Chip and Picor to decline in 2012. It believed cash, cash equivalents and operating cash flow would fund planned operations and capital purchases for the foreseeable future. No specific revenue or earnings guidance was provided.
- Capital expenditure commitments were approximately $1.0 million, principally for manufacturing equipment.
- SynQor’s patent-infringement action against Vicor remained pending, with trial set for July 2014. Vicor denied infringement and said it would vigorously defend itself; SynQor seeks an injunction and unspecified damages.
- A separate insurance-reimbursement judgment related to the 2007 Ericsson settlement was vacated by the First Circuit in March 2012 and remanded. The filing does not state a final recovery amount or outcome.
- The New York tax audit for 2008–2010 was settled in April 2012 for approximately $49,000. Vicor also reported a $10.1 million valuation allowance against certain deferred tax assets.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether bookings and backlog stabilize, particularly at VI Chip and Picor, and whether customer concentration affects subsequent revenue.
- Whether operating cash flow remains resilient if revenue declines continue, and whether planned manufacturing investment affects cash balances.
- How auction-rate security liquidity and valuation assumptions change; the filing estimates a 100-basis-point change in the liquidity premium could shift fair value by about $0.4 million.
- Developments in the SynQor litigation and the remanded insurance-reimbursement case, including any potential financial exposure or recovery.
- Whether the elevated effective tax rate, deferred-tax valuation allowance and dividend payments change in subsequent periods.