Vicor Corporation (VICR) — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. Financial amounts below are in U.S. dollars; millions unless otherwise stated.
Business context
Vicor designs, manufactures and markets modular power-conversion components and complete power systems for markets including computing, industrial, telecommunications, aerospace and defense, and transportation. Its segments are the Brick Business Unit (BBU), VI Chip and Picor. The company is transitioning toward newer VI Chip, VI Brick and Picor technologies while seeking to sustain its legacy brick business.
Financial and operating performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $218.5 | $253.0 |
| Gross margin | $91.7; 41.9% | $106.7; 42.2% |
| Operating income (loss) | ($2.8) | $13.7 |
| Net income (loss) attributable to Vicor | ($4.1) | $8.8 |
| Diluted earnings (loss) per share | ($0.10) | $0.21 |
| Cash provided by operating activities | $17.2 | $26.4 |
| Capital additions | $7.4 | $7.5 |
- Revenue fell 13.6%; orders declined 14.2%. External segment revenue was BBU $179.9 million, VI Chip $35.4 million and Picor $3.2 million.
- BBU operating income was $28.1 million; VI Chip operating loss widened to $27.4 million from $16.3 million; Picor operating loss widened to $2.8 million from $1.2 million.
- Fourth-quarter revenue was $50.4 million, with gross margin of $20.1 million. Vicor reported a fourth-quarter net loss attributable to the company of $4.8 million, or $0.12 per share, versus quarterly profits in each of the first three quarters.
- Cash and cash equivalents were $84.6 million; working capital was $128.5 million and the current ratio was 8.3:1. Total assets were $202.6 million, total liabilities $20.6 million and total equity $182.0 million. The filing reports no conventional interest-bearing debt balance.
- Cash increased $12.6 million during the year. Operating cash flow was supplemented by $3.6 million in net sales of long-term investments; equipment purchases used $7.4 million.
- Research and development expense was $38.7 million, or 17.7% of revenue. Backlog declined to $31.4 million from $54.2 million.
Material changes, unusual items and management outlook
- Revenue declined across all segments. VI Chip and Picor were particularly affected by lower bookings, delayed new-product introductions, and dependence on a limited number of customers. BBU revenue also weakened, including lower defense-related custom-power activity and softer international demand.
- Gross margin percentage slipped, primarily because Vicor added approximately $1.4 million to inventory reserves for excess and obsolete inventory, mostly VI Chip materials. A higher share of higher-margin BBU products partly offset the charge.
- Fourth-quarter items included a $2.0 million VJCL goodwill impairment, a $1.5 million increase in the tax valuation allowance, the $1.4 million inventory-reserve charge, and a $2.0 million gain from settling an insurance recovery dispute.
- Management said cash 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. Vicor expected to maintain R&D spending at a level consistent with prior periods as a percentage of revenue.
- Product plans included second-generation PFM and DCM products, additional DCM-based VI Bricks and a new VI Chip/Picor-enabled brick during 2013. The filing notes that DCM production release had been delayed while packaging was redesigned.
- Vicor initiated a workforce reduction in February 2013 and expected a first-quarter pretax charge of approximately $1.3 million, with cash payments in 2013 and 2014. It also expected no significant near-term capacity expansion.
Risks, contingencies and governance
- Vicor cited economic weakness, European recession, U.S. defense budget uncertainty, volatile orders, declining backlog, customer concentration and lengthy development and sales cycles as risks. It disclosed nine consecutive quarters of declining earnings per share.
- The ongoing SynQor patent litigation concerns bus converters; SynQor seeks an injunction and unspecified damages. Vicor disputes the claims and is defending the case. Management did not expect current litigation to materially affect financial position or results, but acknowledged litigation costs and commercial effects.
- Failed auctions left $6.1 million par value of auction-rate securities illiquid; their reported fair value was $5.0 million. These Level 3-valued securities had a $1.1 million unrealized loss, including credit and temporary impairment components. Further market deterioration could require additional impairment.
- Other risks include single-source component suppliers, inventory obsolescence, product warranty and indemnification exposure, intellectual-property disputes, manufacturing-site concentration, and the ability to commercialize new products. The 2012 filing disclosed some customer agreements with warranty and indemnification obligations exceeding standard terms.
- Dr. Vinciarelli controlled 81.3% of voting power at year-end, according to the filing. A tender offer was expected to purchase at least approximately 2.03 million shares for about $10.9 million; the offer could reduce public float. The company paid no common-stock dividend in 2012 and has no fixed dividend policy.
- The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor reported effective controls as of year-end.
Investor facts to verify
- Whether bookings and backlog stabilize, particularly among large VI Chip and Picor customers, and how concentrated revenue remains.
- Whether planned PFM, DCM and VI Brick launches meet timing, qualification and customer-adoption targets.
- Whether inventory reserves, gross margins and the VI Chip segment loss improve as demand forecasts and orders develop.
- Progress and potential exposure in the SynQor litigation, and any changes in warranty or indemnification commitments.
- Recoverability and valuation assumptions for the illiquid auction-rate securities, and the realization of deferred tax assets.
- Final tender-offer share count and cost, workforce-reduction charges and payments, and the company’s cash and capital-spending needs.