Vicor Corporation — Q3 2011 Form 10-Q
Business context and period. Vicor designs, manufactures and markets modular power components and power systems. This unaudited filing covers the quarter and nine months ended September 30, 2011; amounts below are in millions except per-share data. Its segments are Brick Business Unit (BBU), V*I Chip and Picor.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $58.560 | $68.672 | $194.417 | $177.758 |
| Gross margin | $24.440 | $32.473 | $82.203 | $81.536 |
| Gross margin rate | 41.7% | 47.3% | 42.3% | 45.9% |
| Operating expenses | $22.766 | $21.091 | $69.725 | $62.937 |
| Operating income | $1.674 | $11.382 | $12.478 | $18.599 |
| Net income attributable to Vicor | $1.082 | $15.819 | $8.166 | $22.518 |
| Diluted EPS | $0.03 | $0.38 | $0.20 | $0.54 |
| Cash dividends per share | $0.15 | $0.30 | $0.15 | $0.30 |
Q3 revenue fell 14.7% year over year and 10.5% sequentially from Q2 2011. Nine-month revenue rose 9.4%, while nine-month net income fell. Q3 2010 included a nonrecurring, noncash $5.158 million tax benefit from releasing part of the deferred tax valuation allowance, making the year-over-year earnings comparison less comparable.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $66.889 million at September 30, up from $49.279 million at December 31, 2010. Current assets were $140.690 million and current liabilities $20.769 million; the reported current ratio was 6.8:1 and working capital was $119.921 million.
- Nine-month operating cash flow was $21.654 million; capital additions were $6.251 million. Cash flow after capital additions was therefore approximately $15.403 million. Investing activities provided $1.689 million; financing activities used $5.782 million, including $6.272 million of common-stock dividends.
- Long-term investments totaled $11.613 million, including failed-auction securities with $11.175 million par value and estimated fair value of $9.506 million. One $2.075 million security was redeemed at par in October 2011.
- No debt balance is presented on the reported balance sheet. Total equity was $183.871 million.
- Inventory was $36.461 million, up from $35.489 million at year-end. Backlog was $62.803 million, down from $64.914 million at the end of Q2.
Drivers, outlook and risks
- Q3 BBU revenue declined 27.0%, attributed chiefly to lower defense-electronics bookings and completion of two major Vicor Custom Power programs. V*I Chip revenue rose 83.0% and Picor revenue rose 19.2%. For the nine months, V*I Chip revenue increased 164.3%, while BBU revenue declined 6.5%.
- Management attributed lower gross margin percentage to product mix shifting toward lower-margin V*I Chip products and lower volumes of higher-margin BBU and Vicor Custom Power products. Operating expenses increased 7.9% in Q3 and 10.8% for the nine-month period, including higher compensation, R&D spending and legal fees.
- Bookings in Q3 were 1.8% higher than Q2 but 19.4% below Q3 2010. Nine-month bookings were 11.1% lower than the comparable prior-year period. The filing gives no numerical earnings or revenue guidance. Management said available cash and expected operating cash flows should fund planned operations and capital equipment purchases for the foreseeable future.
- Management identified development and commercialization of products, customer and market demand, manufacturing costs, hiring, intellectual-property protection, litigation, and the liquidity and valuation of auction-rate securities among key uncertainties. Securities valuations use significant unobservable assumptions; a 1 percentage-point change in the estimated liquidity-risk premium could change their fair value by approximately $0.4 million. Further market or credit deterioration could require additional losses or impairment charges.
- SynQor’s patent-infringement case remained pending; Vicor disputed the allegations and said it would vigorously defend itself. Separately, an insurance carriers’ appeal remained unresolved over an approximately $16.479 million judgment related to the Ericsson settlement; no final, collectible judgment had been entered as of quarter-end.
- In Q3, Picor approved an offer to repurchase up to 1.142 million shares from certain option holders; Vicor accrued a maximum potential obligation of $368,000. Warranty activity included a $369,000 downward revision of estimated obligations for the quarter. The board approved a $0.15-per-share dividend, half the $0.30 per share paid for the comparable 2010 periods.
Important facts for investors to verify
- Whether subsequent bookings and backlog trends support a recovery in BBU demand and whether V*I Chip growth can improve consolidated margins.
- The timing and amount of any further auction-rate security redemptions, and the sensitivity of carrying values to the assumptions used in the Level 3 valuation.
- Developments in the SynQor litigation and the appeal concerning the Ericsson-related insurance judgment, including any financial or operating consequences.
- Whether cash generation, capital spending and dividend policy remain consistent with management’s liquidity outlook.
- Potential dilution or compensation effects from Picor option settlements and performance-based awards; the filing reported $7.790 million of unrecognized compensation expense for one performance-based award group, with achievement then considered not probable.