Vicor Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone fourth-quarter filing; Q4 figures are identified separately where available. Vicor designs, manufactures and sells modular power components and power systems, while also licensing technology.
Financial performance and liquidity
- FY2016 revenue: $200.3 million, down 9.0% from $220.2 million in 2015. Gross profit was $91.2 million, with gross margin of 45.5%, compared with $99.5 million and 45.2% in 2015.
- Profitability: Operating loss was $6.3 million, versus a $0.3 million operating loss in 2015. Net loss attributable to Vicor was $6.2 million, or $0.16 per share, compared with net income of $4.9 million, or $0.13 per diluted share, in 2015. The 2015 result included a $5.0 million gain from the sale of an equity-method investment.
- Fourth quarter: Revenue was $48.1 million, versus $51.4 million in Q4 2015. Net loss attributable to Vicor was $2.7 million, or $0.07 per share, versus a $1.8 million loss, or $0.05 per share, a year earlier.
- Segment trends: BBU revenue fell 12.5% to $151.4 million and operating income declined to $11.8 million from $21.7 million. VI Chip revenue rose 9.0% to $38.4 million; its operating loss narrowed to $16.5 million from $21.0 million. Picor revenue fell 11.8% to $10.5 million, and its operating loss widened to $0.6 million.
- Cash flow and investment: Operating cash flow was $0.5 million, down from $11.5 million in 2015. Capital expenditures were $8.4 million; cash and cash equivalents declined $6.8 million to $56.2 million. Management cited approximately $2.4 million of capital spending commitments.
- Liquidity and obligations: Working capital was $89.5 million, down from $94.9 million; the current ratio was 5.0, versus 5.6. Total liabilities were $23.1 million and total equity was $131.0 million. The balance sheet lists no borrowing balance; contractual obligations shown include $4.8 million of operating leases. Management said available cash and expected operating cash flow should fund operations and planned equipment purchases for the foreseeable future.
- Other metrics: Backlog scheduled for shipment within 12 months increased to $48.4 million from $39.1 million. Inventory rose 15.8% to $27.1 million. International sales were 59.4% of revenue; China represented 32.1%.
Material changes and management commentary
- Management attributed lower revenue mainly to weaker BBU bookings and unpredictable demand for legacy products. Higher VI Chip and Picor bookings late in 2016 were largely scheduled for shipment in 2017.
- Demand for advanced products and customer design activity increased, including 48-volt datacenter power solutions, but sales cycles remained lengthy and customer processor-generation delays had postponed orders. Management expects advanced-product adoption to grow but gave no quantified revenue or earnings guidance.
- Gross margin percentage improved despite lower sales, reflecting product mix and lower warranty-reserve charges. Operating expenses fell 2.3%, but remained high relative to revenue; R&D was $41.8 million, or 20.9% of revenue.
- Vicor consolidated its Custom Power operations and acquired full ownership of certain Converpower operating assets in 2016. A dedicated VIA packaging manufacturing line was installed. Management expected 2017 capital expenditures not to be significantly higher than recent years.
- Vicor reversed approximately $0.8 million of VI Chip performance-based stock compensation in Q3 2016 after determining the relevant margin targets would not be met.
Risks, contingencies and unusual items
- Results are exposed to sales concentration, customer order and shipment timing, long design-to-sales cycles, and the risk that design wins will not convert into volume sales. NuPower accounted for 16.4% of FY2016 revenue; the five largest customers accounted for 26.5%.
- Manufacturing utilization and margins are sensitive to volume. The company also relies on third parties and, for some key components, single-source suppliers; supply interruptions, excess inventory or obsolescence could affect costs and deliveries.
- The SynQor patent case remained stayed pending patent-review proceedings and appeals. Vicor said it did not consider a loss probable, but could not estimate a possible loss range. Federal Circuit appeal decisions were expected later in 2017.
- A $3.0 million-par auction-rate security remained illiquid after failed auctions and was carried at $2.5 million. Management did not consider the decline other-than-temporary; further market deterioration could require additional impairment.
- Vicor reported no cash dividends on its common stock in 2016 or 2015. Its two-class voting structure gives CEO and Chairman Patrizio Vinciarelli effective control, according to the filing.
- The company plans to adopt the new revenue-recognition standard in 2018; it expects the change to require distributor sales to be recognized at shipment to stocking distributors rather than upon resale to end customers. The financial impact was still under evaluation.
Most important facts for investors to verify
- Whether the higher VI Chip and Picor bookings and $48.4 million backlog convert into shipments and revenue, and on what schedule.
- Whether BBU demand stabilizes and the advanced-product business can grow enough to offset ongoing VI Chip losses and elevated R&D costs.
- Cash generation, capital expenditure needs and inventory quality, particularly given low 2016 operating cash flow and rising inventory.
- Developments in the SynQor litigation and the valuation or liquidity of the auction-rate security.
- Customer concentration, China exposure and reliance on key suppliers; also confirm the effects of the 2018 revenue-accounting change.