Vicor Corporation (NASDAQ: VICR) — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing; the company also reports fourth-quarter results below. Vicor designs and manufactures modular power-conversion components and complete power systems, reported in three product segments: Brick Business Unit (BBU), V*I Chip, and Picor.
Key financial results
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $253.0 million | $250.7 million | Up 0.9% |
| Gross margin | $106.7 million; 42.2% | $114.5 million; 45.7% | Down $7.8 million; 3.5 percentage points |
| Operating income | $13.7 million | $29.1 million | Down $15.4 million |
| Net income attributable to Vicor | $8.8 million | $33.3 million | Down $24.5 million |
| Diluted EPS | $0.21 | $0.80 | Down $0.59 |
| Cash from operating activities | $26.4 million | $16.9 million | Up $9.5 million |
| Capital expenditures | $7.5 million | $12.1 million | Down $4.6 million |
2011 revenue was nearly flat, but profitability declined materially. Management attributed lower gross margin primarily to a greater mix of lower-margin V*I Chip products and lower volumes of higher-margin BBU components and Vicor Custom Power products. Operating expenses rose 8.9% to $93.0 million, including higher compensation, R&D, and legal costs.
Fourth quarter: Revenue was $58.6 million, versus $73.0 million in fourth-quarter 2010. Vicor-attributable net income was $0.7 million, or $0.02 per share, versus $10.8 million, or $0.26 per share, a year earlier.
Segments and operating trends
- BBU: Revenue declined 10.2% to $194.8 million; operating income fell 42.6% to $31.9 million. Vicor Custom Power revenue fell following completion of two major defense programs.
- V*I Chip: Segment revenue increased substantially, but the segment remained loss-making: operating loss was $16.3 million, compared with $24.6 million in 2010.
- Picor: Segment revenue grew, while operating loss was $1.2 million, broadly similar to 2010.
- Full-year orders decreased 16.1%. Year-end backlog fell to $54.2 million from $78.9 million.
- International sales were 57% of revenue, up from 49% in 2010. One customer represented approximately 14.9% of 2011 revenue.
Liquidity, balance sheet, and cash flow
- Cash and cash equivalents were $71.9 million at year-end, up from $49.3 million. Working capital was $124.4 million; the current ratio was 7.2, compared with 5.6 in 2010.
- Total assets were $208.1 million, total liabilities $23.4 million, and total equity $184.7 million. The balance sheet presented does not identify funded borrowings; verify the full debt and commitment disclosures before concluding the company has no debt.
- Operating cash flow was $26.4 million. Cash uses included $7.5 million of equipment purchases, $6.3 million of common-stock dividends, and $0.7 million of dividends to noncontrolling shareholders.
- Long-term investments included $9.1 million par value of auction-rate securities, carried at an estimated fair value of $7.5 million. All auctions had failed; management classified them as long-term and said the resulting illiquidity was not expected to impair current operations.
- Contractual obligations totaled $3.6 million, primarily operating leases and purchase obligations; capital-expenditure commitments were an additional $1.0 million. The board had authorized share repurchases, with $8.5 million remaining, but none were made in 2011.
Outlook, risks, and unusual items
- Management expected V*I Chip and Picor revenue growth to decline in 2012 and said overall orders had weakened. It provided no specific revenue or earnings guidance in the filing.
- Management’s stated strategy is to maintain the legacy BBU business while investing in V*I Chip, VI Brick, and Picor products, expanding manufacturing capability, and broadening distribution. It believes operating cash flow and cash balances will fund planned operations and equipment purchases for the foreseeable future.
- Risks include customer and program concentration; order deferrals and cancellations; lower-margin product mix; dependence on single-source components and reported semiconductor shortages; capacity underutilization; and exposure to international markets and economic conditions.
- Defense-related BBU revenue was approximately 29% of BBU revenue, down from 37% in 2010. Two major Vicor Custom Power programs substantially concluded by early 2011.
- Vicor is defending a patent-infringement action brought by SynQor concerning bus converters. SynQor sought unspecified damages and an injunction; it withdrew its preliminary-injunction motion. Vicor disputes the claims and filed counterclaims. The filing does not state a clear estimated loss amount.
- 2010 earnings included $6.3 million of noncash tax benefits from releases of deferred-tax valuation allowance, making the year-over-year net-income decline larger than the operating-income decline alone would suggest. The remaining valuation allowance was approximately $9.7 million at year-end 2011.
- The company reported $9.7 million of inventory reserves and continued to face valuation uncertainty around auction-rate securities. A potential insurance recovery related to the prior Ericsson settlement remained uncollected and was not recorded as an asset.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Whether order trends and the $54.2 million backlog translated into shipments and revenue after year-end, particularly given the fourth-quarter slowdown.
- Whether new V*I Chip and Picor products can grow sales and improve margins, and how much ongoing investment their losses require.
- The status and potential financial exposure of the SynQor litigation, including legal costs and any effect on product sales.
- The recoverability, timing of liquidity, and potential further impairment of the auction-rate securities.
- Customer concentration, defense-program replacement demand, and the effect of component-supply constraints on production and delivery.
- Future dividend decisions and the company’s use of cash for manufacturing investment versus shareholder returns.