Vicor Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Vicor designs, manufactures and sells modular power components and power systems. Its segments are the Brick Business Unit (BBU), VI Chip and Picor.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $58.4 | $55.1 | $165.0 | $143.9 |
| Gross profit / margin | $25.6 / 43.7% | $23.0 / 41.7% | $71.0 / 43.0% | $58.0 / 40.3% |
| Operating expenses | $29.7 | $24.3 | $85.6 | $74.9 |
| Operating loss | $(4.1) | $(1.4) | $(14.6) | $(16.8) |
| Net loss attributable to Vicor | $(3.7) | $(0.9) | $(13.9) | $(10.5) |
| Loss per share | $(0.10) | $(0.02) | $(0.36) | $(0.27) |
| Operating cash flow | Not provided for quarter | $1.5 | $(2.7) | |
| Capital expenditures | Not provided for quarter | $4.9 | $4.0 |
Q3 revenue rose 6.0% year over year and 9.4% sequentially. Nine-month revenue increased 14.7%. The company remained loss-making; Q3 net loss widened despite higher revenue and gross margin, principally amid higher operating costs. No interest-bearing debt is listed on the balance sheet.
Liquidity and balance sheet
- At September 30, cash and equivalents were $53.2 million, down from $56.3 million at December 31, 2013. Current assets were $114.3 million and current liabilities $27.3 million; the current ratio was 4.2:1, versus 5.7:1 at year-end. Working capital was $87.0 million, down $10.9 million.
- Total assets were $158.7 million, total liabilities $29.1 million and total equity $129.6 million. Cash and equivalents less total liabilities were approximately $24.1 million.
- Nine-month cash decreased $3.2 million. Operating cash flow of $1.5 million and financing cash flow of $0.1 million were more than offset by $4.8 million of investing outflow, mainly $4.9 million of equipment purchases.
- Backlog scheduled for shipment within 12 months was $52.5 million at quarter-end, compared with $45.6 million at the end of Q2.
Changes, outlook and notable items
- Revenue mix: Q3 BBU revenue increased 8.6% year over year, while VI Chip declined 16.7%; Picor increased from a smaller base. Management attributed the VI Chip decline to a major datacenter customer transitioning product platforms, with some Picor products replacing VI Chip products. Higher-margin BBU and Picor mix helped lift gross margin.
- Costs and losses: Q3 operating expenses rose 22.0% year over year. Legal fees increased $2.8 million in the quarter and $8.0 million over nine months, primarily due to SynQor litigation. Q3 included a $2.0 million severance and related charge for moving Westcor manufacturing from Sunnyvale, California, to Andover, Massachusetts; severance payments were to begin in January 2015.
- Management commentary: Management cited macroeconomic weakness, customer concentration, slower-than-expected adoption of new products, weak defense demand and weak European demand. The strategy is shifting toward fewer, higher-volume customers, leaving Vicor exposed to demand swings until adoption and customer diversification improve. Bookings increased 14.9% year over year in Q3.
- Liquidity outlook: Management said cash, cash equivalents and expected operating cash flows should fund planned operations and capital equipment purchases for the foreseeable future. Capital expenditure commitments were approximately $0.5 million. No specific revenue or earnings guidance was provided.
- Investment risk: $6.0 million par value of failed auction-rate securities was classified as long-term and valued at $5.0 million, using Level 3 assumptions. The securities had a $1.0 million unrealized loss, including an estimated $0.4 million credit loss. Management did not expect to need to sell them, but further market or credit deterioration could lead to additional losses or impairment.
- Litigation: SynQor alleges patent infringement and seeks unspecified damages and other relief. Vicor disputes the claims and said loss was not probable, but could not estimate a possible loss range. On October 23, 2014, after quarter-end, the court continued the trial indefinitely.
- Taxes and other risks: A full valuation allowance against domestic deferred tax assets prevented recognition of a tax benefit for most losses. A $0.6 million discrete tax benefit was recognized in Q3 following release of certain reserves after completion of an IRS examination. An Italian tax inspection remained unresolved; management said it was too early to assess potential liability and did not expect a material impact. Vicor stopped accepting orders for Russian end-customers identified as sanctioned entities; there were no related receivables or backlog at quarter-end.
- Controls: Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether bookings and backlog convert to shipments and revenue, particularly as the major datacenter customer changes product platforms and customer concentration remains significant.
- Whether gross-margin improvement can persist while operating expenses, especially litigation costs, remain elevated.
- Developments in SynQor litigation, including any change to the trial schedule, potential exposure or legal spending.
- Recoverability and valuation assumptions for the failed auction-rate securities, and any resulting impairment or liquidity effects.
- Execution and total costs of the Westcor manufacturing consolidation, and the outlook for operating cash flow relative to capital investment.
- Changes in the domestic deferred-tax valuation allowance and outcome of the Italian tax inspection.