Vicor Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Vicor designs, manufactures and sells power components and systems through its Brick Business Unit (BBU), VI Chip and Picor segments. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $46.865 | $55.467 | $88.811 | $115.135 |
| Gross profit / margin | $18.461 / 39.4% | $24.106 / 43.5% | $35.068 / 39.5% | $48.573 / 42.2% |
| Operating income (loss) | $(6.982) | $0.709 | $(15.478) | $1.173 |
| Net income (loss) attributable to Vicor | $(4.616) | $0.220 | $(9.606) | $0.546 |
| Diluted earnings (loss) per share | $(0.12) | $0.01 | $(0.24) | $0.01 |
Q2 revenue increased 11.7% sequentially from Q1 2013. Q2 revenue by segment was BBU $40.211 million, VI Chip $6.044 million and Picor $0.610 million. Export sales were 58% of Q2 revenue and 56% for the first half.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $60.778 million at June 30, down from $84.554 million at December 31, 2012. Working capital was $101.704 million, versus $128.498 million; the current ratio was 6.6:1, versus 8.3:1.
- Operating cash flow was negative $4.216 million for the first half, compared with positive $12.888 million a year earlier. Capital expenditures were $2.543 million. Cash used in financing was $16.992 million, principally reflecting $17.100 million spent on share purchases.
- Total assets were $177.268 million and total equity was $156.417 million. The balance sheet presents no borrowings or debt line item. Capital expenditure commitments were approximately $0.964 million.
- Inventory was $28.668 million, down from $29.955 million at year-end. The company held $6.000 million par value of failed auction-rate securities, carried at $4.917 million as long-term investments.
Changes versus prior periods
- First-half revenue fell 22.9% year over year; Q2 revenue fell 15.5%. In Q2, BBU revenue declined 12.2% and VI Chip 33.4%, while Picor rose 5.9%. For the first half, VI Chip revenue fell 60.1%.
- Gross margin percentage declined year over year in both Q2 and the first half. Management attributed the pressure mainly to lower sales and a $0.640 million Q2 increase in reserves for potentially excess and obsolete inventory; a more favorable mix of higher-margin BBU products partly offset the decline.
- Operating expenses rose 8.7% in Q2 and 6.6% for the first half. First-half results included $1.361 million of severance charges from workforce reductions completed in February.
- BBU generated Q2 operating income of $2.441 million, while VI Chip and Picor recorded operating losses of $8.349 million and $0.811 million, respectively. VI Chip’s first-half operating loss was $17.587 million.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said 2013 bookings, revenue and operating results had been hurt by weak defense-electronics spending, recession in Europe, slower-than-expected growth in certain new products, and VI Chip and Picor dependence on a limited number of customers. Backlog scheduled for shipment within 12 months was $51.958 million at quarter-end, up from $37.934 million at Q1-end.
- Management believed available cash and expected operating cash flows would fund planned operations and capital equipment purchases for the foreseeable future. It also said the illiquidity of the auction-rate securities would not impair execution of the current operating plan.
- The failed auction-rate securities are valued using Level 3 discounted cash-flow assumptions. Management estimated that a 1 percentage-point change in the liquidity risk premium would change fair value by approximately $0.300 million. Additional market deterioration or credit-rating declines could require further impairment; management said it did not expect a significant loss on eventual liquidation.
- Vicor recorded a $5.931 million first-half income-tax benefit, primarily related to deferred tax assets, a potential federal NOL carryback and research tax credits. A $12.294 million valuation allowance remained against certain deferred tax assets, principally state-related.
- Two 2013 tender offers resulted in purchases of 3,273,088 common shares for $17.100 million. An employee/director option exchange covering 1,531,077 options produced additional Q2 stock-compensation expense, including approximately $0.625 million from the exchange.
- SynQor’s patent-infringement action remains pending; trial was set for July 2014. Vicor disputed the allegations and said it intended to defend itself. Management did not expect current litigation or claims to materially affect financial position or results.
- Management reported disclosure controls and procedures were effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether bookings and the reported backlog convert into shipments and cash, given weak markets and customer concentration.
- Whether margins recover and inventory reserves or operating costs rise further as revenue levels change.
- The liquidity, credit assumptions and valuation sensitivity of the failed auction-rate securities.
- Cash-flow trends after substantial share tenders, and the realization of tax assets subject to a valuation allowance.
- Developments and potential financial exposure in the SynQor litigation ahead of the scheduled 2014 trial.