Vicor Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited results; dollar amounts below are in millions unless noted. Vicor designs and manufactures modular power components and systems, reported in Brick Business Unit (BBU), VI Chip and Picor segments.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $52.948 | $58.560 | $168.083 | $194.417 |
| Gross margin | $22.953; 43.4% | $24.440; 41.7% | $71.526; 42.6% | $82.203; 42.3% |
| Operating income | $0.296 | $1.674 | $1.469 | $12.478 |
| Net income attributable to Vicor | $0.191 | $1.082 | $0.737 | $8.166 |
| Diluted EPS | $0.00 | $0.03 | $0.02 | $0.20 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $14.307 | $21.654 |
Q3 revenue fell 9.6% year over year and 4.5% sequentially. Nine-month revenue fell 13.5%. Gross margin dollars declined with sales, while gross margin percentage improved, which management attributed primarily to a higher mix of BBU products. Nine-month operating cash flow less capital additions was approximately $9.469 million, compared with $15.403 million in 2011.
Balance sheet and liquidity
- Cash and cash equivalents were $84.752 million at September 30, 2012, up from $71.908 million at December 31, 2011.
- Current assets were $151.858 million and current liabilities $19.667 million; working capital was $132.191 million and the current ratio was 7.7:1.
- No borrowings or debt are reported on the balance sheet presented. Total liabilities shown were approximately $22.7 million, principally current liabilities and deferred revenue.
- Nine-month investing cash flow was an outflow of $1.533 million, including $4.838 million of capital additions. Cash increased $12.844 million during the period.
- Inventory declined $4.990 million, or 14%, from year-end; management linked the reduction to lower bookings and efforts to manage raw materials.
Changes and segment developments
- Q3 external revenue increased 4.1% at BBU to $45.753 million, but declined 50.0% at VI Chip to $6.443 million and 55.9% at Picor to $0.752 million. For the first nine months, revenue declined 8.2% at BBU, 28.4% at VI Chip and 53.7% at Picor.
- Management cited weaker economic conditions, lower defense electronics spending, slower-than-expected growth in new product opportunities, delayed product introductions, and customer concentration at VI Chip and Picor. Nine-month orders were down 3.2% versus the prior-year comparable nine-month period.
- Q3 operating expenses were nearly flat year over year at $22.657 million; nine-month expenses increased 0.5% to $70.057 million. Lower R&D costs were offset by higher SG&A costs.
- Backlog scheduled for shipment within 12 months was $42.880 million at Q3 end, versus $42.219 million at Q2 end. Orders rose 3.0% sequentially in Q3 but were 5.1% below Q3 2011.
- No cash dividends were paid in the first nine months of 2012, compared with $0.15 per share declared and $6.272 million paid in the first nine months of 2011.
Outlook, risks and unusual items
- Management said cash, cash equivalents and expected operating cash flows should fund planned operations and capital equipment purchases for the foreseeable future. It provided no specific revenue or earnings guidance.
- Vicor held failed auction-rate securities with $6.100 million par value and $5.049 million estimated fair value, classified as long-term. Their fair value uses Level 3 assumptions, including a 3–5 year estimated timeframe for successful auctions. Management said it expected eventual recovery without significant loss, but further market deterioration or weaker credit conditions could result in additional losses or material impairment charges.
- A SynQor patent-infringement action remained pending; Vicor disputed the allegations and said it would defend itself. Trial was scheduled for July 2014. The filing says management did not expect current litigation or claims to materially harm financial position or results, but outcomes are uncertain.
- In October 2012, after quarter-end, Vicor settled claims with insurance carriers for $1.975 million. The gain was to be recorded in Q4 2012, not the reported quarter.
- Capital expenditure commitments were approximately $2.019 million. Management identified risks including customer demand and concentration, product development and market acceptance, manufacturing efficiency, personnel retention, intellectual-property litigation, and valuation of illiquid investments.
- The nine-month effective tax rate rose to 48.3% from 33.4%, reflecting lower expected pretax income, state tax effects and the absence of federal R&D credits extended for 2012. A valuation allowance of approximately $9.809 million remained against certain deferred tax assets.
Important facts for investors to verify
- Whether orders, backlog and sales at VI Chip and Picor recover, given their customer concentration and lower bookings.
- Whether the auction-rate securities’ valuation and expected liquidity remain supportable, and whether further impairment is required.
- The development and potential financial effects of the SynQor litigation and the timing of the $1.975 million insurance settlement gain.
- Whether operating cash generation can sustain planned capital investment as revenue and earnings remain below prior-year levels.
- How tax rates and deferred-tax-asset realizability evolve, including the valuation allowance and availability of R&D tax credits.