Vicor Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; financial statements are unaudited. Vicor designs, manufactures and markets modular power components and systems, and licenses technology for royalties. Its reporting segments are Brick Business Unit (BBU), VI Chip and Picor.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $52.9M | $56.1M | $99.0M | $120.1M |
| Gross margin | $24.5M; 46.2% | $26.5M; 47.2% | $43.8M; 44.2% | $55.4M; 46.1% |
| Operating income (loss) | ($0.6M) | $0.8M | ($6.0M) | $4.4M |
| Net income (loss) attributable to Vicor | ($0.5M); ($0.01) per share | $0.8M; $0.02 per share | ($5.9M); ($0.15) per share | $4.2M; $0.11 per share |
- Q2 revenue increased 15.0% sequentially from Q1 2016’s $46.0M, while gross margin rose from 42.0%. Q2 revenue remained 5.7% below the prior-year quarter.
- Q2 revenue by segment, as presented in MD&A: BBU $40.6M, VI Chip $10.1M and Picor $2.3M. Year-over-year, BBU declined 10.6%, VI Chip increased 23.3% and Picor declined 10.1%.
- For the first half, revenue fell 17.6%. BBU revenue decreased 14.2%, VI Chip 21.0% and Picor 47.4%.
- Operating expenses were $25.1M in Q2, down 2.5% year over year; first-half expenses were $49.8M, down 2.3%. R&D increased modestly in both comparisons as the company continued investment in advanced products.
- Cash and cash equivalents were $54.2M at June 30, down from $63.0M at year-end 2015. Long-term investments were $2.6M. Current assets were $111.6M and current liabilities $22.7M; working capital was $88.9M and the current ratio was 4.9:1.
- No interest-bearing debt is listed on the presented balance sheet. Total liabilities were $23.6M.
- First-half operating cash flow was negative $4.0M; capital expenditures were $4.6M, producing investing cash outflow of $4.6M. Cash declined $8.8M in the period.
- Inventory increased 11.5% from year-end to $26.1M. Backlog scheduled for shipment within 12 months was $41.7M at quarter-end, versus $42.1M at Q1-end.
Changes, outlook and management commentary
- Management attributed weaker results chiefly to lower bookings and delayed adoption of new products, alongside weak and unpredictable demand for legacy products. First-half bookings through March 31 were down 21.5% from the comparable prior-year period.
- Management reported that Q2 shipments of legacy products were not affected by supplier delays, following supply-chain disruption in Q1, but said delays could again affect production. It expects relatively flat aggregate BBU demand until macroeconomic conditions improve.
- Vicor expects its 48-volt-to-point-of-load datacenter products to gain volume adoption among leading customers, but noted customer order timing and processor-generation transitions remain uncertain. No quantified revenue or earnings guidance was provided.
- Management said cash and expected operating cash flows should fund planned operations and equipment purchases for the foreseeable future. Capital expenditure commitments were approximately $1.7M.
- In March 2016, Vicor acquired full ownership of certain Converpower operating assets and cash, consolidating operations into wholly owned Granite Power Technologies. The arrangement includes royalties through June 2021; the estimated present value of future royalties was $0.2M. The transaction was accounted for as an equity transaction, with no income-statement impact reported.
- Vicor’s $3.0M-par auction-rate security remained illiquid and was valued at $2.6M, including a $0.4M unrealized loss. It is student-loan-backed and U.S.-guaranteed, but fair value relies on Level 3 assumptions; management warned further market deterioration or credit-rating decline could cause additional losses or impairment.
- SynQor patent litigation remains a contingency. In May 2016, the PTAB found challenged claims of the ’021 patent invalid, upheld challenged claims of the ’702 and ’290 patents, and found all but one remaining challenged ’190 claims invalid. Appeals are pending and decisions were not expected until 2017; the court case was stayed. Vicor said it believes the claims lack merit and that a loss is not probable, but it cannot estimate any potential loss.
- Management reported effective disclosure controls as of June 30, 2016 and no material change in internal control over financial reporting during the quarter. No material changes to the previously reported risk factors were identified.
Investor verification priorities
- Track bookings, backlog conversion and customer adoption timing for 48-volt datacenter products, particularly given the quarter-to-quarter volatility described by management.
- Assess whether revenue recovery and production volumes can support gross margins and a return to operating profitability.
- Monitor operating cash use, capital spending and the cash balance, alongside increased inventory.
- Review future valuation and impairment disclosures for the illiquid auction-rate security, including changes in assumptions and credit conditions.
- Follow the SynQor appeals and stayed litigation, and any resulting change in the company’s assessment or ability to estimate potential exposure.