Vicor Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited, compared with the three months ended March 31, 2012. Vicor designs and sells modular power components and power systems, serving markets including aerospace and defense, computing, industrial, telecommunications, and transportation.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $41.946 million | $59.668 million |
| Gross margin | $16.607 million; 39.6% | $24.467 million; 41.0% |
| Operating income (loss) | ($8.496 million) | $0.464 million |
| Net income (loss) attributable to Vicor | ($4.990 million); ($0.12) per share | $0.326 million; $0.01 per share |
| Operating cash flow | ($1.681 million) | $7.524 million |
| Capital expenditures | $1.171 million | $1.261 million |
- Cash and cash equivalents were $71.403 million at quarter-end, down from $84.554 million at December 31, 2012. Working capital was $110.929 million and the current ratio was 7.1:1.
- Total current liabilities were $18.296 million. The filing does not identify any borrowings or a debt balance.
- Cash used in financing was $10.303 million, principally reflecting $10.392 million spent to repurchase 1,931,513 shares in a tender offer completed in March.
- Backlog scheduled for shipment within 12 months was $37.934 million, versus $31.405 million at the end of Q4 2012.
Material changes and management commentary
- Revenue fell 29.7% year over year and 16.8% sequentially. Management attributed the decline to weaker defense electronics spending, recession in Europe, a sharp drop in bookings in Q4 2012, and slower-than-expected growth in certain new product opportunities.
- By segment, reported external revenue was BBU $38.202 million (down 15.0%), VI Chip $3.097 million (down 77.6%), and Picor $0.647 million (down 28.2%). VI Chip and Picor remained dependent on a limited number of customers.
- Gross margin dollars declined 32.1%; margin percentage fell 1.4 percentage points. Management said lower revenue was the primary cause, partly offset by a product mix shift toward higher-margin BBU products.
- Operating expenses increased 4.6% to $25.103 million, primarily due to $1.361 million of severance charges from workforce reductions completed in February. SG&A declined modestly, while R&D was essentially flat.
- The Q1 income tax benefit was $3.495 million, primarily reflecting increased federal deferred tax assets, a potential federal NOL carryback, and the federal research tax credit. A $12.295 million valuation allowance remained, primarily against certain state deferred tax assets.
Outlook, risks, and unusual items
- No specific revenue, earnings, or margin guidance was provided. Management stated that cash and expected operating cash flows should fund planned operations and capital equipment purchases for the foreseeable future; it also cited ongoing manufacturing investment needs and $1.315 million of capital expenditure commitments.
- Vicor held failed-auction securities with $6.100 million par value and $5.031 million estimated fair value, classified as long-term. They had been illiquid since 2008 and were valued using Level 3 discounted-cash-flow assumptions. Management expected eventual recovery and said the illiquidity would not prevent execution of its operating plan, but warned that further market deterioration or weaker credit conditions could lead to additional losses or potentially material impairment charges.
- SynQor’s patent-infringement lawsuit remained pending; trial was scheduled for July 2014. Vicor disputed the allegations and said it would defend itself. Management did not expect current litigation or claims to materially adversely affect financial position or results.
- After quarter-end, Vicor reported accepting 1,341,575 shares at $5.00 per share for approximately $6.708 million in a second tender offer, completed after the quarter on April 26, 2013. Combined with the March tender, cash used for these offers was approximately $17.1 million.
- Management identified risks involving customer concentration and orders, market weakness, new-product adoption, manufacturing efficiency, hiring and retention, intellectual-property litigation, and the valuation of illiquid investments. Disclosure controls were assessed as effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether bookings and backlog convert into shipments and revenue, particularly for VI Chip and large customers.
- Whether Vicor can restore operating profitability and positive operating cash flow amid continued market weakness.
- The assumptions and valuation sensitivity underlying the $5.031 million fair value of failed-auction securities, including the possibility of further impairment.
- The financial and product impact of the SynQor litigation and its scheduled 2014 trial.
- The effect of the completed share tenders on cash, share count, and funding available for planned manufacturing investment.
- The realizability of deferred tax assets, including the state tax assets subject to valuation allowance.