UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2016
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
Commission File Number 0-18277
VICOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 04-2742817 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
25 Frontage Road, Andover, Massachusetts 01810
(Address of Principal Executive Office)
(978) 470-2900
(Registrants telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the issuers classes of Common Stock as of April 22, 2016 was:
Common Stock, $.01 par value |
27,037,328 | |||
Class B Common Stock, $.01 par value |
11,758,218 |
VICOR CORPORATION
Page | ||||
Condensed Consolidated Balance Sheets at March 31, 2016 and December 31, 2015 |
1 | |||
Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015 |
2 | |||
3 | ||||
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 |
4 | |||
5 | ||||
Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations |
16 | |||
Item 3 - Quantitative and Qualitative Disclosures About Market Risk |
24 | |||
24 | ||||
26 | ||||
26 | ||||
26 | ||||
27 | ||||
EX-31.1 SECTION 302 CERTIFICATION OF CEO |
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EX-31.2 SECTION 302 CERTIFICATION OF CFO |
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EX-32.1 SECTION 906 CERTIFICATION OF CEO |
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EX-32.2 SECTION 906 CERTIFICATION OF CFO |
Part I Financial Information
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
March 31, 2016 | December 31, 2015 | |||||||
Assets | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 59,710 | $ | 62,980 | ||||
Accounts receivable, less allowance of $148 in 2016 and $171 in 2015 |
23,349 | 25,982 | ||||||
Inventories, net |
24,150 | 23,442 | ||||||
Other current assets |
3,048 | 3,102 | ||||||
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Total current assets |
110,257 | 115,506 | ||||||
Long-term investments, net |
2,553 | 2,866 | ||||||
Property, plant and equipment, net |
37,177 | 37,450 | ||||||
Long-term deferred tax assets, net |
15 | 15 | ||||||
Other assets |
1,908 | 1,708 | ||||||
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Total assets |
$ | 151,910 | $ | 157,545 | ||||
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Liabilities and Equity | ||||||||
Current liabilities: |
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Accounts payable |
$ | 8,232 | $ | 7,470 | ||||
Accrued compensation and benefits |
8,145 | 8,349 | ||||||
Accrued expenses |
2,220 | 2,568 | ||||||
Accrued severance charges |
37 | 195 | ||||||
Income taxes payable |
29 | 31 | ||||||
Deferred revenue |
1,933 | 1,988 | ||||||
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Total current liabilities |
20,596 | 20,601 | ||||||
Long-term deferred revenue |
433 | 468 | ||||||
Contingent consideration obligations |
352 | 144 | ||||||
Long-term income taxes payable |
193 | 192 | ||||||
Deferred income taxes payable |
| 55 | ||||||
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Total liabilities |
21,574 | 21,460 | ||||||
Commitments and contingencies (Note 11) |
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Equity: |
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Vicor Corporation stockholders equity: |
||||||||
Class B Common Stock |
118 | 118 | ||||||
Common Stock |
395 | 395 | ||||||
Additional paid-in capital |
174,605 | 174,337 | ||||||
Retained earnings |
94,334 | 99,685 | ||||||
Accumulated other comprehensive loss |
(394 | ) | (577 | ) | ||||
Treasury stock, at cost |
(138,927 | ) | (138,927 | ) | ||||
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Total Vicor Corporation stockholders equity |
130,131 | 135,031 | ||||||
Noncontrolling interest |
205 | 1,054 | ||||||
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Total equity |
130,336 | 136,085 | ||||||
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Total liabilities and equity |
$ | 151,910 | $ | 157,545 | ||||
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See accompanying notes.
-1-
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31, |
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2016 | 2015 | |||||||
Net revenues |
$ | 46,027 | $ | 64,017 | ||||
Cost of revenues |
26,711 | 35,126 | ||||||
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Gross margin |
19,316 | 28,891 | ||||||
Operating expenses: |
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Selling, general and administrative |
14,016 | 14,862 | ||||||
Research and development |
10,729 | 10,419 | ||||||
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Total operating expenses |
24,745 | 25,281 | ||||||
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Income (loss) from operations |
(5,429 | ) | 3,610 | |||||
Other income (expense), net: |
||||||||
Total unrealized gains (losses) on available-for-sale securities, net |
27 | (15 | ) | |||||
Portion of gains (losses) recognized in other comprehensive income (loss) |
(23 | ) | 19 | |||||
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Net credit gains recognized in earnings |
4 | 4 | ||||||
Other income (expense), net |
71 | (33 | ) | |||||
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Total other income (expense), net |
75 | (29 | ) | |||||
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Income (loss) before income taxes |
(5,354 | ) | 3,581 | |||||
Less: Provision for income taxes |
22 | 139 | ||||||
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Consolidated net income (loss) |
(5,376 | ) | 3,442 | |||||
Less: Net income (loss) attributable to noncontrolling interest |
(25 | ) | 71 | |||||
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Net income (loss) attributable to Vicor Corporation |
$ | (5,351 | ) | $ | 3,371 | |||
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Net income (loss) per common share attributable to Vicor Corporation: |
||||||||
Basic |
$ | (0.14 | ) | $ | 0.09 | |||
Diluted |
$ | (0.14 | ) | $ | 0.09 | |||
Shares used to compute net income (loss) per common share attributable to Vicor Corporation: |
||||||||
Basic |
38,794 | 38,689 | ||||||
Diluted |
38,794 | 39,149 |
See accompanying notes.
-2-
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
Three Months Ended March 31, |
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2016 | 2015 | |||||||
Consolidated net income (loss) |
$ | (5,376 | ) | $ | 3,442 | |||
Foreign currency translation gains (losses), net of tax (1) |
173 | (37 | ) | |||||
Unrealized gains (losses) on available-for-sale securities, net of tax (2) |
23 | (15 | ) | |||||
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Other comprehensive income (loss) |
196 | (52 | ) | |||||
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Consolidated comprehensive income (loss) |
(5,180 | ) | 3,390 | |||||
Less: Comprehensive income (loss) attributable to noncontrolling interest |
(12 | ) | 71 | |||||
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Comprehensive income (loss) attributable to Vicor Corporation |
$ | (5,168 | ) | $ | 3,319 | |||
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(1) | Net of tax provision (benefit) of $0 for the three months ended March 31, 2016 and 2015, respectively. |
(2) | The deferred tax assets associated with cumulative unrealized losses on available-for-sale securities are completely offset by a tax valuation allowance as of March 31, 2016 and 2015. Therefore, there is no net income tax provision (benefit) recognized for the three months ended March 31, 2016 and 2015. |
See accompanying notes.
-3-
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended March 31, |
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2016 | 2015 | |||||||
Operating activities: |
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Consolidated net income (loss) |
$ | (5,376 | ) | $ | 3,442 | |||
Adjustments to reconcile consolidated net income (loss) to net cash provided by (used for) operating activities: |
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Depreciation and amortization |
2,195 | 2,403 | ||||||
Stock-based compensation expense |
329 | 563 | ||||||
(Benefit) provision for doubtful accounts |
(28 | ) | 33 | |||||
Decrease in long-term deferred revenue |
(35 | ) | (34 | ) | ||||
Deferred income taxes |
(55 | ) | | |||||
Gain on disposal of equipment |
(2 | ) | (35 | ) | ||||
Credit gain on available-for-sale securities |
(4 | ) | (4 | ) | ||||
Increase in long-term income taxes payable |
1 | 6 | ||||||
Change in current assets and liabilities, net |
2,141 | (1,304 | ) | |||||
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Net cash (used for) provided by operating activities |
(834 | ) | 5,070 | |||||
Investing activities: |
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Additions to property, plant and equipment |
(1,887 | ) | (1,469 | ) | ||||
Sales and maturities of investments |
| 270 | ||||||
Proceeds from sale of equipment |
2 | 35 | ||||||
Increase in other assets |
(214 | ) | (65 | ) | ||||
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Net cash used for investing activities |
(2,099 | ) | (1,229 | ) | ||||
Financing activities: |
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Proceeds from issuance of Common Stock |
19 | 310 | ||||||
Acquisition of noncontrolling interest |
(372 | ) | | |||||
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Net cash provided by financing activities |
(353 | ) | 310 | |||||
Effect of foreign exchange rates on cash |
16 | (16 | ) | |||||
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Net (decrease) increase in cash and cash equivalents |
(3,270 | ) | 4,135 | |||||
Cash and cash equivalents at beginning of period |
62,980 | 55,187 | ||||||
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Cash and cash equivalents at end of period |
$ | 59,710 | $ | 59,322 | ||||
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Supplemental disclosure of non-cash financing activities: |
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Acquisition of noncontrolling interest |
$ | (346 | ) | $ | |
See accompanying notes.
-4-
Notes to Condensed Consolidated Financial Statements
March 31, 2016
(unaudited)
1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of Vicor Corporation and its consolidated subsidiaries (collectively, the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for any other interim period or the year ending December 31, 2016. The balance sheet at December 31, 2015 presented herein has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2015 filed by the Company with the Securities and Exchange Commission on March 8, 2016.
2. Long-Term Investments
As of March 31, 2016 and December 31, 2015, the Company held one auction rate security that had experienced failed auctions of $3,000,000 at par value, which was purchased through and is held by a broker-dealer affiliate of Bank of America, N.A. (the Failed Auction Security). The Failed Auction Security held by the Company is Aaa/AA+ rated by major credit rating agencies, collateralized by student loans, and guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program. Management is not aware of any reason to believe the issuer of the Failed Auction Security is presently at risk of default. Through March 31, 2016, the Company has continued to receive interest payments on the Failed Auction Security in accordance with the terms of its indenture. Management believes the Company ultimately should be able to liquidate the Failed Auction Security without significant loss primarily due to the overall quality of the issue held and the collateral securing the substantial majority of the underlying obligation. However, current conditions in the auction rate securities market have led management to conclude the recovery period for the Failed Auction Security exceeds 12 months. As a result, the Company continued to classify the Failed Auction Security as long-term as of March 31, 2016.
The following is a summary of available-for-sale securities (in thousands):
Gross | Gross | Estimated | ||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
March 31, 2016 |
Cost | Gains | Losses | Value | ||||||||||||
Failed Auction Security |
$ | 3,000 | $ | | $ | 447 | $ | 2,553 | ||||||||
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Gross | Gross | Estimated | ||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
December 31, 2015 |
Cost | Gains | Losses | Value | ||||||||||||
Failed Auction Security |
$ | 3,000 | $ | | $ | 474 | $ | 2,526 | ||||||||
Brokered certificates of deposit |
340 | | | 340 | ||||||||||||
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$ | 3,340 | $ | | $ | 474 | $ | 2,866 | |||||||||
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-5-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2016
(unaudited)
As of March 31, 2016, the Failed Auction Security had been in an unrealized loss position for greater than 12 months.
The amortized cost and estimated fair value of the available-for-sale security on March 31, 2016, by contractual maturity, is shown below (in thousands):
Estimated | ||||||||
Cost | Fair Value | |||||||
Due in twenty to forty years |
$ | 3,000 | $ | 2,553 | ||||
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Based on the fair value measurements described in Note 3, the fair value of the Failed Auction Security on March 31, 2016, with a par value of $3,000,000, was estimated by the Company to be approximately $2,553,000. The gross unrealized loss of $447,000 on the Failed Auction Security consists of two types of estimated loss: an aggregate credit loss of $68,000 and an aggregate temporary impairment of $379,000. In determining the amount of credit loss, the Company compared the present value of cash flows expected to be collected to the amortized cost basis of the security, considering credit default risk probabilities and changes in credit ratings as significant inputs, among other factors (See Note 3).
The following table represents a rollforward of the activity related to the credit loss recognized in earnings on the Failed Auction Security for the three months ended March 31 (in thousands):
2016 | 2015 | |||||||
Balance at the beginning of the period |
$ | 72 | $ | 84 | ||||
Reductions in the amount related to credit gain for which other-than-temporary impairment was not previously recognized |
(4 | ) | (4 | ) | ||||
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Balance at the end of the period |
$ | 68 | $ | 80 | ||||
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At this time, the Company has no intent to sell the impaired Failed Auction Security and does not believe it is more likely than not the Company will be required to sell this security. If current market conditions deteriorate further, the Company may be required to record additional unrealized losses. If the credit rating of the security deteriorates, the Company may be required to adjust the carrying value of the investment through impairment charges recorded in the Condensed Consolidated Statements of Operations, and any such impairment adjustments may be material.
Based on the Companys ability to access cash and cash equivalents and its expected operating cash flows, management does not anticipate the current lack of liquidity associated with the Failed Auction Security held will affect the Companys ability to execute its current operating plan.
3. Fair Value Measurements
The Company accounts for certain financial assets at fair value, defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions market participants would use in pricing an asset or liability. A three-level hierarchy is used to show the extent and level of judgment used to estimate fair value measurements.
-6-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2016
(unaudited)
Assets measured at fair value on a recurring basis included the following as of March 31, 2016 (in thousands):
Using | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices | Other | Significant | ||||||||||||||
in Active | Observable | Unobservable | Total Fair | |||||||||||||
Markets | Inputs | Inputs | Value as of | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | March 31, 2016 | |||||||||||||
Cash equivalents: |
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Money market funds |
$ | 9,599 | $ | | $ | | $ | 9,599 | ||||||||
Long-term investments: |
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Failed Auction Security |
| | 2,553 | 2,553 | ||||||||||||
Liabilities: |
||||||||||||||||
Contingent consideration obligations |
| | (352 | ) | (352 | ) |
Assets measured at fair value on a recurring basis included the following as of December 31, 2015 (in thousands):
Using | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices | Other | Significant | ||||||||||||||
in Active | Observable | Unobservable | Total Fair | |||||||||||||
Markets | Inputs | Inputs | Value as of | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | December 31, 2015 | |||||||||||||
Cash equivalents: |
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Money market funds |
$ | 10,412 | $ | | $ | | $ | 10,412 | ||||||||
Long-term investments: |
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Failed Auction Security |
| | 2,526 | 2,526 | ||||||||||||
Brokered certificates of deposit |
| 340 | | 340 | ||||||||||||
Liabilities: |
||||||||||||||||
Contingent consideration obligation |
| | (144 | ) | (144 | ) |
The Company has classified its contingent consideration obligations as Level 3 because the fair value for these liabilities was determined using unobservable inputs. The liabilities were based on estimated sales of legacy products over the period of royalty payments at the royalty rate (see Note 7), discounted using the Companys estimated cost of capital.
The Company has classified its brokered certificates of deposit as Level 2 because the fair value for these investments was determined utilizing observable inputs from non-active markets. The fair values fluctuate with changes in market interest rates obtained from information available in publicly quoted markets. Management tested the reported fair values by comparing them to net present value calculations utilizing a discount rate based on U.S. Treasury bill and bond yields for similar maturities.
As of March 31, 2016, there was insufficient observable auction rate security market information available to determine the fair value of the Failed Auction Security using Level 1 or Level 2 inputs. As such, the Companys investment in the Failed Auction Security was deemed to require valuation using Level 3 inputs. Management, after consulting with advisors, valued the Failed Auction Security using analyses and pricing models similar to those used by market participants (i.e., buyers, sellers, and the broker-dealers responsible for execution of the Dutch auction pricing mechanism by which each issues interest rate was set). Management utilized a probability weighted discounted cash flow (DCF) model to determine the estimated fair value of this security as of March 31, 2016. The major assumptions used in preparing the DCF model included: estimates for the amount and
-7-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2016
(unaudited)
timing of future interest and principal payments based on default probability assumptions used to measure the credit loss of 2.3%; the rate of return required by investors to own this type of security in the current environment, which management estimates to be 5.0% above the risk free rate of return; and an estimated timeframe of three to five years for successful auctions for this type of security to occur. In making these assumptions, management considered relevant factors including: the formula applicable to the security defining the interest rate paid to investors in the event of a failed auction (the Penalty Rate); forward projections of the interest rate benchmarks specified in such formulas; the likely timing of principal repayments; the probability of full repayment considering the guarantees by the U.S. Department of Education of the underlying student loans, guarantees by other third parties, and additional credit enhancements provided through other means; and publicly available pricing data for recently issued student loan asset-backed securities not subject to auctions. In developing its estimate of the rate of return required by investors to own the security, management compared the Penalty Rate of the Failed Auction Security with yields of actively traded long-term bonds with similar characteristics and, reflecting the limited liquidity for auction rate securities and the discounts to par value seen in recent tender offers by issuers and arms length market transactions between informed buyers and sellers, estimated the implied yield (i.e., the discount to par value) necessary to complete a sale of the Failed Auction Security. Management has calculated an increase or decrease in the liquidity risk premium of 5.0% referenced above of 1.0% (i.e., 100 basis points) as used in the model, would decrease or increase, respectively, the fair value of the Failed Auction Security by approximately $100,000.
For purposes of the valuation process for the Failed Auction Security, management consists of senior members of the Companys finance department. The fair value measurements for the Failed Auction Security are reviewed and updated on a quarterly basis. The calculations are prepared by the Companys Corporate Controller, in conjunction with information provided by its valuation advisors, and include the development and substantiation of the unobservable inputs. The methodology, assumptions, and calculations are reviewed and approved by the Companys Chief Financial Officer and Chief Accounting Officer.
The significant unobservable inputs used in the fair value measurement of the Failed Auction Security are the cumulative probability of earning the maximum rate until maturity, the cumulative probability of principal return prior to maturity, the cumulative probability of default, the liquidity risk premium, and the recovery rate in default. Significant increases (decreases) in any of those inputs in isolation would result in changes in fair value measurement. Significant increases (decreases) in the cumulative probability of earning the maximum rate until maturity, the cumulative probability of principal return prior to maturity, and the recovery rate in default would result in a higher (lower) fair value measurement, while increases (decreases) in the cumulative probability of default and the liquidity risk premium would result in a lower (higher) fair value measurement.
Generally, the interrelationships are such that a change in the assumption used for the cumulative probability of principal return prior to maturity is accompanied by a directionally similar change in the assumption used for the cumulative probability of earning the maximum rate until maturity and a directionally opposite change in the assumptions used for the cumulative probability of default and the liquidity risk premium. The recovery rate in default is somewhat independent and based upon the securitys specific underlying assets and published recovery rate indices.
-8-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2016
(unaudited)
Quantitative information about Level 3 fair value measurements as of March 31, 2016 is as follows (dollars in thousands):
Valuation | Unobservable | Weighted | ||||||||||
Fair Value | Technique | Input |
Average | |||||||||
Failed Auction Security |
$ | 2,553 | Discounted cash flow |
Cumulative probability of earning the maximum rate until maturity | 0.03 | % | ||||||
Cumulative probability of principal return prior to maturity | 94.06 | % | ||||||||||
Cumulative probability of default | 5.91 | % | ||||||||||
Liquidity risk premium | 5.00 | % | ||||||||||
Recovery rate in default | 40.00 | % |
The change in the estimated fair value calculated for the investment valued on a recurring basis utilizing Level 3 inputs (i.e., the Failed Auction Security) for the three months ended March 31, 2016 was as follows (in thousands):
Balance at the beginning of the period |
$ | 2,526 | ||
Credit gain on available-for-sale securities included in Other income (expense), net |
4 | |||
Gain included in Other comprehensive income (loss) |
23 | |||
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|
|||
Balance at the end of the period |
$ | 2,553 | ||
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The change in the estimated fair value calculated for the liabilities valued on a recurring basis utilizing Level 3 inputs (i.e., the Contingent consideration obligations) for the three months ended March 31, 2016 was as follows (in thousands):
Balance at the beginning of the period |
$ | 144 | ||
Obligation incurred upon acquisition of noncontrolling interest (see Note 7) |
208 | |||
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Balance at the end of the period |
$ | 352 | ||
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There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2016.
4. Stock-Based Compensation
The Company uses the Black-Scholes option pricing model to calculate the fair value of stock option awards as of their grant date. Stock-based compensation expense for the three months ended March 31 was as follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2016 | 2015 | |||||||
Cost of revenues |
$ | 52 | $ | 61 | ||||
Selling, general and administrative |
238 | 408 | ||||||
Research and development |
39 | 94 | ||||||
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Total stock-based compensation |
$ | 329 | $ | 563 | ||||
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-9-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2016
(unaudited)
On December 31, 2010, the Company granted 2,984,250 non-qualified stock options under the VI Chip 2007 Stock Option and Incentive Plan with performance-based vesting provisions tied to achievement of certain margin targets by VI Chip Corporation. As of December 31, 2010, the Company determined it was probable the margin targets could be achieved and, accordingly, began recording stock-based compensation expense relating to these options beginning January 1, 2011. This determination remains the same as of March 31, 2016 and, accordingly, expense has been recorded through that date. The unrecognized compensation expense for these performance-based options was approximately $451,000 as of March 31, 2016.
5. Net Income (Loss) per Share
The following table sets forth the computation of basic and diluted net income (loss) per share for the three months ended March 31 (in thousands, except per share amounts):
Three Months Ended | ||||||||
March 31, | ||||||||
2016 | 2015 | |||||||
Numerator: |
||||||||
Net income (loss) attributable to Vicor Corporation |
$ | (5,351 | ) | $ | 3,371 | |||
|
|
|
|
|||||
Denominator: |
||||||||
Denominator for basic net income (loss) per share-weighted average shares (1) |
38,794 | 38,689 | ||||||
Effect of dilutive securities: |
||||||||
Employee stock options (2) |
| 460 | ||||||
|
|
|
|
|||||
Denominator for diluted net income (loss) per share adjusted weighted-average shares and assumed conversions |
38,794 | 39,149 | ||||||
|
|
|
|
|||||
Basic net income (loss) per share |
$ | (0.14 | ) | $ | 0.09 | |||
|
|
|
|
|||||
Diluted net income (loss) per share |
$ | (0.14 | ) | $ | 0.09 | |||
|
|
|
|
(1) | Denominator represents weighted average number of shares of Common Stock and Class B Common Stock outstanding. |
(2) | Options to purchase 731,672 and 112,929 shares of Common Stock for the three months ended March 31, 2016 and 2015, respectively, were not included in the calculation of net income per share as the effect would have been antidilutive. |
6. Inventories
Inventories are valued at the lower of cost (determined using the first-in, first-out method) or net realizable value. Fixed production overhead is allocated to the inventory cost per unit based on the normal capacity of the production facilities. Abnormal production costs, including fixed cost variances from normal production capacity, if any, are charged to cost of revenues in the period incurred. All shipping and handling costs incurred in connection with the sale of products are included in cost of revenues.
-10-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2016
(unaudited)
The Company provides reserves for inventories estimated to be excess, obsolete or unmarketable. The Companys estimation process for assessing net realizable value is based upon its known backlog, projected future demand, historical consumption and expected market conditions. If the Companys estimated demand and/or market expectation were to change or if product sales were to decline, the Companys estimation process may cause larger inventory reserves to be recorded, resulting in larger charges to cost of revenues.
Inventories were as follows (in thousands):
March 31, 2016 | December 31, 2015 | |||||||
Raw materials |
$ | 17,292 | $ | 16,257 | ||||
Work-in-process |
3,050 | 2,879 | ||||||
Finished goods |
3,808 | 4,306 | ||||||
|
|
|
|
|||||
Net balance |
$ | 24,150 | $ | 23,442 | ||||
|
|
|
|
7. Noncontrolling Interest Transactions
On March 30, 2016, the Company acquired 100% ownership of certain operating assets and cash of its consolidated subsidiary, Converpower Corporation (Converpower), in which it held a 49% ownership interest. The operating assets and cash were acquired in exchange for the Companys common shares representing that 49% interest and the aggregate dollar amount of royalty payments to be made by the Company to Converpower. The transaction was executed through a newly-formed, wholly-owned subsidiary, Granite Power Technologies, Inc. (GPT), the business operations of which had formerly existed as a division of Vicor. The shares of Converpower common stock held by the Company were contributed to GPT prior to the transaction. At the same time that it entered into the Asset Purchase Agreement associated with this transaction, the Company and Converpower entered into a license agreement providing the Company the right to continue manufacturing certain Converpower products in exchange for payment of royalties, quarterly through June 30, 2021, equal to a percentage of the revenue generated by the manufacture and sale of these products by GPT. The estimated present value of total future royalties, included in Contingent consideration obligations in the accompanying Condensed Consolidated Balance Sheet as of March 31, 2016, is $208,000. Although the Company exchanged its shares representing its 49% equity interest in Converpower, it acquired 100% control of the business operations. Accordingly, this transaction has been accounted for as an acquisition of a noncontrolling interest (i.e., an equity transaction). As such, as presented in the Companys Condensed Consolidated Balance Sheet as of March 31, 2016, the noncontrolling interest balance in equity associated with Converpower was reduced to zero, and the additional paid-in capital account was reduced by $208,000, the estimated present value of total future royalties. As a result of the transactions associated with the consolidation of the Converpower operation into GPT, the Companys aggregate balance of cash, short-term interest receivable, and long-term investments on its Condensed Consolidated Balance Sheet as of March 31, 2016, declined by approximately $718,000. No amounts were recorded in the Condensed Consolidated Statement of Operations related to these transactions.
8. Severance and Other Charges
A summary of the activity related to the accrued severance charges, is as follows (in thousands):
Balance as of December 31, 2015 |
$ | 195 | ||
Payments |
(158 | ) | ||
|
|
|||
Balance as of March 31, 2016 |
$ | 37 | ||
|
|
-11-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2016
(unaudited)
9. Product Warranties
The Company generally offers a two-year warranty for all of its products, though it is party to a limited number of supply agreements with certain customers contractually committing the Company to warranty and indemnification requirements exceeding those to which the Company has been exposed in the past. The Company provides for the estimated cost of product warranties at the time product revenue is recognized. Factors influencing the Companys warranty reserves include the number of units sold, historical and anticipated rates of warranty returns, and the cost per return. The Company periodically assesses the adequacy of warranty reserves and adjusts the amounts as necessary. Warranty obligations are included in Accrued expenses in the accompanying Condensed Consolidated Balance Sheets.
Product warranty activity for the three months ended March 31 was as follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2016 | 2015 | |||||||
Balance at the beginning of the period |
$ | 584 | $ | 204 | ||||
Accruals for warranties for products sold in the period |
122 | 15 | ||||||
Fulfillment of warranty obligations |
(68 | ) | (32 | ) | ||||
Revisions of estimated obligations |
(50 | ) | | |||||
|
|
|
|
|||||
Balance at the end of the period |
$ | 588 | $ | 187 | ||||
|
|
|
|
10. Income Taxes
The tax provision is based on the estimated annual effective tax rate for the year, which includes estimated federal, state and foreign income taxes on the Companys projected pre-tax income (loss) and, in 2015, for estimated federal and state income taxes for certain noncontrolling interest subsidiaries that were not part of the Companys consolidated income tax returns.
The provisions for income taxes and the effective income tax rates for the three months ended March 31 were as follows (dollars in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2016 | 2015 | |||||||
Provision for income taxes |
$ | 22 | $ | 139 | ||||
Effective income tax rate |
0.4 | % | 3.9 | % |
The provision for the three months ended March 31, 2016 was primarily due to estimated state taxes in jurisdictions in which the Company does not have net operating loss carryforwards. No tax benefit could be recognized for the majority of the Companys losses during the period due to a full valuation allowance against all net domestic deferred tax assets. In addition, in connection with the Companys acquisition of 100% ownership of certain operating assets and cash of Converpower, the related deferred tax liability for unremitted earnings of $55,000 was reversed and recorded as a discrete benefit in the first quarter of 2016 (see Note 7). The provision for the three months ended March 31, 2015 was primarily due to estimated federal and state taxes for one noncontrolling interest subsidiary, and for estimated state taxes in jurisdictions in which the Company does not have net operating loss carryforwards.
-12-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2016
(unaudited)
As of March 31, 2016, the Company continues to maintain a valuation allowance of approximately $25,863,000 against all domestic net deferred tax assets and the majority of foreign net deferred tax assets, for which realization cannot be considered more likely than not at this time.
11. Commitments and Contingencies
At March 31, 2016, the Company had approximately $1,844,000 of capital expenditure commitments.
On January 28, 2011, SynQor, Inc. (SynQor) filed a complaint for patent infringement against Ericsson, Inc. (Ericsson), Cisco Systems, Inc. (Cisco) and the Company in the U.S. District Court for the Eastern District of Texas (the Texas Action). This immediately followed a complaint filed by the Company on January 26, 2011, in the U.S. District Court for the District of Massachusetts, in which the Company sought a declaratory judgment that its bus converter products do not infringe any valid claim of certain of SynQors U.S. patents, and that the claims of those patents are invalid. With respect to the Company, SynQors complaint alleges the Companys products, including, but not limited to, unregulated bus converters used in intermediate bus architecture power supply systems, infringe certain SynQor patents. SynQor seeks, among other items, an injunction against further infringement and an award of unspecified compensatory and enhanced damages, interest, costs and attorney fees. On February 8, 2011, SynQor filed a motion for preliminary injunction seeking an order enjoining the Company from manufacturing, using, selling, and offering for sale in the United States and/or importing into the United States certain identified unregulated bus converters, as well as any other bus converters not significantly different from those products. On February 17, 2011, the Company withdrew its Massachusetts action without prejudice to allow the litigation to proceed in Texas. On May 16, 2011, SynQor announced it was withdrawing its motion for preliminary injunction against the Company. On that date, SynQor also announced it and Ericsson had entered into a definitive settlement agreement, the terms of which were not disclosed. On September 16, 2011, the U.S. District Court for the Eastern District of Texas (the Texas Court) issued an order setting a trial date of July 7, 2014. On September 20, 2011, SynQor filed an amended complaint in the Texas Action. The amended complaint repeated the allegations of patent infringement against the Company contained in SynQors original complaint, and included additional patent infringement allegations with respect to U.S. Patent No. 8,023,290 (the 290 patent), which was issued on that day. As with SynQors original complaint, the amended complaint alleges the Companys products, including but not limited to the Companys unregulated bus converters used in intermediate bus architecture power supply systems, infringe the asserted patents. On October 4, 2011, the Company filed an answer and counterclaims to SynQors amended complaint, in which the Company alleges the 290 patent is unenforceable because it was procured through inequitable conduct before the U.S. Patent and Trademark Office and seeks damages against SynQor for SynQors unfair and deceptive trade practices and tortious interference with prospective economic advantage in connection with SynQors allegations of patent infringement against the Company. On January 2, 2014, the Texas Court issued its claim construction order following a claim construction hearing held on December 17, 2013. On January 16, 2014, the Company filed a motion seeking reconsideration of certain aspects of the Texas Courts claim construction ruling. On March 31, 2014, the Texas Court issued an order severing the case against the Company and Cisco into two separate matters, with separate trials to be held with respect to SynQors claims against Cisco and SynQors claims against the Company. On June 30, 2014, the Company filed a number of motions seeking summary judgment in this matter, including for a finding of no direct, indirect, or willful infringement and for a finding of indefiniteness with respect to U.S. Patent No. 7,272,021 (the 021 patent), which is one of four related patents at question in the Texas Action. The Texas Court has yet to rule on these motions. On October 23, 2014, the Texas Court issued an order continuing trial in this matter indefinitely. On January 7, 2015, the Companys case and that of Cisco were assigned to a new judge within the Texas Court. On February 6, 2015, SynQor filed a motion to consolidate the Companys and Ciscos cases for trial, which was subsequently denied. On March 13, 2015, the U.S. Court of Appeals for the Federal Circuit in Washington, D.C. Circuit issued a ruling invalidating certain claims of U.S. Patent No. 7,072,190 (the 190 patent) asserted by SynQor against the Company. Challenges to the validity of the remaining claims relating to the 190 patent, and to the remaining patents asserted by SynQor against the Company, remain pending before the U.S. Patent and Trademark Office and in the Texas Action. On March 26, 2015, the Texas Court scheduled pre-trial conferences for September 15, 2015, for Ciscos case and January 13, 2016, for the Companys case. On April 20, 2015, the Patent Trial and Appeal Board of the United States Patent and Trademark Office (the PTAB) issued a decision upholding the validity of all of the claims of SynQors U.S. Patent No. 7,564,702 (the 702 patent), another of the power converter patents included in the claims asserted against the Company in the Texas Action. On May 20, 2015, the Company filed a request for rehearing concerning that decision. The PTAB has not ruled on that request. On May 5, 2015, the PTAB issued a decision invalidating all of the asserted
-13-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2016
(unaudited)
claims of the 021 patent. On June 10, 2015, SynQor filed a request for rehearing concerning that decision. The PTAB has not ruled on that request. The Company has received no notice from the Texas Court regarding the timing of rulings on the Companys summary judgment motions. On June 19, 2015, the Texas Court issued an order scheduling a jury trial in SynQors patent infringement action against Cisco beginning on November 30, 2015. SynQors patent infringement allegations against Cisco include allegations that Cisco is using certain parts supplied by the Company in infringing circuits. On October 5, 2015, the Texas Court issued an order denying a motion by Cisco seeking a stay of SynQors case against Cisco pending the resolution of matters concerning the asserted SynQor patents before the PTAB. On November 20, 2015, SynQor and Cisco informed the Texas Court they had reached a confidential settlement of SynQors case against Cisco. On November 24, 2015, a Magistrate Judge of the Texas Court issued an order staying SynQors case against the Company pending the resolution of matters concerning the asserted SynQor patents before the PTAB. SynQor has filed a motion seeking reconsideration of that order, and that request is still pending.
The Company continues to believe none of its products, including its unregulated bus converters, infringe any valid claim of the asserted SynQor patents, either alone or when used in an intermediate bus architecture implementation, including such use by Cisco. The Company believes SynQors claims lack merit and, therefore, continues to vigorously defend itself against SynQors patent infringement allegations. The Company does not believe a loss is probable for this matter. If a loss were to be incurred, however, the Company cannot estimate the amount of possible loss or range of possible loss at this time.
In addition to the SynQor matter, the Company is involved in certain other litigation and claims incidental to the conduct of its business. While the outcome of lawsuits and claims against the Company cannot be predicted with certainty, management does not expect any current litigation or claims to have a material adverse impact on the Companys financial position or results of operations.
12. Segment Information
The Company has organized its business segments according to its key product lines. The Brick Business Unit segment (BBU) designs, develops, manufactures and markets the Companys modular DC-DC converters and configurable products, and also includes the entities comprising Vicor Custom Power and the BBU operations of Vicor Japan Company, Ltd. (VJCL). The VI Chip segment includes VI Chip Corporation, which designs, develops, manufactures and markets many of the Companys advanced power component products. The VI Chip segment also includes the VI Chip business conducted through VJCL. The Picor segment includes Picor Corporation, which designs, develops, manufactures and markets integrated circuits and related products for use in a variety of power management and power system applications. The Picor segment develops these products for use in the Companys BBU and VI Chip modules, to be sold as complements to the Companys BBU and VI Chip products, or for sale to third parties for separate (i.e., stand-alone) applications.
The Companys chief operating decision maker evaluates performance and allocates resources based on segment revenues and segment operating income (loss). The operating income (loss) for each segment includes selling, general and administrative and research and development expenses directly attributable to the segment. Certain of the Companys indirect overhead costs, which include corporate selling, general and administrative expenses, are allocated among the segments based upon an estimate of costs associated with each segment. Assets allocated to each segment are based upon specific identification of such assets, which include accounts receivable, inventories, fixed assets and certain other assets. The Corporate segment consists of those operations and assets shared by all segments. The costs of certain centralized executive and administrative functions are recorded in this segment, as are certain shared assets, most notably cash and cash equivalents, deferred tax assets, long-term investments, the Companys facilities in Massachusetts, real estate and other assets. The Companys accounting policies and method of presentation for segments are consistent with that used throughout the Condensed Consolidated Financial Statements.
-14-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2016
(unaudited)
The following table provides segment financial data for the three months ended March 31 (in thousands):
BBU | VI Chip | Picor | Corporate | Eliminations (1) |
Total | |||||||||||||||||||
2016: |
||||||||||||||||||||||||
Net revenues |
$ | 36,869 | $ | 7,747 | $ | 2,955 | $ | | $ | (1,544 | ) | $ | 46,027 | |||||||||||
Income (loss) from operations |
1,506 | (5,708 | ) | (1,004 | ) | (223 | ) | | (5,429 | ) | ||||||||||||||
Total assets |
176,502 | 17,247 | 5,724 | 77,569 | (125,132 | ) | 151,910 | |||||||||||||||||
Depreciation and amortization |
1,119 | 584 | 126 | 366 | | 2,195 | ||||||||||||||||||
2015: |
||||||||||||||||||||||||
Net revenues |
$ | 44,878 | $ | 14,180 | $ | 7,109 | $ | | $ | (2,150 | ) | $ | 64,017 | |||||||||||
Income (loss) from operations |
5,379 | (3,488 | ) | 2,017 | (298 | ) | | 3,610 | ||||||||||||||||
Total assets |
155,737 | 17,125 | 7,489 | 79,483 | (98,561 | ) | 161,273 | |||||||||||||||||
Depreciation and amortization |
1,153 | 799 | 97 | 354 | | 2,403 |
(1) | The elimination for net revenues is principally related to inter-segment sales by Picor to BBU and VI Chip and for inter-segment sales by VI Chip to BBU. The elimination for total assets is principally related to inter-segment accounts receivable due to BBU for the funding of VI Chip and Picor operations. |
13. Impact of Recently Issued Accounting Standards
In March 2016, the Financial Accounting Board (FASB) issued new guidance for employee share-based payment accounting, which makes several modifications to existing guidance related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. This new guidance also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company has not yet determined the impact this new guidance will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued new guidance for lease accounting, which will require lessees to recognize all leases with a duration of greater than twelve months on the balance sheet. For lessors, the guidance modifies the classification criteria and accounting for sales-type and direct financing leases. The new standard is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company has not yet determined the impact this new guidance will have on its consolidated financial statements and related disclosures.
In July 2015, the FASB issued new guidance for inventory accounting, which will require companies to measure in scope inventory at the lower of cost or net realizable value. Current guidance requires an entity to measure inventory at the lower of cost or market. The new guidance does not apply to inventory that is measured using last-in, first-out (LIFO) or retail inventory methods. The guidance applies to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO), which the Company employs, or average cost methods. The new guidance will be effective for the Company on January 1, 2017, and is to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company has not yet determined the impact the new guidance will have on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued new guidance for revenue recognition, which will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective which, for the Company, will now be on January 1, 2018, as on July 9, 2015, the FASB voted to defer the effective date of the new standard by one year. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect the new guidance will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect the standard will have on its ongoing financial reporting.
-15-
VICOR CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2016
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
Except for statements of historical fact contained herein, statements in this report constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words believes, expects, anticipates, intends, estimates, plans, assumes, may, will, would, should, continue, prospective, project, and other similar words or expressions identify forward-looking statements. Forward-looking statements include, without limitation, statements regarding the transition of the Companys business strategically and organizationally from serving a large number of relatively low volume customers across diversified markets and geographies to serving a small number of relatively large volume customers, typically concentrated in computing and communications; the level of customer orders overall and, in particular, from large customers and the delivery lead times associated therewith; the financial and operational impact of customer changes to shipping schedules; the derivation of a portion of the Companys sales in each quarter from orders booked in the same quarter; the Companys ongoing development of power conversion architectures, switching topologies, packaging technologies, and products; the Companys plans to invest in expanded manufacturing capacity and the timing and location thereof; the Companys continued success depending in part on its ability to attract and retain qualified personnel; the Companys belief that cash generated from operations and the total of its cash and cash equivalents will be sufficient to fund operations for the foreseeable future; the Companys belief that it has limited exposure to currency risks; the Companys intentions regarding the declaration and payment of cash dividends; the Companys intentions regarding protecting its rights under its patents; and the Companys expectation that no current litigation or claims will have a material adverse impact on its financial position or results of operations. These statements are based upon the Companys current expectations and estimates as to the prospective events and circumstances which may or may not be within the Companys control and as to which there can be no assurance. Actual results could differ materially from those expressed or implied by forward-looking statements as a result of various factors, including the Companys ability to: grow its revenues, establish and maintain profitability, develop and market new products and technologies cost effectively, and on a timely basis leverage the Companys new technologies in standard products to promote market acceptance of the Companys new approach to power system architecture; leverage design wins into increased product sales; continue to meet requirements of key customers and prospects; enter into licensing agreements increasing the Companys market opportunity and accelerating market penetration; realize significant royalties under such licensing agreements; achieve sustainable bookings rates for the Companys products across served markets and geographies; improve manufacturing and operating efficiencies; successfully enforce the Companys intellectual property rights; successfully defend outstanding litigation; hire and retain key personnel; and maintain an effective system of internal controls over financial reporting, including the Companys ability to obtain required financial information for investments on a timely basis, the Companys ability to assess the value of assets, including illiquid investments, and the accounting therefor. These and other factors that may influence actual results are described in the risk factors set forth in the Companys Annual Report on Form 10-K for the year ended December 31, 2015, under Part I, Item I Business, under Part I, Item 1A Risk Factors, under Part I, Item 3 Legal Proceedings, and under Part II, Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations. The risk factors contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2015 may not be exhaustive. Therefore, the information contained therein should be read together with other reports and documents that the Company files with the Securities and Exchange Commission from time to time, including Forms 10-Q, 8-K and 10-K, which may supplement, modify, supersede or update those risk factors. Except as required by law, the Company does not undertake any obligation to update any forward-looking statements as a result of future events or developments.
Overview
We design, develop, manufacture, and market modular power components and power systems for converting, regulating, and controlling electric current. We also license certain rights to our technology in return for recurring royalties. The principal customers for our power converters and systems are large original equipment manufacturers (OEMs) and their contract manufacturers, and smaller, lower volume users. We serve a broad range of market segments and geographies worldwide.
We have organized our business segments according to our key product lines. Reflecting our history and direction, we broadly categorize our products as either legacy or advanced, generally based on design, performance, and form factor considerations, as well as the range of applications for which the products are appropriate.
-16-
VICOR CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2016
The BBU segment designs, develops, manufactures and markets our legacy lines of DC-DC converters and configurable products, as well as complementary components providing AC line rectification, input filtering, power factor correction, and transient protection. The BBU segment also includes the BBU business conducted through VJCL and our Vicor Custom Power subsidiaries. The BBU has customers concentrated in aerospace and aviation, defense electronics, industrial automation and equipment, medical diagnostics, rail transportation, and test and measurement instrumentation.
On March 30, 2016, we acquired 100% ownership of certain operating assets and cash of Converpower Corporation (Converpower). We also entered into a license with Converpower allowing us to continue manufacturing certain products and support existing customers. With the closing of the Converpower transaction, we have completed the consolidation of our Vicor Custom Power operations into three subsidiaries.
The VI Chip segment consists of our subsidiary, VI Chip Corporation, which designs, develops, manufactures, and markets many of our advanced power component products. The VI Chip segment also includes the VI Chip business conducted through VJCL. VI Chip targets large, high-volume customers concentrated in the datacenter and supercomputer segments of the computing market, although we also target applications in aerospace and aviation, defense electronics, electric and hybrid vehicles, instrumentation and test equipment, and networking equipment.
The Picor segment consists of our subsidiary, Picor Corporation, which designs, develops, manufactures, and markets integrated circuits and related solid-state products for use in a variety of power management and power system applications. Picor develops these products for use in our BBU and VI Chip modules, to be sold as complements to our BBU and VI Chip products, or for sale to third parties for separate (i.e., stand-alone) applications, often integrated with VI Chip products to represent a customer solution, particularly in the datacenter and supercomputer segments of the computing market.
For the first quarter of 2016, we recorded sequentially lower consolidated revenue, reflecting trends and circumstances existing, to varying degrees, since 2014. Lower revenues have been the primary contributor to the operating losses of the last three quarters, as our operating expenses are heavily weighted toward personnel costs, which are largely fixed. We believe the following factors influenced our results for the first quarter of 2016 and may continue to influence our results for the foreseeable future:
| Global demand for our legacy brick converters, configurable products, and associated components has been lower than expected, as the macroeconomic variables underlying customer confidence across industries and geographies remain weak. Our legacy products are commonly used in high-value capital goods and sizeable infrastructure projects, the end demand for which has lagged, reflecting low-growth economies and budgetary uncertainty. We have taken steps to reduce our exposure to certain problematic market segments, notably the custom segment of defense electronics, but we expect to experience relatively flat demand for the BBU until macroeconomic trends improve. |
| Our profitability is closely aligned with production volumes. We manufacture our products in Andover, Massachusetts, in a state-of-the-art, highly automated factory. While direct labor and associated costs are scaled with volume, extended periods of low activity and/or small production runs contribute to lower profitability, largely due to lower overhead absorption, which is less scalable, given the sophistication and complexity of our manufacturing processes. An additional influence on product-level profitability has been the availability and delivery timing of certain materials and components we use in our products. Due to the same economic uncertainty we are experiencing, our suppliers are facing production and scheduling challenges. Our first quarter shipments of legacy products were lower, in part, due to supplier delays. Although we have taken actions to minimize the impact of supply chain disruption, we anticipate supplier delays may again be an influence on production volumes for the foreseeable future. |
| We have focused our organization on the promising opportunities for our advanced products, in which we have invested a substantial amount of research and development effort and dollars. Many of these opportunities are in the early phases of expansion, and we are committed to expanding our product lines and our ability to serve and support customers in pursuit of these opportunities. As such, our operating costs have been high, relative to revenue levels, and likely will remain relatively high until revenue from our legacy products recovers and we achieve sustained revenue from our newer advanced products. |
-17-
VICOR CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2016
| Customer adoption of certain new products has been delayed by unanticipated market influences beyond our control. For example, our leadership position in the transition of datacenter computing to 48 Volt to Point-of-Load solutions using our Factorized Power Architecture was the basis for our expectation of an earlier, higher-volume uptake of such solutions and our decisions to focus our resources on such opportunities. However, delays in the transition of processor generations and associated supply chain disruption caused repeated delays in customer purchase orders. We continue to believe our new products, notably our 48 Volt to Point-of-Load solutions for datacenters, will be adopted in volume by our customers. However, we cannot control the actions by, nor the timing, of our customers, their contract manufacturers, or the significant vendors also participating in the market. |
| Our consolidated financial results have recently been influenced by adjustments associated with operational restructuring initiatives. At the end of the first quarter, as noted, we completed the consolidation of our Vicor Custom Power operations, reducing our six domestic locations to three. The goal of this consolidation is to reduce excess capacity and lower the overall cost structure of our custom operations, which are focused on the defense electronics segment. However, both the fourth quarter of 2015 and the first quarter of 2016 were negatively influenced by the consolidation, as orders and shipments were skewed by the period-end timing of the associated transactions. |
| Prior quarterly consolidated financial results have recently been influenced by certain non-operations related factors, including investment transactions, legal fees associated with ongoing litigation, and circumstance specific tax transactions. Notably, our results for the first quarter of 2016 were not meaningfully influenced by such factors. Although such factors, which are inherently unpredictable, may meaningfully influence our financial results, we currently do not anticipate any positive or negative non-operating factors for the foreseeable future. |
Consolidated revenues for the first quarter of 2016 decreased by 28.1% to $46,027,000 from $64,017,000 for the first quarter of 2015, and decreased by 10.4% on a sequential basis from $51,394,000 for the fourth quarter of 2015, primarily due to a decrease in customer bookings in the fourth quarter of 2015 compared to the fourth quarter of 2014. Bookings for custom solutions declined notably during the fourth quarter of 2015, for the reasons described above, representing the majority of the total fourth quarter bookings decline, which, in turn, contributed to approximately half of the first quarter revenue decline. Export sales as a percentage of total revenues for the respective quarters ended March 31, 2016 and 2015 were approximately 59% and 65%, reflecting the prior periods relatively high volume of shipments to off-shore contract manufactures serving customers of our 48 Volt to Point-of-Load solutions.
Gross margin decreased to $19,316,000 for the first quarter of 2016 from $28,891,000 for the first quarter of 2015, and decreased on a sequential basis from $22,831,000 for the fourth quarter of 2015. Gross margin as a percentage of net revenue decreased to 42.0% for the first quarter of 2016 compared to 45.1% for the first quarter of 2015, and decreased on a sequential basis from 44.4% for the fourth quarter of 2015, due to the decrease in net revenues. As described above, lower total production and shorter individual production runs contributed to lower overhead absorption.
Backlog, representing the total of orders for products for which shipment is scheduled within the next 12 months, was $42,096,000 at the end of the first quarter of 2016, as compared to $39,073,000 at the end of the fourth quarter of 2015.
Operating expenses for the first quarter of 2016 decreased $536,000, or 2.1%, to $24,745,000 from $25,281,000 for the first quarter of 2015, due to a decrease in selling, general and administrative expenses of $846,000, partially offset by an increase in research and development expense of $310,000. The primary components of the decrease in selling, general and administrative expenses were declines in compensation expenses of $267,000, commissions expense of $234,000, and legal fees of $225,000, partially offset by an increase in advertising expenses of $108,000. The decrease in legal fees is due to reduced activity with our ongoing patent infringement litigation. The primary elements of the increase in research and development expenses were project and pre-production materials of $117,000, compensation expenses of $107,000, and depreciation and amortization of $80,000, partially offset by a decrease in facilities expenses of $74,000.
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VICOR CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2016
Net loss attributable to Vicor Corporation for the first quarter of 2016 was $(5,351,000), or $(0.14) per share, compared to net income attributable to Vicor Corporation of $3,371,000, or $0.09 per diluted share, for the first quarter of 2015, and net loss attributable to Vicor Corporation of ($1,752,000), or $ (0.05) per share, for the fourth quarter of 2015.
For the three months ended March 31, 2016, depreciation and amortization totaled $2,195,000, and capital additions totaled $1,887,000, compared to totals of $2,403,000 and $1,469,000, respectively, for the three months ended March 31, 2015.
Inventories increased by approximately $708,000, or 3.0%, to $24,150,000, compared to $23,442,000 at December 31, 2015. This increase was primarily associated with an increase in VI Chip inventories of $1,013,000, partially offset by a decrease in BBU inventories of $440,000.
Critical Accounting Policies and Estimates
Please refer to the Companys Annual Report on Form 10-K for the year ended December 31, 2015 for a summary of the Companys critical accounting policies and estimates.
Three months ended March 31, 2016, compared to three months ended March 31, 2015
Net revenues for the first quarter of 2016 were $46,027,000, a decrease of $17,990,000, or 28.1%, as compared to $64,017,000 for the first quarter of 2015, and decreased $5,367,000, or 10.4%, on a sequential basis from $51,394,000 for the fourth quarter of 2015.
Net revenues, by segment, for the first quarter of 2016 and the first quarter of 2015 were as follows (dollars in thousands):
Decrease | ||||||||||||||||
2016 | 2015 | $ | % | |||||||||||||
BBU |
$ | 36,869 | $ | 44,878 | $ | (8,009 | ) | (17.8 | )% | |||||||
VI Chip |
7,340 | 13,877 | (6,537 | ) | (47.1 | )% | ||||||||||
Picor |
1,818 | 5,262 | (3,444 | ) | (65.5 | )% | ||||||||||
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|
|
|
|
|
|||||||||||
Total |
$ | 46,027 | $ | 64,017 | $ | (17,990 | ) | (28.1 | )% | |||||||
|
|
|
|
|
|
The decrease in consolidated net revenues for the first quarter of 2016 from the first quarter of 2015 was primarily due to a 25.2% decrease in bookings in the fourth quarter of 2015, compared to the fourth quarter of 2014. In addition, bookings declined 17.7% in the first quarter of 2016 compared to the first quarter of 2015. For both comparisons, bookings declined across all three segments. The decrease in BBU revenues was primarily attributable to a decrease in BBU module and configurable product revenues of approximately $7,124,000 and a decrease in Vicor Custom Power revenues of $1,126,000. Revenues recorded by VI Chip and Picor for the first quarter of 2015 were associated largely with fulfillment of orders for our 48 Volt to Point-of-Load solutions. As previously disclosed, such volumes sharply declined through the subsequent quarters of 2015, largely due to delays resulting from the matters discussed above. Customer bookings patterns continue to be unpredictable, particularly for the VI Chip and Picor segments.
Gross margin for the first quarter of 2016 decreased $9,575,000, or 33.1%, to $19,316,000, from $28,891,000 for the first quarter of 2015. Gross margin as a percentage of net revenue decreased to 42.0% for the first quarter of 2016 compared to 45.1% for the first quarter of 2015, primarily due to the decrease in production volume, as addressed above.
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VICOR CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2016
Selling, general, and administrative expenses were $14,016,000 for the first quarter of 2016, a decrease of $846,000, or 5.7%, from $14,862,000 for the first quarter of 2015. Selling, general, and administrative expenses as a percentage of net revenues increased to 30.5% for the first quarter of 2016 from 23.2% for the first quarter of 2015, due to the decrease in net revenues.
The components of the $846,000 decrease in selling, general and administrative expenses for the first quarter of 2016 from the first quarter of 2015 were as follows (dollars in thousands):
Increase (decrease) | ||||||||
Compensation |
$ | (267 | ) | (3.0 | )%(1) | |||
Commissions expense |
(234 | ) | (21.0 | )%(2) | ||||
Legal fees |
(225 | ) | (33.0 | )%(3) | ||||
Bad debt expense |
(65 | ) | (175.8 | )% | ||||
Supplies expense |
(58 | ) | (38.6 | )% | ||||
Project materials |
(52 | ) | (72.8 | )% | ||||
Employment recruiting |
(48 | ) | (42.0 | )% | ||||
Audit, tax, and accounting fees |
(40 | ) | (6.4 | )% | ||||
Outside services |
72 | 14.7 | % | |||||
Advertising expenses |
108 | 31.0 | %(4) | |||||
Other, net |
(37 | ) | (1.5 | )% | ||||
|
|
|||||||
$ | (846 | ) | (5.7 | )% | ||||
|
|
(1) | Decrease primarily attributable to the consolidation of Westcor operations and the disposition of certain Vicor Custom Power subsidiaries. |
(2) | Decrease primarily attributable to the decrease in net revenues subject to commissions. |
(3) | Decrease attributable to reduced activity associated with patent infringement litigation, primarily due to the delay of the trial. See Note 11 to the Condensed Consolidated Financial Statements. |
(4) | Increase primarily attributable to increases in sales support expenses, direct mailings, and advertising in trade publications. |
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VICOR CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2016
Research and development expenses were $10,729,000 for the first quarter of 2016, an increase of $310,000, or 3.0%, compared to $10,419,000 for the first quarter of 2015. As a percentage of net revenues, research and development expenses increased to 23.3% for the first quarter of 2016 from 16.3% for the first quarter of 2015, due to the decrease in net revenues.
The components of the $310,000 increase in research and development expenses were as follows (dollars in thousands):
Increase (decrease) | ||||||||
Project and pre-production materials |
$ | 117 | 9.4 | %(1) | ||||
Compensation |
107 | 1.5 | % | |||||
Depreciation and amortization |
80 | 13.6 | %(2) | |||||
Set-up and tooling expenses |
36 | 52.7 | % | |||||
Deferred costs |
31 | 78.5 | % | |||||
Facilities expenses |
(74 | ) | (13.1 | )% | ||||
Other, net |
13 | 1.5 | % | |||||
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$ | 310 | 3.0 | % | |||||
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(1) | Increase primarily attributable to increases in spending by the BBU and VI Chip segments. |
(2) | Increase primarily attributable to additions of engineering equipment over the past several quarters for BBU and Picor. |
The significant components of Other income (expense), net for the three months ended March 31, and the changes between the periods were as follows (in thousands):
Increase | ||||||||||||
2016 | 2015 | (decrease) | ||||||||||
Foreign currency gains (losses), net |
$ | 55 | $ | (80 | ) | $ | 135 | |||||
Interest income |
14 | 5 | 9 | |||||||||
Credit gains on available-for-sale securities |
4 | 4 | | |||||||||
Gain on disposals of equipment |
2 | 35 | (33 | ) | ||||||||
Other, net |
| 7 | (7 | ) | ||||||||
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$ | 75 | $ | (29 | ) | $ | 104 | ||||||
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We assess the value of our investment portfolio of auction rate securities each quarter, and record any credit gains or losses calculated as a component of Other income (expense), net. Our exposure to market risk fluctuations in foreign currency exchange rates relate primarily to the operations of VJCL, for which the functional currency is the Japanese Yen. The functional currency of all other subsidiaries in Europe and Asia is the U.S. Dollar. While our Vicor B.V. operation also potentially exposes us to exchange rate risk, as that subsidiarys sales are denominated in Euros and Pounds Sterling, any periodic gains or losses associated with exchange rate fluctuations are small, given the small U.S. Dollar value of shipments we make to Vicor B.V.
Loss before income taxes was $(5,354,000) for the first quarter of 2016, as compared to income before taxes of $3,581,000 for the first quarter of 2015.
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VICOR CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2016
The provision for income taxes and the effective income tax rates for the first quarter of 2016 and the first quarter of 2015 were as follows (dollars in thousands):
2016 | 2015 | |||||||
Provision for income taxes |
$ | 22 | $ | 139 | ||||
Effective income tax rate |
0.4 | % | 3.9 | % |
The provision for the three months ended March 31, 2016 was primarily due to estimated state taxes in jurisdictions in which the Company does not have net operating loss carryforwards. No tax benefit could be recognized for the majority of the Companys losses during the period due to a full valuation allowance against all net domestic deferred tax assets. In addition, in connection with the Companys acquisition of 100% ownership of certain operating assets and cash of Converpower, the related deferred tax liability for unremitted earnings of $55,000 was reversed and recorded as a discrete benefit in the first quarter of 2016 (see Note 7 to the Condensed Consolidated Financial Statements). The provision for the three months ended March 31, 2015 was primarily due to estimated federal and state taxes for one noncontrolling interest subsidiary, and for estimated state taxes in jurisdictions in which the Company does not have net operating loss carryforwards.
Net loss per share attributable to Vicor Corporation was $(0.14) for the first quarter of 2016, compared to net income per diluted share of $0.09 for the first quarter of 2015.
Liquidity and Capital Resources
As of March 31, 2016, we had $59,710,000 in cash and cash equivalents. The ratio of total current assets to total current liabilities was 5.4:1 as of March 31, 2016 and 5.6:1 as of December 31, 2015. Working capital, defined as total current assets less total current liabilities, decreased $5,244,000 to $89,661,000 as of March 31, 2016 from $94,905,000 as of December 31, 2015.
The changes in working capital from December 31, 2015 to March 31, 2016 were as follows (in thousands):
Increase (decrease) |
||||
Cash and cash equivalents |
$ | (3,270 | ) | |
Accounts receivable |
(2,633 | ) | ||
Inventories, net |
708 | |||
Other current assets |
(54 | ) | ||
Accounts payable |
(762 | ) | ||
Accrued compensation and benefits |
204 | |||
Accrued expenses |
348 | |||
Accrued severance charges |
158 | |||
Income taxes payable |
2 | |||
Deferred revenue |
55 | |||
|
|
|||
$ | (5,244 | ) | ||
|
|
The primary uses of cash for the three months ended March 31, 2016 was for operating activities of $834,000 and the purchase of equipment of $1,887,000.
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VICOR CORPORATION
Managements Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2016
In November 2000, our Board of Directors authorized the repurchase of up to $30,000,000 of our Common Stock (the November 2000 Plan). The November 2000 Plan authorizes us to make such repurchases from time to time in the open market or through privately negotiated transactions. The timing and amounts of Common Stock repurchases are at the discretion of management based on its view of economic and financial market conditions. We did not repurchase shares of Common Stock under the November 2000 Plan during the three months ended March 31, 2016. As of March 31, 2016, we had approximately $8,541,000 remaining under the November 2000 Plan.
Our primary liquidity needs are for making continuing investments in manufacturing equipment. We believe cash generated from operations and the total of our cash and cash equivalents will be sufficient to fund planned operations and capital equipment purchases for the foreseeable future. We had approximately $1,844,000 of capital expenditure commitments, principally for manufacturing equipment, as of March 31, 2016.
-23-
Vicor Corporation
March 31, 2016
Item 3 Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of market risks, including changes in interest rates affecting the return on our cash and cash equivalents and fluctuations in foreign currency exchange rates. As our cash and cash equivalents consist principally of cash accounts and money market securities, which are short-term in nature, we believe our exposure to market risk on interest rate fluctuations for these investments is not significant. As of March 31, 2016, our long-term investment portfolio, recorded on our Condensed Consolidated Balance Sheet as Long-term investments, net, consisted of a single auction rate security with a par value of $3,000,000, purchased through and held in custody by a broker-dealer affiliate of Bank of America, N.A., that has experienced failed auctions (the Failed Auction Security) since February 2008. While the Failed Auction Security is Aaa/AA+ rated by major credit rating agencies, collateralized by student loans and guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program, continued failure to sell at its periodic auction dates (i.e., reset dates) could negatively impact the carrying value of the investment, in turn leading to impairment charges in future periods. Periodic changes in the fair value of the Failed Auction Security attributable to credit loss (i.e., risk of the issuers default) are recorded through earnings as a component of Other income (expense), net, with the remainder of any periodic change in fair value not related to credit loss (i.e., temporary mark-to-market carrying value adjustments) recorded in Accumulated other comprehensive (loss) income, a component of Stockholders Equity. Should we conclude a decline in the fair value of the Failed Auction Security is other than temporary, such losses would be recorded through earnings as a component of Other income (expense), net. We do not believe there was an other-than-temporary decline in value in this security as of March 31, 2016.
Our exposure to market risk for fluctuations in foreign currency exchange rates relates primarily to the operations of VJCL, for which the functional currency is the Japanese Yen, and changes in the relative value of the Yen to the U.S. Dollar. As the functional currency of all other subsidiaries in Europe and other subsidiaries in Asia is the U.S. Dollar, we believe risk to fluctuations in foreign currency exchange rates is not significant, as these operations do not incur material foreign exchange exposures.
Item 4 Controls and Procedures
(a) | Disclosure regarding controls and procedures. |
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act), management, with the participation of our Chief Executive Officer (CEO) (who is our principal executive officer) and Chief Financial Officer (CFO) (who is our principal financial officer), conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the last fiscal quarter (i.e., March 31, 2016). The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure information required to be disclosed by a company in the reports it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2016, our CEO and CFO concluded, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. Accordingly, management, including the CEO and CFO, recognizes our disclosure controls or our internal control over financial reporting may not prevent or detect all errors and all fraud. The design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
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Vicor Corporation
March 31, 2016
(b) | Changes in internal control over financial reporting. |
There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2016, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II Other Information
March 31, 2016
See Note 11. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 Financial Statements.
There have been no material changes in the risk factors described in Part I, Item 1A Risk Factors of the Companys Annual Report on Form 10-K for the year ended December 31, 2015.
Exhibit Number |
Description | |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act. | |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act. | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | The following material from the Companys Quarterly Report on Form 10-Q, for the quarter ended March 31, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss); (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Condensed Consolidated Financial Statements. |
-26-
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VICOR CORPORATION | ||||||
Date: April 29, 2016 | By: | /s/ Patrizio Vinciarelli | ||||
Patrizio Vinciarelli | ||||||
Chairman of the Board, President and | ||||||
Chief Executive Officer | ||||||
(Principal Executive Officer) | ||||||
Date: April 29, 2016 | By: | /s/ James A. Simms | ||||
James A. Simms | ||||||
Vice President, Chief Financial Officer | ||||||
(Principal Financial Officer) |
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