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VICR > SEC Filings for VICR > Form 10-Q on 1-May-2013All Recent SEC Filings

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Form 10-Q for VICOR CORP


1-May-2013

Quarterly Report

Management's Discussion and Analysis of

Financial Condition and Results of Operation

March 31, 2013

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Except for historical information contained herein, some matters discussed 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," "intend," "estimate," "plans," "assumes," "may," "will," "would," "should," "continue," "prospective," "project," and other similar expressions identify forward-looking statements. Forward-looking statements also include statements regarding the transition of the Company's business strategically and organizationally from serving a highly diversified customer base to serving an increasing number of large customers; 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 Company's sales in each quarter from orders booked in the same quarter; the Company's ongoing development of power conversion architectures, switching topologies, packaging technologies, and products; the Company's plans to invest in expanded manufacturing, capacity, and the timing thereof; the Company's belief regarding currency risk being mitigated because of limited foreign exchange fluctuation exposure; the Company's continued success depending in part on its ability to attract and retain qualified personnel; the Company's 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 Company's intentions regarding the declaration and payment of cash dividends; the Company's intentions regarding protecting its rights under its patents; and the Company's 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 Company's current expectations and estimates as to the prospective events and circumstances which may or may not be within the Company's control and as to which there can be no assurance. Actual results could differ materially from those implied by forward-looking statements as a result of various factors, including the Company's ability to: hire and retain key personnel; develop and market new products and technologies cost effectively, and on a timely basis leverage the Company's new technologies in standard products to promote market acceptance of the Company's 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 Company's market opportunity and accelerating market penetration; realize significant royalties under such licensing agreements; achieve sustainable bookings rates for the Company's products across both markets and geographies; improve manufacturing and operating efficiencies; successfully enforce the Company's intellectual property rights; successfully defend outstanding litigation; and maintain an effective system of internal controls over financial reporting, including the Company's ability to obtain required financial information for investments on a timely basis, the Company's 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 Company's Annual Report on Form 10-K for the year ended December 31, 2012, 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 - "Management's Discussion and Analysis of Financial Condition and Results of Operations." The risk factors contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 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. The Company does not undertake any obligation to update any forward-looking statements as a result of future events or developments.

Overview

Vicor Corporation designs, develops, manufactures and markets modular power components and complete power systems. The Company sells its products primarily to customers in the higher-performance, higher-power segments of the power systems market, including aerospace and defense electronics, enterprise and high performance computing, industrial equipment and automation, telecommunications and network infrastructure, and vehicles and transportation.

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 Company's modular power converters and configurable products, and also includes the operations of the Company's Westcor division, the six 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 the Company's factorized power architecture ("FPA") products. The VI Chip segment also includes the VI Chip business conducted through VJCL. Picor Corporation designs, develops, manufactures and markets integrated circuits and related products for use in a variety of power management and power system applications. Picor develops these products to be sold as part of the Company's products or to third parties for separate applications.

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Table of Contents

VICOR CORPORATION

Management's Discussion and Analysis of

Financial Condition and Results of Operation

March 31, 2013

The Company's bookings, revenues, and operating results in 2013 have been negatively impacted by general economic conditions. Some of the markets in which the Company has historically focused remain in a weakened state. In particular, expenditures in the defense electronics sector have declined from historical levels as a result of governmental budget constraints and we have been impacted by the continued recession in Europe. In addition, VI Chip and Picor continue to be dependent on a limited number of customers, and the Company has experienced slower than expected growth from certain new product opportunities.

Revenues for the first quarter of 2013 decreased by 29.7% to $41,946,000, from $59,668,000 for the corresponding period in 2012, and decreased by 16.8% on a sequential basis from $50,424,000 for the fourth quarter of 2012. Export sales as a percentage of total revenues for the three months ended March 31, 2013 and 2012 were approximately 54% and 53%, respectively. Gross margin decreased to $16,607,000 for the first quarter of 2013 from $24,467,000 in the first quarter of 2012, and decreased on a sequential basis from $20,125,000 for the fourth quarter of 2012. Gross margin as a percentage of revenue decreased to 39.6% for the first quarter of 2013 compared to 41.0% for the first quarter of 2012, and decreased on a sequential basis from 39.9% for the fourth quarter of 2012. During the first quarter of 2013, the Company recorded a pre-tax charge of $1,361,000 for the cost of severance and other employee-related costs for a workforce reduction initiated and completed in February 2013. Net loss attributable to Vicor Corporation for the first quarter of 2013 was $(4,990,000), or $(0.12) per share, compared to net income attributable to Vicor Corporation of $326,000, or $0.01 per diluted share, in the first quarter of 2012, and net loss attributable to Vicor Corporation of ($4,814,000), or ($0.12) per share, for the fourth quarter of 2012.

Backlog, representing the total of orders for products for which shipment is scheduled within the next 12 months, was $37,934,000 at the end of the first quarter of 2013, as compared to $31,405,000 at the end of the fourth quarter of 2012.

Operating expenses for the three months ended March 31, 2013, increased $1,100,000, or 4.6%, to $25,103,000 from $24,003,000 for the corresponding period in 2012, primarily due to the charge related to workforce reduction discussed above. This increase was partially offset by a decrease in selling, general and administrative expenses of $273,000. The primary decreases in selling, general and administrative expenses were commissions expense of $289,000, outside services expense of $149,000, legal fees of $135,000, and depreciation and amortization of $103,000, partially offset by increases in compensation expenses of $166,000, advertising expenses of $62,000, bad debt expense of $54,000, and telephone expenses of $54,000. Research and development expenses increased by $12,000. The primary elements of the increases in research and development expenses were supplies expenses of $113,000 and compensation expenses of $90,000, partially offset by decreases in project and pre-production materials of $113,000 and computer expenses of $40,000.

"Other income (expense), net" for the three months ended March 31, 2013, decreased $38,000 to $15,000 compared to $53,000 for the corresponding period a year ago. The primary components of the change were decreases in gains on disposals of equipment of $21,000 and interest of $15,000.

For the three months ended March 31, 2013, depreciation and amortization totaled $2,494,000 and capital additions totaled $1,171,000, compared to $2,632,000 and $1,261,000, respectively, for the first three months of 2012.

Inventories decreased by approximately $34,000 or 0.1% to $29,921,000, compared to $29,955,000 at December 31, 2012. This decrease was associated with a decrease in VI Chip inventories of $328,000, partially offset by increases in BBU and Picor inventories of $177,000 and $117,000, respectively.

Critical Accounting Policies and Estimates

Please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2012, for a complete summary of the critical accounting policies and estimates.

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Table of Contents

VICOR CORPORATION

Management's Discussion and Analysis of

Financial Condition and Results of Operation

March 31, 2013

Three months ended March 31, 2013, compared to three months ended March 31, 2012

Net revenues for the first quarter of 2013, were $41,946,000, a decrease of $17,722,000 or 29.7% as compared to $59,668,000 for the same period a year ago, and decreased 16.8% on a sequential basis from the fourth quarter of 2012.

The components of net revenues for the three months ended March 31, were as follows (dollars in thousands):

                                                      Increase (decrease)
                            2013         2012            $              %

                BBU       $ 38,202     $ 44,935     $    (6,733 )      (15.0 )%
                VI Chip      3,097       13,832         (10,735 )      (77.6 )%
                Picor          647          901            (254 )      (28.2 )%

                Total     $ 41,946     $ 59,668     $   (17,722 )      (29.7 )%

The decrease in BBU revenues is primarily attributed to decreases in BBU component revenues of approximately $3,903,000, Vicor Custom Power revenues of approximately $1,322,000, and Westcor revenues of approximately $670,000. The overall decrease in revenues in the first quarter of 2013 reflects the sharp decline in bookings in the fourth quarter of 2012 across all three business segments. This is due to continued weakness in the defense electronics sector, continued recession in Europe and slower than expected growth from certain new product opportunities.

Gross margin for the first quarter of 2013 decreased $7,860,000, or 32.1%, to $16,607,000 from $24,467,000 in the first quarter of 2012. Gross margin as a percentage of net revenues decreased to 39.6% from 41.0%. The decrease in gross margin and gross margin percentage was primarily attributed to the decrease in net revenues, although the decrease in the gross margin percentage was partially offset by a shift in product mix to a higher proportion of higher-margin BBU products.

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Table of Contents

VICOR CORPORATION

Management's Discussion and Analysis of

Financial Condition and Results of Operation

March 31, 2013

Selling, general and administrative expenses were $13,887,000 for the quarter ended March 31, 2013, a decrease of $273,000, or 1.9%, compared to $14,160,000 for the same period in 2012. Selling, general and administrative expenses as a percentage of net revenues increased to 33.1% from 23.7% for the same period in 2012, primarily due to a decrease in net revenues.

The components of the $273,000 decrease in selling, general and administrative expenses were as follows (in thousands):

                                               Increase (decrease)

           Commissions expense               $    (289 )        (22.1 )%(1)
           Outside services                       (149 )        (25.3 )%(2)
           Legal fees                             (135 )        (23.4 )%(3)
           Depreciation and amortization          (103 )        (14.3 )%(4)
           Facilities expenses                     (67 )        (18.1 )%
           Employment recruiting                   (60 )        (62.7 )%
           Stockholder reporting                    19           94.1 %
           Audit, tax, and accounting fees          25            4.1 %
           Travel expenses                          25            4.0 %
           Telephone expenses                       54           20.0 %
           Bad debt expense                         54          159.0 %
           Advertising expenses                     62           10.1 %
           Compensation                            166            2.0 %(5)
           Other, net                              125           42.7 %

                                             $    (273 )         (1.9 )%

(1) Decrease primarily attributed to the decrease in net revenues subject to commissions.

(2) Decrease attributed to a reduction in the use of outside consultants by the sales and marketing departments.

(3) Decrease attributed to a reduction in legal expenses associated with the patent infringement claim filed against the Company during the first quarter of 2011 by SynQor, Inc. See Note 11 to the Condensed Consolidated Financial Statements.

(4) Decrease attributed to certain of the Company's corporate fixed assets becoming fully depreciated during 2012.

(5) Increase primarily attributed to annual compensation adjustments in May 2012.

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Table of Contents

VICOR CORPORATION

Management's Discussion and Analysis of

Financial Condition and Results of Operation

March 31, 2013

Research and development expenses were $9,855,000 for the quarter ended March 31, 2013, an increase of $12,000, or 0.1%, compared to $9,843,000 for the same period in 2012. As a percentage of net revenues, research and development increased to 23.5% from 16.5% for the same period in 2012, primarily due to a decrease in net revenues.

The components of the $12,000 increase in research and development expenses were as follows (in thousands):

                                                  Increase (decrease)

         Supplies expense                       $     113           85.0 %(1)
         Compensation                                  90            1.3 %
         Deferred costs                                33          100.0 %
         Employment recruiting                        (14 )       (151.7 )%
         Outside services/subcontract labor           (25 )         (7.8 )%
         Set-up and tooling expenses                  (28 )        (36.7 )%
         Computer expenses                            (40 )        (26.5 )%
         Project and pre-production materials        (113 )        (10.6 )%(2)
         Other, net                                    (4 )         (0.3 )%

                                                $      12           (0.1 )%

(1) Increase primarily attributed to an increase in engineering supplies for new Picor products.

(2) Decrease attributable to decreases in spending by the BBU and VI Chip segments.

During the first quarter of 2013, the Company recorded a pre-tax charge of $1,361,000 for the cost of severance and other employee-related costs for a workforce reduction initiated and completed in February 2013.

The significant changes in the components of the "Other income (expense), net" were as follows (in thousands):

                                                                           Increase
                                                   2013       2012        (decrease)

    Interest income                                $  19      $  34      $        (15 )
    Gain on disposals of equipment                     3         24               (21 )
    Foreign currency losses                          (26 )      (27 )               1
    Credit gain on available-for-sale securities       1          3                (2 )
    Other, net                                        18         19                (1 )

                                                   $  15      $  53      $        (38 )

The Company's exposure to market risk for fluctuations in foreign currency exchange rates relates primarily to the operations of VJCL. The functional currency of the Company's subsidiaries in Europe and Hong Kong is the U.S. dollar. The decrease in interest income for the period was due to lower average balances on the Company's long-term investments as well as a general decrease in interest rates.

Income (loss) before income taxes was $(8,481,000) for the first quarter of 2013, compared to $517,000 for the same period in 2012.

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Table of Contents

VICOR CORPORATION

Management's Discussion and Analysis of

Financial Condition and Results of Operation

March 31, 2013

The provision for income taxes and the effective income tax rate were as follows (dollars in thousands):

                                                     2013          2012
            (Benefit) provision for income taxes   $ (3,495 )     $  176
            Effective income tax rate                 (41.2 %)      34.0 %

For the three months ended March 31, 2013, a net income tax benefit was recorded primarily due to an increase in net federal deferred tax assets not covered by a valuation allowance, a potential net operating loss carryback for federal income tax purposes and the recognition of a benefit from the federal research tax credit for 2012, as a discrete item. The federal research tax credit for 2012 and 2013 was extended on January 2, 2013 pursuant to the American Taxpayer Relief Act of 2012. The Company recorded a provision for income taxes for the three months ended March 31, 2012 based on the Company's projecting annual pre-tax income at that time.

Net loss per share attributable to Vicor Corporation was $(0.12) for the first quarter of 2013, compared to basic and diluted income per share of $0.01 for the first quarter of 2012.

Liquidity and Capital Resources

At March 31, 2013, the Company had $71,403,000 in cash and cash equivalents. The ratio of current assets to current liabilities was 7.1:1 as of March 31, 2013 and 8.3:1 as of December 31, 2012. Working capital decreased $17,569,000 to $110,929,000 as of March 31, 2013 from $128,498,000 as of December 31, 2012.

The primary working capital changes were due to the following (in thousands):

                                                      Increase
                                                     (decrease)

                Cash and cash equivalents           $    (13,151 )
                Accounts receivable                       (3,440 )
                Deferred tax assets                         (201 )
                Accounts payable                             339
                Accrued compensation and benefits           (624 )
                Accrued severance                         (1,079 )
                Accrued expenses                             262
                Income taxes payable                         286
                Deferred revenue                              85
                Other                                        (46 )

                                                    $    (17,569 )

The primary uses of cash for the three months ended March 31, 2013 was for the purchase of 1,931,513 shares of Common Stock for an aggregate of $10,392,000 in connection with a tender offer completed on March 7, 2013, operating activities of $1,681,000, and the purchase of equipment of $1,171,000.

On March 18, 2013, the Company announced its intent to commence a tender offer for shares of its Common Stock representing up to $10,000,000 in aggregate value and commenced this tender offer on March 21, 2013, with an expiration date of April 22, 2013. Based on the final results of the tender offer, as reported on April 26, 2013, the Company accepted for purchase 1,341,575 shares of its Common Stock at a price of $5.00 per share for a total cost of approximately $6,708,000. The tender offer was not contingent upon obtaining financing or any minimum shares being tendered. Shareholders whose shares were purchased via this tender offer were paid the determined price per share net in cash, without interest, with existing cash.

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Table of Contents

VICOR CORPORATION

Management's Discussion and Analysis of

Financial Condition and Results of Operation

March 31, 2013

As of March 31, 2013, the Company held $6,100,000 of auction rate securities at par value classified as long-term investments. Please see Note 2 of the Company's Condensed Consolidated Financial Statements for a discussion of the securities and the Company's accounting treatment thereof.

In November 2000, the Board of Directors of the Company authorized the repurchase of up to $30,000,000 of the Company's Common Stock (the "November 2000 Plan"). The November 2000 Plan authorizes the Company to make such repurchases from time to time in the open market or through privately negotiated transactions. The timing and amounts of stock repurchases are at the discretion of management based on its view of economic and financial market conditions. The Company did not repurchase shares of Common Stock during the three months ended March 31, 2013. As of March 31, 2013, the Company had approximately $8,541,000 remaining under the November 2000 Plan.

During the three months ended March 31, 2013, one of the Company's subsidiaries paid a total of $800,000 in cash dividends, all of which were paid to the Company.

The Company's primary liquidity needs are for making continuing investments in manufacturing equipment. The Company believes cash generated from operations and the total of its cash and cash equivalents will be sufficient to fund planned operations and capital equipment purchases for the foreseeable future. The Company had approximately $1,315,000 of capital expenditure commitments, principally for manufacturing equipment, as of March 31, 2013.

Based on the Company's ability to access cash and cash equivalents and its expected operating cash flows, management does not anticipate the current lack of liquidity of the Company's auction rate securities will affect the Company's ability to execute its current operating plan.

The Company does not consider the impact of inflation and changing prices on its business activities or fluctuations in the exchange rates for foreign currency transactions to have been significant during the last three fiscal years.

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Table of Contents

Vicor Corporation

March 31, 2013

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