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VICR > SEC Filings for VICR > Form 10-Q on 30-Oct-2013All Recent SEC Filings

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Form 10-Q for VICOR CORP


30-Oct-2013

Quarterly Report

Management's Discussion and Analysis of

Financial Condition and Results of Operation

September 30, 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

September 30, 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 the Company has 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 third quarter of 2013 increased by 4.0% to $55,091,000, from $52,948,000 for the corresponding period in 2012, and increased by 17.6% on a sequential basis from $46,865,000 for the second quarter of 2013. Export sales as a percentage of total revenues for the three months ended September 30, 2013 and 2012 were approximately 61% and 52%, respectively. Gross margin increased to $22,980,000 for the third quarter of 2013 from $22,953,000 in the third quarter of 2012, and increased on a sequential basis from $18,461,000 for the second quarter of 2013. Gross margin as a percentage of revenue decreased to 41.7% for the third quarter of 2013 compared to 43.4% for the third quarter of 2012, and increased on a sequential basis from 39.4% for the second quarter of 2013. Net loss attributable to Vicor Corporation for the third quarter of 2013 was $(932,000), or $(0.02) per share, compared to net income attributable to Vicor Corporation of $191,000, or $0.00 per diluted share, in the third quarter of 2012, and net loss attributable to Vicor Corporation of $(4,616,000), or $(0.12) per share, for the second quarter of 2013.

Revenues for the nine months ended September 30, 2013 decreased by 14.4% to $143,902,000, from $168,083,000 for the corresponding period in 2012. Export sales as a percentage of total revenues for the nine months ended September 30, 2013 and 2012 were approximately 58% and 51%, respectively. Gross margin decreased to $58,048,000 for the nine months ended September 30, 2013, from $71,526,000 for the corresponding period in 2012. Gross margin as a percentage of revenue decreased to 40.3% for the nine months ended September 30, 2013 compared to 42.6% for the corresponding period a year ago. During the first quarter of 2013, the Company recorded a pre-tax charge of $1,361,000 for severance and other employee-related costs for a workforce reduction initiated and completed in February 2013. Net loss attributable to Vicor Corporation for the nine months ended September 30, 2013, was $(10,538,000), or $(0.27) per share, compared to net income attributable to Vicor Corporation of $737,000, or $0.02 per diluted share, for the corresponding period a year ago.

Backlog, representing the total of orders for products for which shipment is scheduled within the next 12 months, was $53,888,000 at the end of the third quarter of 2013, as compared to $51,958,000 at the end of the second quarter of 2013.

Operating expenses for the three months ended September 30, 2013 increased $1,678,000, or 7.4%, to $24,335,000 from $22,657,000 for the corresponding period in 2012, due to an increase in selling, general and administrative expenses of $1,053,000 and research and development expenses of $625,000. The primary elements of the increase in selling, general and administrative expenses were compensation expenses of $440,000, legal fees of $245,000, commissions expense of $179,000, depreciation and amortization of $69,000, bad debt expense of $68,000, and stockholder reporting expenses of $63,000, partially offset by decreases in outside services of $67,000, employment recruiting of $57,000, and project materials of $51,000. The primary elements of the increase in research and development expenses were compensation expenses of $275,000, project and pre-production materials of $183,000, depreciation and amortization of $59,000, and certification expenses of $55,000.

Operating expenses for the nine months ended September 30, 2013 increased $4,824,000, or 6.9%, to $74,881,000 from $70,057,000 for the corresponding period in 2012, primarily due to an increase in selling, general and administrative expenses of $2,570,000, research and development expenses of $893,000, and the charge related to workforce reduction discussed above. The primary elements of the increase in selling, general and administrative expenses were compensation expenses of $1,716,000, bad debt expense of $356,000, stockholder reporting expenses of $220,000, audit, tax, and accounting fees of $218,000, advertising expenses of $185,000, and training and professional development of $184,000, partially offset by decreases in commissions expense of $274,000, outside services expense of $225,000, and employment recruiting of $119,000. The primary elements of the increase in research and development expenses were compensation expenses of $572,000, project and pre-production materials of $275,000, depreciation and amortization of $189,000, and supplies expense of $108,000, partially offset by decreases in set-up and tooling expenses of $141,000, deferred costs of $91,000, and travel expenses of $67,000. Included in the increase in compensation expense was an increase in stock-based compensation expense due to the stock option exchange, discussed below.

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Table of Contents

VICOR CORPORATION

Management's Discussion and Analysis of

Financial Condition and Results of Operation

September 30, 2013

On May 17, 2013, the Company commenced an offer (the "Exchange Offer") to its employees and directors to exchange certain outstanding options to purchase shares of the Company's common stock granted under the Company's Amended and Restated 2000 Stock Option and Incentive Plan, as amended (the "2000 Plan"), on a one-for-one basis, for replacement options to purchase shares of common stock, to be granted under the Company's 2000 Plan (the "Option Exchange"). Pursuant to the Exchange Offer, which expired on June 17, 2013, 638 eligible participants tendered, and the Company accepted for exchange, options to purchase an aggregate of 1,531,077 shares of the Company's common stock, representing approximately 91% of options eligible for exchange under the offer. As a result of the Option Exchange, the Company recorded additional stock-based compensation expense of approximately $625,000 during the second quarter of 2013. (See Note 4 to the Condensed Consolidated Financial Statements for additional details).

"Other income (expense), net" for the three months ended September 30, 2013 decreased $19,000 to $51,000 compared to $70,000 for the corresponding period a year ago. The primary reasons for the decrease were decreases in interest income of $13,000, and credit gains on available-for-sale securities of $11,000.

"Other income (expense), net" for the nine months ended September 30, 2013 decreased $193,000 to $12,000 compared to $205,000 for the corresponding period in 2012. The primary reasons for the decrease were increases in credit losses on available-for-sale securities of $94,000, and decreases in interest income of $41,000, and gains on disposals of equipment of $28,000.

For the nine months ended September 30, 2013, depreciation and amortization totaled $7,555,000 and capital additions totaled $4,027,000, compared to $7,870,000 and $4,838,000, respectively, for the first nine months of 2012.

Inventories decreased by approximately $1,968,000 or 6.6% to $27,987,000, compared to $29,955,000 at December 31, 2012. This decrease was associated with decreases in VI Chip and Picor inventories of $1,333,000 and $959,000, respectively, partially offset by an increase in BBU inventories of $324,000.

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.

Three months ended September 30, 2013, compared to three months ended September 30, 2012

Net revenues for the third quarter of 2013 were $55,091,000, an increase of $2,143,000 or 4.0% as compared to $52,948,000 for the same period a year ago, and increased 17.6% on a sequential basis from the second quarter of 2013.

The components of net revenues for the three months ended September 30, were as follows (dollars in thousands):

                                                      Increase (decrease)
                            2013         2012            $              %
                BBU       $ 42,331     $ 45,753     $    (3,422 )       (7.5 )%
                VI Chip     11,947        6,443           5,504         85.4 %
                Picor          813          752              61          8.1 %

                Total     $ 55,091     $ 52,948     $     2,143          4.0 %

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Table of Contents

VICOR CORPORATION

Management's Discussion and Analysis of

Financial Condition and Results of Operation

September 30, 2013

The overall increase in net revenues during the third quarter of 2013 was due to an increase in VI Chip revenues of approximately $5,504,000, driven by increased bookings in the second and third quarters of 2013. The decrease in BBU revenues is primarily attributed to decreases in BBU component revenues of approximately $3,829,000 and Vicor Custom Power revenues of approximately $275,000, partially offset by an increase in Westcor revenues of approximately $345,000 and Vicor Japan revenues of $294,000. Net revenues increased sequentially over the second quarter of 2013 by $2,143,000, or 4.0%. Overall bookings during the three months ended September 30, 2013 increased by 6.3% compared to the same period in 2012, but decreased sequentially from the second quarter of 2013 by 6.7%, primarily due to lower BBU bookings.

Gross margin for the third quarter of 2013 increased $27,000, or 0.1%, to $22,980,000 from $22,953,000 in the third quarter of 2012. Gross margin as a percentage of net revenues decreased to 41.7% from 43.4%, primarily due to a shift in product mix to a higher proportion of lower-margin VI Chip products.

Selling, general and administrative expenses were $14,478,000 for the quarter ended September 30, 2013, an increase of $1,053,000, or 7.8%, compared to $13,425,000 for the same period in 2012. Selling, general and administrative expenses as a percentage of net revenues increased to 26.3% from 25.4% for the same period in 2012.

The components of the $1,053,000 increase in selling, general and administrative expenses were as follows (in thousands):

                                              Increase (decrease)
            Compensation                    $     440            5.5 % (1)
            Legal fees                            245           86.2 % (2)
            Commissions expense                   179           13.9 % (3)
            Depreciation and amortization          69            9.5 %
            Bad debt expense                       68         1674.4 % (4)
            Stockholder reporting                  63           73.7 %
            Project materials                     (51 )        (87.9 )% (5)
            Employment recruiting                 (57 )        (46.5 )%
            Outside services                      (67 )        (14.0 )%
            Other, net                            164            6.9 %

                                            $   1,053            7.8 %

(1) Increase primarily attributed to annual compensation adjustments in May 2013 and an increase in Vicor stock-based compensation expense related to the Option Exchange and other stock option grants in the second quarter of 2013. See Note 4 to the Condensed Consolidated Financial Statements.

(2) Increase attributed to legal expenses associated with the patent infringement claim filed against the Company during the first quarter of 2011 by SynQor, Inc. See Note 12 to the Condensed Consolidated Financial Statements.

(3) Increase primarily attributed to the increase in net revenues subject to commissions.

(4) Increase attributed to an increase in allowance for bad debts.

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

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Table of Contents

VICOR CORPORATION

Management's Discussion and Analysis of

Financial Condition and Results of Operation

September 30, 2013

Research and development expenses were $9,857,000 for the quarter ended September 30, 2013, an increase of $625,000, or 6.8%, compared to $9,232,000 for the same period in 2012. As a percentage of net revenues, research and development expenses increased to 17.9% from 17.4% for the same period in 2012.

The components of the $625,000 increase in research and development expenses were as follows (in thousands):

                                                  Increase (decrease)
        Compensation                           $     275              4.3 % (1)
        Project and pre-production materials         183             19.2 % (2)
        Depreciation and amortization                 59             13.0 %
        Certification expenses                        55             89.2 %
        Supplies expense                              44             36.1 % (3)
        Other, net                                     9              0.7 %

                                               $     625              6.8 %

(1) Increase primarily attributed to annual compensation adjustments in May 2013.

(2) Increase attributed to increases in spending by the BBU and VI Chip segments.

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

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

                                                                           Increase
                                                    2013      2012        (decrease)
    Interest income                                 $  27     $  40      $        (13 )
    Loss on disposals of equipment                     -         (2 )               2
    Foreign currency losses                             6         7                (1 )
    Credit gains on available-for-sale securities       1        12               (11 )
    Other, net                                         17        13                 4

                                                    $  51     $  70      $        (19 )

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 Asia 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 $(1,304,000) for the third quarter of 2013, compared to $366,000 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

September 30, 2013

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

                                                     2013          2012
             (Benefit) provision for income taxes   $  (406 )     $   86
             Effective income tax rate                (31.1 %)      23.5 %

For the three months ended September 30, 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. The Company recorded a provision for income taxes for the three months ended September 30, 2012 based on the Company's projecting annual pre-tax income at that time.

Net loss per share attributable to Vicor Corporation was $(0.02) for the third quarter of 2013, compared to basic and diluted income per share of $0.00 for the third quarter of 2012.

Nine months ended September 30, 2013 compared to nine months ended September 30, 2012

Net revenues for the nine months ended September 30, 2013 were $143,902,000, a decrease of $24,181,000 or 14.4%, compared to $168,083,000 for the same period a year ago.

The components of net revenues for the nine months ended September 30, were as follows (dollars in thousands):

                                                       Increase (decrease)
                           2013          2012             $              %
               BBU       $ 120,743     $ 136,510     $   (15,767 )      (11.6 )%
               VI Chip      21,088        29,343          (8,255 )      (28.1 )%
               Picor         2,071         2,230            (159 )       (7.1 )%

               Total     $ 143,902     $ 168,083     $   (24,181 )      (14.4 )%

The decrease in BBU revenues is primarily attributed to decreases in BBU component revenues of approximately $12,110,000, Vicor Custom Power revenues of approximately $2,569,000, Vicor Japan revenues of $1,163,000, partially offset by an increase in Westcor revenues of approximately $184,000. The overall decrease in revenues to date in 2013 is due to continued weakness in the defense electronics sector, continued recession in Europe and slower than expected growth from certain new product opportunities. In addition, the decrease in VI Chip and Picor revenues reflects a dependence on a limited number of customers. Overall bookings during the nine months ended September 30, 2013 increased by 15.1% compared with the last nine months of 2012. This increase was primarily attributed to increases in VI Chip and Picor orders of 129.7% and 11.8%, respectively.

Gross margin for the first nine months of 2013 decreased $13,478,000, or 18.8%, to $58,048,000 from $71,526,000 compared to the same period a year ago. Gross margin as a percentage of net revenues decreased to 40.3% from 42.6%. The decrease in gross margin and gross margin percentage was primarily attributed to the decrease in net revenues.

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Table of Contents

VICOR CORPORATION

Management's Discussion and Analysis of

Financial Condition and Results of Operation

September 30, 2013

Selling, general and administrative expenses were $43,820,000 for the nine months ended September 30, 2013, an increase of $2,570,000, or 6.2%, compared to $41,250,000 for the same period in 2012. Selling, general and administrative expenses as a percentage of net revenues increased to 30.5% from 24.5% for the same period in 2012, primarily due to the decrease in net revenues.

The components of the $2,570,000 increase in selling, general and administrative expenses were as follows (in thousands):

                                                  Increase (decrease)
        Compensation                            $    1,716           7.1 % (1)
        Bad debt expense                               356         493.5 % (2)
        Stockholder reporting                          220         122.6 % (3)
        Audit, tax, and accounting fees                218          20.4 %
        Advertising expenses                           185          10.8 %
        Training and professional development          184         436.2 % (4)
        Telephone expenses                              36           4.3 %
        Legal fees                                      33           2.3 %
        Employment recruiting                         (119 )       (34.9 )%
        Outside services                              (225 )       (15.0 )% (5)
        Commissions expense                           (274 )        (7.0 )% (6)
        Other, net                                     240           3.9 %

                                                $    2,570           6.2 %

. . .

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