SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
For the quarterly period ended March 31, 2005
For the transition period from
Commission File Number0-18277
VICOR CORPORATION
25 Frontage Road, Andover, Massachusetts 01810(Address of registrant’s principal executive office)
(978) 470-2900(Registrant’s 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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of March 31, 2005.
INDEX TO FORM 10-Q
Item 1 — Financial Statements
Condensed Consolidated Balance Sheets(In thousands)(Unaudited)
See accompanying notes.
Condensed Consolidated Statements of Operations(In thousands, except per share amounts)(Unaudited)
Condensed Consolidated Statements of Cash Flows(In thousands)(Unaudited)
Notes to Condensed Consolidated Financial StatementsMarch 31, 2005(Unaudited)
1. Basis of Presentation
Notes to Condensed Consolidated Financial Statements (Continued)March 31, 2005(Unaudited)
Management’s Discussion and Analysis ofFinancial Condition and Results of OperationsMarch 31, 2005
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,” “continue,” “prospective,” “project,” and other similar expressions identify forward-looking statements. 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 projected in the forward-looking statements as a result of various factors, including our ability to develop and market new products and technologies cost effectively, to leverage design wins into increased product sales, to decrease manufacturing costs, to enter into licensing agreements that amplify the market opportunity and accelerate market penetration, to realize significant royalties under the license agreements, to achieve an increased bookings rate over a longer period, and to successfully leverage the V · I Chips in standard products to promote market acceptance of Factorized Power, and those factors described in the risk factors set forth in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Reference is made in particular to the discussions set forth below in this report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and set forth in the Annual Report on Form 10-K under Part I, Item 1 — “Business — Second-Generation Automated Manufacturing Line,” “—Competition,” “—Patents,” “—Licensing,” and “—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 Annual Report on Form 10-K may not be exhaustive. Therefore, the information contained in that Form 10-K 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.
Management’s Discussion and Analysis ofFinancial Condition and Results of OperationsMarch 31, 2005(Continued)
Results of Operations
Three months ended March 31, 2005 compared to three months ended March 31, 2004
Net revenues for the first quarter of 2005 were $43,180,000, an increase of $659,000, or 1.5%, as compared to $42,521,000 for the same period a year ago, and an increase of 6.3% on a sequential basis from the fourth quarter of 2004. The increase in net revenues from the prior year resulted primarily from an increase in unit shipments of standard and custom products of approximately $1,034,000 offset by a decrease in license revenue of $375,000. Orders during the quarter increased by 23.5% compared with the fourth quarter of 2004. The book-to-bill ratio for the first quarter of 2005 was 1.09:1 as compared to 1.13:1 for the first quarter of 2004 and .94:1 in the fourth quarter of 2004. The decrease in license revenue was due to receipt of the final royalty payment from Nagano Japan Radio Company, Ltd. (“NJRC”) in January 2004.
Gross margin for the first quarter of 2005 increased $2,045,000, or 13.6%, to $17,045,000 from $15,000,000 for the first quarter of 2004, and increased to 39.5% from 35.3% as a percentage of net revenues. The primary components of the increase in gross margin dollars and percentage were due to the higher level of shipments and increased manufacturing efficiencies, resulting in lower average unit costs.
Selling, general and administrative expenses were $10,104,000 for the period, a decrease of $74,000, or 0.7%, from the same period in 2004. As a percentage of net revenues, selling, general and administrative expenses decreased slightly to 23.4% from 23.9%. The principal components of the $74,000 decrease were $361,000, or 53.1%, of decreased legal fees in connection with the litigation with Exar Corporation that was settled in July 2004 and $142,000, or 22.5%, of decreased depreciation expense, due to certain computer hardware and software becoming fully depreciated in 2004. The principal components partially offsetting the above decreases were $159,000, or 3.7%, in increased compensation as annual compensation adjustments resumed in mid-2004, $113,000, or 53.3%, in increased audit fees due to the requirements of complying with the Sarbanes-Oxley Act of 2002, $69,000, or 14.3%, in increased advertising expenses and $57,000, or 8.1%, in increased costs associated with Vicor Japan Company, Ltd.
Research and development expenses increased $1,153,000, or 19.4%, to $7,096,000, and increased as a percentage of net revenues to 16.4% from 14.0%. The principal components of the $1,153,000 increase were $516,000, or 17.9%, in increased compensation expense as annual compensation adjustments resumed in mid-2004, $361,000, or 74.1% in increased project material costs, $71,000, or 5.6%, in increased development costs associated with the automation, test and mechanical engineering groups, as less of these departments’ efforts were associated with internally constructed manufacturing and test equipment in 2005 as compared to 2004, $62,000, or 20.4%, in increased depreciation expense, $53,000, or 161.1%, in increased supplies and $44,000, or 115.0%, in increased tooling costs. The increases in compensation expense, project materials, depreciation expense, supplies and tooling costs were principally due to the development efforts associated with the Company’s new Factorized Power Architecture (“FPA”) products. The Company has a long-term commitment to investing in new product design and development in order to maintain and improve its competitive position.
The major changes in the components of the other income (expense), net were as follows (in thousands):
Income before income taxes was $339,000 for the first quarter of 2005 compared to a loss before income taxes of $906,000 for the same period in 2004, principally due to the increase in gross margin in 2005.
Tax provisions in 2005 and 2004 have been provided for estimated income taxes due in various state and international taxing jurisdictions for which losses incurred by the Company cannot be offset, for federal and state taxes for certain minority-owned subsidiaries that are not part of the Company’s consolidated income tax returns, and for the Federal alternative minimum tax.
Diluted income per share was $0.00 for the first quarter of 2005 compared to diluted loss per share of ($0.03) for the first quarter of 2004.
Liquidity and Capital Resources
At March 31, 2005 the Company had $36,695,000 in cash and cash equivalents. The ratio of current assets to current liabilities was 8.3:1 at March 31, 2005 compared to 8.6:1 at December 31, 2004. Working capital increased $1,059,000, from $148,419,000 at December 31, 2004 to $149,478,000 at March 31, 2005. The primary factors affecting the working capital increase were an increase in accounts receivable of $3,459,000 and in cash and cash equivalents of $418,000. These increases were partially offset by a decrease in short-term investments of $1,243,000 and a decrease in inventory of $1,525,000. The primary sources of cash for the three months ended March 31, 2005 were $2,798,000 from operating activities and $905,000 of net sales of short-term investments. The primary uses of cash for the three months ended March 31, 2005 were for the acquisition of equipment of approximately $1,372,000 and treasury stock of $1,902,000.
The Company’s primary liquidity needs are for making continuing investments in manufacturing equipment, much of which is built internally, particularly equipment for the Company’s new FPA products. The internal construction of manufacturing machinery, in order to provide for additional manufacturing capacity, is a practice which the Company expects to continue in the future. The Company expects capital spending to increase in 2005 as compared to 2004. In April 2005, management authorized the purchase of approximately $4,000,000 for FPA equipment during the remainder of the year.
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 spent approximately $1,902,000 for the repurchase of 178,400 shares of Common Stock during the three months ended March 31, 2005. As of March 31, 2005, the Company had approximately $23,018,000 remaining under the plan.
The Company believes that cash generated from operations and the total of its cash and cash equivalents, together with other sources of liquidity, will be sufficient to fund planned operations and capital equipment purchases for the foreseeable future. At March 31, 2005, the Company had approximately $943,000 of capital expenditure commitments.
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.
March 31, 2005
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to a variety of market risks, including changes in interest rates affecting the return on its cash and cash equivalents and short-term investments and fluctuations in foreign currency exchange rates.
As the Company’s cash and cash equivalents consist principally of money market securities, which are short-term in nature, the Company’s exposure to market risk on interest rate fluctuations for these investments is not significant. The Company’s short-term investments consist mainly of corporate debt securities. These debt securities are all highly rated investments, in which a significant portion have interest rates reset at auction at regular intervals. As a result, the Company believes there is minimal market risk to these investments.
The Company’s exposure to market risk for fluctuations in foreign currency exchange rates relates primarily to the operations of Vicor Japan Company, Ltd. (“VJCL”) and changes in the dollar/yen exchange rate. The Company believes that this market risk is currently not material due to the relatively small size of VJCL’s operations.
Item 4 – Controls and Procedures
(a) Disclosure controls and procedures.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management conducted an evaluation with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the Company’s disclosure controls and procedures, as of the end of the last fiscal quarter. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that they believe the Company’s disclosure controls and procedures are reasonably effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. We intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and we may from time to time make changes to the disclosure controls and procedures to enhance their effectiveness and to ensure that our systems evolve with our business.
The Company’s management, including the CEO and CFO, does not expect that our Disclosure Controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that 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 that 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 evaluation of 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.
(b) Changes in internal control over financial reporting.
There were no changes in the Company’s internal control over financial reporting identified in connection with the Company’s evaluation of internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II — Other InformationMarch 31, 2005
Item 1 — Legal Proceedings
Not applicable.
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds
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.
Item 3 — Defaults Upon Senior Securities
Item 4 — Submission of Matters to a Vote of Security Holders
Item 5 — Other Information
Part II — Other InformationMarch 31, 2005(Continued)
Item 6 – Exhibits
SIGNATURES
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.