Vicor - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

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 June 30, 2005.

 

 

VICOR CORPORATION

INDEX TO FORM 10-Q

FORM 10-Q

PART 1        

ITEM 1        
PAGE 1        

VICOR CORPORATION

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

See accompanying notes.

FORM 10-Q
PART I        
ITEM 1        
PAGE 2        

VICOR CORPORATION

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes.

FORM 10-Q
PART I        
ITEM 1        
PAGE 3        

VICOR CORPORATION

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes.

FORM 10-Q
PART I        
ITEM 1        
PAGE 4        

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

June 30, 2005

(Unaudited)

1. Basis of Presentation

FORM 10-Q
PART I        
ITEM 1        
PAGE 5        

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2005
(Unaudited)

2. Stock-Based Compensation

FORM 10-Q
PART I        
ITEM 1        
PAGE 6        

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2005
(Unaudited)

2. Stock-Based Compensation (Continued)

FORM 10-Q
PART I        
ITEM 1        
PAGE 7        

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2005
(Unaudited)

3. Net Income (Loss) per Share

4. Inventories

FORM 10-Q
PART I        
ITEM 1        
PAGE 8        

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2005
(Unaudited)

4. Inventories (Continued)

5. Product Warranties

6. Income Taxes

FORM 10-Q
PART I        
ITEM 1        
PAGE 9        

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2005
(Unaudited)

6. Income Taxes (Continued)

7. Comprehensive Income (Loss)

8. Legal Proceedings

FORM 10-Q
PART I        
ITEM 1        
PAGE 10      

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2005
(Unaudited)

8. Legal Proceedings (Continued)

9. Impact of Recently Issued Accounting Standards

FORM 10-Q
PART I        
ITEM 1        
PAGE 11      

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
June 30, 2005
(Unaudited)

9. Impact of Recently Issued Accounting Standards (Continued)

10. Reclassification

11. Dividend

FORM 10-Q
PART I        
ITEM 2        
PAGE 12      

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2005

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. 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 a sustainable increased bookings rate over a longer period, to hire key personnel and build our business units, and to successfully leverage the V • I Chips in standard products to promote market acceptance of Factorized Power, factors impacting the Company’s various end markets, including Consumer Electronics, Communications, Information Technology and Automotive, as well as 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.

Please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 for a complete summary of the critical accounting policies and estimates.

Inventories are valued at the lower of cost (first-in, first-out method) or market. The Company employs a variety of methodologies to determine the amount of inventory reserve. Historically, the Company estimated reserves for its inventory at all significant locations based upon its known backlog and historical usage, and assumptions about future demand and market conditions. In the second quarter of 2005, the Company revised its method for estimating inventory reserves at the Andover location, its principal manufacturing location. The revised model is based upon a comparison of on-hand quantities to projected demand, without reference to historical usage, such

FORM 10-Q
PART I        
ITEM 2        
PAGE 13      

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2005
(Continued)

that amounts on-hand in excess of three-year projected usage are fully reserved. While we have used our best efforts and believe we have used the best available information to estimate future demand, due to uncertainty in the economy and our business and the inherent difficulty in predicting future demand, it is possible that actual demand for our products will differ from our estimates. If actual future demand or market conditions are less favorable than those projected by management, additional inventory reserves for existing inventories may need to be recorded in future periods.

Net revenues for the second quarter of 2005 were $44,579,000, a decrease of $795,000, or 1.8%, as compared to $45,374,000 for the same period a year ago, and an increase of 3.2% on a sequential basis from the first quarter of 2005. The decrease in net revenues from the prior year resulted from a decrease in unit shipments of standard and custom products. The book-to-bill ratio for the second quarter of 2005 was 0.99:1 as compared to 0.97:1 for the second quarter of 2004 and 1.09:1 in the first quarter of 2005.

Gross margin for the second quarter of 2005 decreased $1,801,000, or 10.4%, to $15,579,000 from $17,380,000 for the second quarter of 2004, and decreased to 34.9% from 38.3% as a percentage of net revenues. The primary components of the decrease in gross margin dollars and percentage were due to the decrease in net revenues and by an increase in inventory reserves. During the second quarter of 2005, the Company provided additional reserves of approximately $1,600,000 for potential obsolete inventory arising primarily from the European Union Restriction of Hazardous Substances (“RoHS”) initiative and the conversion of second-generation products to the FasTrak platform. In addition, the Company identified other slow-moving and potential obsolete inventory of approximately $1,200,000, of which $300,000 related to raw material inventories in support of pilot production of V • I Chips. These decreases were partially offset by increased manufacturing efficiencies resulting in lower average unit costs.

Selling, general and administrative expenses were $10,137,000 for the period, a decrease of $470,000, or 4.4%, from the same period in 2004. As a percentage of net revenues, selling, general and administrative expenses decreased to 22.7% from 23.4%. The principal components of the $470,000 decrease were $665,000, or 88.9%, of decreased legal fees and $196,000, or 17.3%, of decreased commission payments due to the reduction of product revenues discussed above. The overall decrease in legal expense was primarily due to litigation with Exar Corporation that was settled in July 2004. The principal components partially offsetting the above decreases were $156,000, or 30.2%, in increased advertising expenses, $149,000, or 10.7%, in increased costs associated with Vicor Japan Company, Ltd. (“VJCL”) and the Vicor Integration Architects (“VIAs”), and $54,000, or 1.2%, in increased compensation expense.

FORM 10-Q
PART I        
ITEM 2        
PAGE 14      

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2005
(Continued)

Research and development expenses increased $875,000, or 13.5%, to $7,380,000, and increased as a percentage of net revenues to 16.6% from 14.3%. The principal components of the $875,000 increase were $602,000, or 15.7%, in increased compensation expense, $74,000, or 7.7%, in increased project material costs, $68,000, or 19.6%, in increased facilities costs and $59,000, or 160.5%, in increased outside services. The increases in compensation expense, project materials and outside services 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.

In the second quarter of 2005, the Company entered into a settlement agreement with Lambda Americas, Inc., successor to Lambda Electronics, Inc., under which the Company received a payment of $2,500,000 in full settlement of the Company’s Reset Patent claims against Lambda and which settled the lawsuit that the Company had filed against Lambda in June 2001. The full amount of the payment, net of a $250,000 contingency fee paid by the Company to its litigation counsel, has been included in gain from litigation-related settlement, net in the accompanying condensed consolidated statement of operations.

The major changes in the components of the other income (expense), net were as follows (in thousands):

The increase in interest income is due to higher interest rates and higher average balances on the Company’s cash equivalents and short-term investments. The increase in foreign currency losses is due to the unfavorable exchange rates in 2005 as compared to 2004.

Income before income taxes was $495,000 for the second quarter of 2005 compared to $362,000 for the same period in 2004.

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

FORM 10-Q
PART I        
ITEM 2        
PAGE 15      

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2005
(Continued)

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 second quarter of 2005 compared to $0.00 for the second quarter of 2004.

Net revenues for the first six months of 2005 were $87,759,000, a decrease of $136,000, or 0.2%, as compared to $87,895,000 for the same period a year ago. The decrease in net revenues resulted primarily from a decrease in license revenues of $375,000 due to the receipt of the final royalty payment from Nagano Japan Radio Company, Ltd. (“NJRC”) in January 2004, partially offset by an increase in unit shipments of standard and custom products of $239,000. Orders during the first six months of 2005 increased by 15.9% compared with the second half of 2004. The book-to-bill ratio was 1.04:1 for the first six months of 2005 compared to 1.05:1 for the same period a year ago, and 0.94:1 for the second half of 2004.

Gross margin for the first six months of 2005 increased $244,000, or 0.8%, to $32,624,000 from $32,380,000, and increased to 37.2% from 36.8% as a percentage of net revenues. The primary component of the increase in gross margin dollars and percentage was due to increased manufacturing efficiencies resulting in lower average unit costs. These increases were partially offset by an increase in inventory reserve expense of approximately $2,700,000 compared with the first six months of 2004. During the second quarter of 2005, the Company provided reserves of approximately $1,600,000 for potential obsolete inventory arising primarily from the European Union Restriction of Hazardous Substances (“RoHS”) initiative and the conversion of second-generation products to the FasTrak platform. In addition, the Company identified other slow-moving and potential obsolete inventory of approximately $1,200,000, of which $300,000 related to raw material inventories in support of pilot production of V • I Chips.

Selling, general and administrative expenses were $20,241,000 for the period, a decrease of $544,000, or 2.6%, over the same period in 2004. As a percentage of net revenues, selling, general and administrative expenses decreased to 23.1% from 23.6%. The principal components of the $544,000 decrease were $1,027,000, or 71.9%, of decreased legal fees and $264,000, or 21.4%, of decreased depreciation expense, due to certain computer hardware and software becoming fully depreciated in 2004. The overall decrease in legal expense was primarily due to litigation with Exar Corporation that was settled in July 2004. The principal components partially offsetting the above decreases were $225,000, or 22.5%, in increased advertising expenses, $213,000, or 2.4%, in increased compensation expense, $196,000, or 7.0%, in increased costs associated with VJCL and the VIAs and $132,000, or 26.5%, in increased audit and tax fees due to the requirements of complying with the Sarbanes-Oxley Act of 2002.

Research and development expenses increased $2,028,000, or 16.3%, to $14,476,000 and increased as a percentage of net revenues to 16.5% from 14.2%. The principal components of the $2,028,000 increase were $1,191,000, or 15.7%, of increased compensation expense, principally due to increased headcount, $465,000, or 30.1%, of increased project material costs, $93,000, or 82.8%, in increased supplies and $72,000, or 10.1%, of

FORM 10-Q
PART I        
ITEM 2        
PAGE 16      

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 2005
(Continued)

increased facilities costs. The increases in compensation expense, project material costs and supplies were principally due to the development efforts associated with the Company’s new FPA products.

In the second quarter of 2005, the Company entered into a settlement agreement with Lambda Americas, Inc., successor to Lambda Electronics, Inc., under which the Company received a payment of $2,500,000 in full settlement of the Company’s Reset Patent claims against Lambda and which settled the lawsuit that the Company had filed against Lambda in June 2001. The full amount of the payment, net of a $250,000 contingency fee paid by the Company to its litigation counsel, has been included in gain from litigation-related settlement, net in the accompanying condensed consolidated statement of operations.

The major changes in the components of the other income (expense), net were as follows (in thousands):

The increase in interest income is due to higher interest rates and higher average balances on the Company’s cash equivalents and short-term investments. The increase in foreign currency losses is due to the unfavorable exchange rates in 2005 as compared to 2004.

Income before income taxes was $834,000 compared to a loss before income taxes of $544,000 for the same period in 2004.

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 six months of 2005, compared to diluted loss per share of $(0.03) for the first six months of 2004.

FORM 10-Q
PART I        
ITEM 3        
PAGE 17      

VICOR CORPORATION

June 30, 2005

At June 30, 2005 the Company had $55,423,000 in cash and cash equivalents. The ratio of current assets to current liabilities was 6.8:1 at June 30, 2005 compared to 8.6:1 at December 31, 2004. Working capital decreased $1,471,000, from $148,419,000 at December 31, 2004 to $146,948,000 at June 30, 2005. The primary factors affecting the working capital decrease were a decrease in short-term investments of $13,089,000, a decrease in inventory of $5,466,000 and an increase in dividend payable of $5,020,000. These decreases were partially offset by an increase in cash and cash equivalents of $19,146,000 and in accounts receivable of $2,926,000. The primary sources of cash for the six months ended June 30, 2005 were $11,754,000 from operating activities and $12,730,000 of net sales of short-term investments. The primary uses of cash for the six months ended June 30, 2005 were for the acquisition of equipment of approximately $2,613,000 and treasury stock of $3,277,000.

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 of 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 $3,277,000 for the repurchase of 312,700 shares of Common Stock during the six months ended June 30, 2005. As of June 30, 2005, the Company had approximately $21,643,000 remaining under the plan.

On June 24, 2005, the Company’s Board of Directors approved an annual cash dividend for 2005 of $.12 per share of the Company’s stock, which will approximate $5,020,000. The dividend is payable on August 31, 2005 to shareholders of record at the close of business on August 11, 2005.

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 June 30, 2005, the Company had approximately $2,114,000 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.

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.

FORM 10-Q
PART I        
ITEM 4        
PAGE 18      

VICOR CORPORATION

June 30, 2005

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. In addition, the functional currency of the Company’s subsidiaries in Europe and Hong Kong is the U.S. Dollar. Therefore, the Company believes that market risk is mitigated since these operations are not exposed to foreign exchange fluctuations.

(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,

FORM 10-Q
PART I        
ITEM 4        
PAGE 19      

VICOR CORPORATION

June 30, 2005

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.

FORM 10-Q
PART II       
ITEM 1        
PAGE 20      

VICOR CORPORATION

Part II — Other Information

June 30, 2005

FORM 10-Q  
PART II         
ITEMS 2 — 4
PAGE 21        

VICOR CORPORATION

Part II — Other Information
June 30, 2005
(Continued)

FORM 10-Q   
PART II         
ITEMS 5 — 6
PAGE 22        

VICOR CORPORATION

Part II — Other Information
June 30, 2005
(Continued)

FORM 10-Q
PART II       
PAGE 23      

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.