Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
1.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of Vicor Corporation and its consolidated subsidiaries
(collectively, the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, these interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for any other interim period or the year ending December 31, 2018. The
balance sheet at December 31, 2017 presented herein has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated financial statements and notes thereto contained in the Companys Annual Report on Form
10-K
for the year ended December 31,
2017 filed by the Company with the Securities and Exchange Commission on March 9, 2018 (2017 Form
10-K).
2.
Recently Adopted Accounting Standard
In May 2014, the Financial Accounting Standards Board (FASB) issued new guidance for revenue recognition
(Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance, which includes several amendments, replaces most
of the prior revenue recognition guidance under U.S. Generally Accepted Accounting Principles. The Company adopted the new guidance as of January 1, 2018 using the modified retrospective method, as applied to all contracts. As a result, the
Company has changed its accounting policy for revenue recognition, as detailed below. The most significant impact of the adoption was on the timing of recognition of sales to the Companys stocking distributors and including the additional
required disclosures under the new standard. Through December 31, 2017, the Company deferred revenue and the related cost of sales on shipments to stocking distributors until the distributors resold the products to their customers. Upon
adoption, the Company is no longer permitted to defer revenue until sale by the stocking distributor to the end customer, but rather, is required to estimate the effects of returns and allowances provided to stocking distributors and record revenue
at the time of sale to the stocking distributor. In addition, the Company modified the accounting for a contractual arrangement due to a reassessment of the number of performance obligations in the arrangement, and adjusted for the timing of certain
royalty revenue. The cumulative effect of adopting this guidance, recorded as an increase to the balance of retained earnings as of January 1, 2018, was approximately $3,670,000. The comparative information for the three and six months ended
December 31, 2017, including disclosures, has not been restated and continues to be reported under the accounting standards in effect for that period.
-5-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
The following tables summarize the impacts of adopting the new revenue
recognition guidance on certain components of the Companys condensed consolidated financial statements as of and for the three and six months ended June 30, 2018 (in thousands):
|
a)
|
Consolidated Balance Sheet Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
|
Adjustments
|
|
|
Balances without
adoption of
Topic 606
|
|
Accounts receivable, net
|
|
$
|
45,056
|
|
|
$
|
(39
|
)
|
|
$
|
45,017
|
|
Inventories, net
|
|
|
41,753
|
|
|
|
(97
|
)
|
|
|
41,656
|
|
Total assets
|
|
|
190,843
|
|
|
|
(136
|
)
|
|
|
190,707
|
|
|
|
|
|
Income taxes payable
|
|
|
526
|
|
|
|
(18
|
)
|
|
|
508
|
|
Deferred revenue
|
|
|
4,610
|
|
|
|
4,445
|
|
|
|
9,055
|
|
Sales allowances
|
|
|
550
|
|
|
|
(466
|
)
|
|
|
84
|
|
Total liabilities
|
|
|
31,905
|
|
|
|
3,961
|
|
|
|
35,866
|
|
|
|
|
|
Retained earnings
|
|
|
109,078
|
|
|
|
(4,097
|
)
|
|
|
104,981
|
|
Total equity
|
|
|
158,938
|
|
|
|
(4,097
|
)
|
|
|
154,841
|
|
Total liabilities and equity
|
|
|
190,843
|
|
|
|
(136
|
)
|
|
|
190,707
|
|
-6-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
|
b)
|
Consolidated Statement of Operations Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
As reported
|
|
|
Adjustments
|
|
|
Balances without
adoption of
Topic 606
|
|
Net revenues
|
|
$
|
74,196
|
|
|
$
|
(597
|
)
|
|
$
|
73,599
|
|
Cost of revenues
|
|
|
38,313
|
|
|
|
(372
|
)
|
|
|
37,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
35,883
|
|
|
|
(225
|
)
|
|
|
35,658
|
|
|
|
|
|
Income before income taxes
|
|
|
8,272
|
|
|
|
(225
|
)
|
|
|
8,047
|
|
Provision for income taxes
|
|
|
363
|
|
|
|
(11
|
)
|
|
|
352
|
|
Consolidated net income
|
|
|
7,909
|
|
|
|
(214
|
)
|
|
|
7,695
|
|
Net income attributable to Vicor Corporation
|
|
|
7,860
|
|
|
|
(214
|
)
|
|
|
7,646
|
|
|
|
|
|
Six Months Ended
|
|
|
|
As reported
|
|
|
Adjustments
|
|
|
Balances without
adoption of
Topic 606
|
|
Net revenues
|
|
$
|
139,465
|
|
|
$
|
(1,401
|
)
|
|
$
|
138,064
|
|
Cost of revenues
|
|
|
73,371
|
|
|
|
(956
|
)
|
|
|
72,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
66,094
|
|
|
|
(445
|
)
|
|
|
65,649
|
|
|
|
|
|
Income before income taxes
|
|
|
12,388
|
|
|
|
(445
|
)
|
|
|
11,943
|
|
Provision for income taxes
|
|
|
497
|
|
|
|
(18
|
)
|
|
|
479
|
|
Consolidated net income
|
|
|
11,891
|
|
|
|
(427
|
)
|
|
|
11,464
|
|
Net income attributable to Vicor Corporation
|
|
|
11,803
|
|
|
|
(427
|
)
|
|
|
11,376
|
|
The impact of the adoption of the new revenue recognition standard on the unaudited
consolidated statements of comprehensive income (loss) and cash flows for the three and six months ended June 30, 2018 was not material.
3.
Revenue Recognition
Prior to January
1, 2018
Product revenue was recognized in the period when persuasive evidence of an arrangement with a customer existed, the products
were shipped and title was transferred to the customer, the price was fixed or determinable, and collection was considered probable.
The Company deferred revenue and the related cost of sales on shipments to stocking distributors until the distributors resold
the products to their customers. The agreements with these stocking distributors allowed them to receive price adjustment credits or to return qualifying products for credit, as determined by the Company, in order to reduce the amounts of
slow-moving, discontinued, or obsolete product from their inventory. These stocking distributors were also granted price adjustment credits in the event of a price decrease subsequent to the date the product was shipped and invoiced to the stocking
distributor. Given the uncertainties associated with the levels of price adjustment credits to be granted to stocking distributors, the sales price to the stocking distributor was not fixed or determinable until the stocking distributor resold the
products to its customers. Therefore,
-7-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
the Company deferred revenue and the related cost of sales on shipments to stocking distributors until the stocking distributors resold the products to their customers. Accordingly, the
Companys revenue fully reflected
end-customer
purchases and was not impacted by stocking distributor inventory levels. Agreements with stocking distributors limited returns of qualifying product to the
Company to a certain percentage of the value of the Companys shipments to that stocking distributor during the prior quarter. In addition, stocking distributors were allowed to return unsold products if the Company terminated the relationship
with the stocking distributor. Title to the inventory transferred to the stocking distributor at the time of shipment or delivery to the stocking distributor. Payment from the stocking distributors were due in accordance with the Companys
standard payment terms. These payment terms were not contingent upon the stocking distributors sale of the products to their
end-customers.
Upon title transfer to stocking distributors, the Company
reduced inventory for the cost of goods shipped, the margin (i.e., revenues less cost of revenues) was recorded as deferred revenue, and an account receivable was recorded. As of December 31, 2017, the Company had gross deferred revenue of
approximately $4,659,000 and gross deferred cost of revenues of approximately $2,135,000 under agreements with stocking distributors.
The Company evaluated revenue arrangements with potential multi-element deliverables to determine if there were more than one
unit of accounting. A deliverable constituted a separate unit of accounting when it had standalone value and there were no customer-negotiated refund or return rights for the undelivered elements. The Company entered into arrangements containing
multiple elements that could include a combination of
non-recurring
engineering services (NRE), prototype units, and production units. The Company determined NRE and prototype units represented one
unit of accounting and production units represented a separate unit of accounting, based on an assessment of the respective standalone value. The Company deferred revenue recognition for NRE and prototype units until completion of the final
milestone under the NRE arrangement, which was generally the delivery of the prototype. Recognition generally took place within six to twelve months of the initiation of the arrangement. Revenue for the production units was recognized upon shipment,
consistent with other product revenue summarized above.
License fees were recognized as earned. The Company recognized
revenue on such arrangements only when the contract was signed, the license term had begun, all obligations had been delivered to the customer, and collection was probable.
Subsequent to January
1, 2018
Revenue is recognized when control of the promised goods or services is transferred to a customer, in an amount that reflects
the consideration the Company expects to be entitled to in exchange for those goods or services. Sales, value add, and other taxes collected concurrent with revenue-producing activities are excluded from revenue. The expected costs associated with
product warranties continue to be recognized at the time product revenue is recognized. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost
and are included in cost of revenues.
The Companys primary source of net revenue comes from the sale of products,
which are modular power components and power systems for converting, regulating and controlling electric current. The principal customers for the Companys power converters and systems are large original equipment manufacturers and the original
design manufacturers and contract manufacturers serving them, and smaller, lower volume users, which are broadly distributed across several major market areas. The Company recognizes revenue for product sales at a point in time following the
transfer of control of such products to the customer, which typically occurs upon shipment or delivery, depending on the terms of the underlying contract. As noted above, the Company previously deferred revenue and the related cost of revenues on
shipments to stocking distributors until the distributors resold the products to their customers. The Company now records revenue for such transactions at the time of sale to the stocking distributor. The Company establishes sales allowances for
estimated future product returns including distributor returns and price adjustment credits, primarily based upon historical and anticipated rates of product returns and allowances.
Certain contracts with customers contain multiple performance obligations, which typically may include a combination of NRE,
prototype units, and production units. For these contracts, the individual performance obligations are accounted for separately if they are distinct. Generally, the Company has determined the NRE and prototype units represent one distinct
performance obligation and the production units represent a separate distinct performance obligation. For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price, based on prices charged
to customers or using the expected cost plus a margin approach. The Company defers revenue recognition for NRE and prototype
-8-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
units until the point in time at which the final milestone under the NRE arrangement is completed and control is transferred to the customer, which is generally the delivery of the prototype.
Revenue for production units is recognized upon shipment or delivery, consistent with product revenue summarized above.
The Company licenses its intellectual property under right to use licenses, in which royalties due to the Company are based
upon a percentage of the licensees sales. The Company utilizes the exception under the revenue recognition guidance for the recognition of sales- or usage-based royalties, in which the royalties are not recognized until the later of when 1)
the customers subsequent sales or usages occur, or 2) the performance obligation to which some or all of the sales- or usage-based royalty has been allocated is satisfied or partially satisfied.
Accounts receivable includes amounts billed and currently due from customers. The amounts due are stated at their estimated
realizable value. The Companys payment terms vary by the type and location of its customers and the products or services offered, although terms generally include a requirement of payment within 30 to 60 days. The Company maintains allowances
for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, based on assessments of customers credit-risk profiles and payment histories. If the financial condition of the Companys
customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company does not require collateral from its customers, although there have been circumstances when the Company
has required cash in advance (i.e., a partial down-payment) to facilitate orders in excess of a customers established credit limit. To date, such amounts have not been material.
The Company records deferred revenue, which represents a contract liability, when cash payments are received or due in advance
of performance under a contract with a customer. During the three and six months ended June 30, 2018, under Topic 606, the Company recognized revenue of approximately $340,000 and $385,000, respectively, that was included in deferred revenue at
the beginning of each respective period.
The Company applies the practical expedient allowed under the new guidance for
the incremental costs of obtaining a contract for sales commissions, which are expensed when incurred because the amortization period is generally less than one year. These costs are included in selling, general and administrative expenses.
The Company also applies another practical expedient allowed under the new guidance and does not disclose the value of
unsatisfied performance obligations for contracts with an original expected length of one year or less.
-9-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
The following tables present the Companys net revenues disaggregated by geography based
on the location of the customer, by reportable segment, for the three and six months ended June 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
BBU
|
|
|
VI Chip
|
|
|
Picor
|
|
|
Total
|
|
United States
|
|
$
|
18,295
|
|
|
$
|
7,771
|
|
|
$
|
353
|
|
|
$
|
26,419
|
|
Europe
|
|
|
4,877
|
|
|
|
1,169
|
|
|
|
106
|
|
|
|
6,152
|
|
Asia Pacific
|
|
|
23,876
|
|
|
|
10,905
|
|
|
|
5,482
|
|
|
|
40,263
|
|
All other
|
|
|
1,301
|
|
|
|
45
|
|
|
|
16
|
|
|
|
1,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,349
|
|
|
$
|
19,890
|
|
|
$
|
5,957
|
|
|
$
|
74,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
BBU
|
|
|
VI Chip
|
|
|
Picor
|
|
|
Total
|
|
United States
|
|
$
|
35,286
|
|
|
$
|
15,770
|
|
|
$
|
986
|
|
|
$
|
52,042
|
|
Europe
|
|
|
9,602
|
|
|
|
1,742
|
|
|
|
181
|
|
|
|
11,525
|
|
Asia Pacific
|
|
|
42,087
|
|
|
|
22,292
|
|
|
|
9,240
|
|
|
|
73,619
|
|
All other
|
|
|
2,011
|
|
|
|
225
|
|
|
|
43
|
|
|
|
2,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
88,986
|
|
|
$
|
40,029
|
|
|
$
|
10,450
|
|
|
$
|
139,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-10-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
The following tables present the Companys net revenues disaggregated by the category of
revenue, by reportable segment, for the three and six months ended June 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
BBU
|
|
|
VI Chip
|
|
|
Picor
|
|
|
Total
|
|
Direct customers, contract manufacturers and
non-stocking
distributors
|
|
$
|
43,404
|
|
|
$
|
17,628
|
|
|
$
|
5,502
|
|
|
$
|
66,534
|
|
Stocking distributors, net of sales allowances
|
|
|
4,735
|
|
|
|
1,865
|
|
|
|
343
|
|
|
|
6,943
|
|
Non-recurring
engineering
|
|
|
197
|
|
|
|
375
|
|
|
|
90
|
|
|
|
662
|
|
Royalties
|
|
|
13
|
|
|
|
13
|
|
|
|
13
|
|
|
|
39
|
|
Other
|
|
|
|
|
|
|
9
|
|
|
|
9
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,349
|
|
|
$
|
19,890
|
|
|
$
|
5,957
|
|
|
$
|
74,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
BBU
|
|
|
VI Chip
|
|
|
Picor
|
|
|
Total
|
|
Direct customers, contract manufacturers and
non-stocking
distributors
|
|
$
|
78,878
|
|
|
$
|
34,934
|
|
|
$
|
9,482
|
|
|
$
|
123,294
|
|
Stocking distributors, net of sales allowances
|
|
|
9,698
|
|
|
|
4,419
|
|
|
|
732
|
|
|
|
14,849
|
|
Non-recurring
engineering
|
|
|
372
|
|
|
|
620
|
|
|
|
180
|
|
|
|
1,172
|
|
Royalties
|
|
|
38
|
|
|
|
38
|
|
|
|
38
|
|
|
|
114
|
|
Other
|
|
|
|
|
|
|
18
|
|
|
|
18
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
88,986
|
|
|
$
|
40,029
|
|
|
$
|
10,450
|
|
|
$
|
139,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the changes in certain contract assets and (liabilities) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
Increase
(decrease)
|
|
Accounts receivable
|
|
$
|
45,056
|
|
|
$
|
34,487
|
|
|
$
|
10,569
|
|
Deferred revenue
|
|
|
(2,652
|
)
|
|
|
(5,015
|
)
|
|
|
2,363
|
|
Deferred expenses
|
|
|
776
|
|
|
|
377
|
|
|
|
399
|
|
Customer prepayments
|
|
|
(1,958
|
)
|
|
|
(776
|
)
|
|
|
(1,182
|
)
|
Sales allowances
|
|
|
(550
|
)
|
|
|
|
|
|
|
(550
|
)
|
-11-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
The increase in accounts receivable was primarily due to an increase in net
revenues of approximately $15,425,000 in the second quarter of 2018 compared to the fourth quarter of 2017. The decrease in deferred revenue was primarily due to the adoption of the new revenue recognition guidance, as the balances related to
stocking distributors were reversed as part of the transition adjustment recorded as of January 1, 2018 (see Note 2 to the Condensed Consolidated Financial Statements). The increase in deferred expenses is primarily due to additional work
incurred on certain NRE projects during the second quarter of 2018 for which the associated revenue is being deferred. The increase in sales allowances was due to the establishment of new allowances, in connection with the new revenue recognition
guidance, for potential returns and price adjustment credits on sales to stocking distributors.
Deferred expenses are
included in Other current assets, and customer prepayments are included in Deferred revenue, in the accompanying Condensed Consolidated Balance Sheets, respectively.
4.
Long-Term Investments
As of June 30, 2018 and December 31, 2017, the Company held one auction rate security with a par value of $3,000,000,
purchased through and held in custody by a broker-dealer affiliate of Bank of America, N.A., that has experienced failed auctions (the Failed Auction Security) since February 2008. The Failed Auction Security held by the Company is
Aaa/AA+ rated by major credit rating agencies, is collateralized by student loans, and is guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program. Management is not aware of any reason to believe the
issuer of the Failed Auction Security is presently at risk of default. Through June 30, 2018, the Company has continued to receive interest payments on the Failed Auction Security in accordance with the terms of its indenture. Management
believes the Company ultimately should be able to liquidate the Failed Auction Security without significant loss primarily due to the overall quality of the issue held and the collateral securing the substantial majority of the underlying
obligation. However, current conditions in the auction rate securities market have led management to conclude the recovery period for the Failed Auction Security exceeds 12 months. As a result, the Company continued to classify the Failed
Auction Security as long-term as of June 30, 2018.
The following is a summary of
available-for-sale
securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Failed Auction Security
|
|
$
|
3,000
|
|
|
$
|
|
|
|
$
|
419
|
|
|
$
|
2,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Failed Auction Security
|
|
$
|
3,000
|
|
|
$
|
|
|
|
$
|
475
|
|
|
$
|
2,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018, the Failed Auction Security had been in an unrealized loss position
for greater than 12 months.
-12-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
The amortized cost and estimated fair value of the Failed Auction Security on
June 30, 2018, by contractual maturity, is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
Due in twenty to forty years
|
|
$
|
3,000
|
|
|
$
|
2,581
|
|
|
|
|
|
|
|
|
|
|
Based on the fair value measurements described in Note 5, the fair value of the Failed
Auction Security on June 30, 2018, with a par value of $3,000,000, was estimated by the Company to be approximately $2,581,000. The gross unrealized loss of $419,000 on the Failed Auction Security consists of two types of estimated loss: an
aggregate credit loss of $44,000 and an aggregate temporary impairment of $375,000. In determining the amount of credit loss, the Company compared the present value of cash flows expected to be collected to the amortized cost basis of the security,
considering credit default risk probabilities and changes in credit ratings as significant inputs, among other factors (See Note 5).
The following table represents a rollforward of the activity related to the credit loss recognized in earnings on the Failed
Auction Security for the six months ended June 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Balance at the beginning of the period
|
|
$
|
48
|
|
|
$
|
59
|
|
Reductions in the amount related to credit gain for which other-than- temporary impairment was not
previously recognized
|
|
|
(4
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
44
|
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
|
At this time, the Company has no intent to sell the impaired Failed Auction Security and does
not believe it is more likely than not the Company will be required to sell this security. If current market conditions deteriorate further, the Company may be required to record additional unrealized losses. If the credit rating of the security
deteriorates, the Company may be required to adjust the carrying value of the investment through impairment charges recorded in the Condensed Consolidated Statements of Operations, and any such impairment adjustments may be material.
Based on the Companys ability to access cash and cash equivalents and its expected operating cash flows, management does
not anticipate the current lack of liquidity associated with the Failed Auction Security held will affect the Companys ability to execute its current operating plan.
5.
Fair Value Measurements
The Company accounts for certain financial assets at fair value, defined as the price that would be received to sell an asset
or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based
measurement that should be determined based on assumptions market participants would use in pricing an asset or liability. A three-level hierarchy is used to show the extent and level of judgment used to estimate fair value measurements.
-13-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
Assets and liabilities measured at fair value on a recurring basis included
the following as of June 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Using
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total Fair
Value as of
June 30, 2018
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
9,501
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,501
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Failed Auction Security
|
|
|
|
|
|
|
|
|
|
|
2,581
|
|
|
|
2,581
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration obligations
|
|
|
|
|
|
|
|
|
|
|
(506
|
)
|
|
|
(506
|
)
|
|
Assets and liabilities measured at fair value on a recurring basis included the
following as of December 31, 2017 (in thousands):
|
|
|
|
|
|
|
Using
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total Fair
Value as of
December 31, 2017
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
9,279
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,279
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Failed Auction Security
|
|
|
|
|
|
|
|
|
|
|
2,525
|
|
|
|
2,525
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration obligations
|
|
|
|
|
|
|
|
|
|
|
(678
|
)
|
|
|
(678
|
)
|
As of June 30, 2018, there was insufficient observable auction rate security market
information available to determine the fair value of the Failed Auction Security using Level 1 or Level 2 inputs. As such, the Companys investment in the Failed Auction Security was deemed to require valuation using Level 3
inputs. Management, after consulting with advisors, valued the Failed Auction Security using analyses and pricing models similar to those used by market participants (i.e., buyers, sellers, and the broker-dealers responsible for execution of the
Dutch auction pricing mechanism by which each issues interest rate was set). Management utilized a probability weighted discounted cash flow (DCF) model to determine the estimated fair value of this security as of June 30,
2018. The major assumptions used in preparing the DCF model were similar to those described in Note 5 - Fair Value Measurements in the Notes to the Consolidated Financial Statements contained in the Companys 2017 Form
10-K.
-14-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
Quantitative information about Level 3 fair value measurements as of
June 30, 2018 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Weighted
Average
|
|
Failed Auction Security
|
|
$
|
2,581
|
|
|
Discounted
cash flow
|
|
Cumulative probability of earning the maximum rate until maturity
|
|
|
0.06
|
%
|
|
|
|
|
|
|
|
|
Cumulative probability of principal return prior to maturity
|
|
|
94.36
|
%
|
|
|
|
|
|
|
|
|
Cumulative probability of default
|
|
|
5.58
|
%
|
|
|
|
|
|
|
|
|
Liquidity risk premium
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
Recovery rate in default
|
|
|
40.00
|
%
|
The change in the estimated fair value calculated for the investment valued on a recurring
basis utilizing Level 3 inputs (i.e., the Failed Auction Security) for the six months ended June 30, 2018 was as follows (in thousands):
|
|
|
|
|
Balance at the beginning of the period
|
|
$
|
2,525
|
|
Credit gain on
available-for-sale
securities included in Other income (expense), net
|
|
|
4
|
|
Gain included in Other comprehensive income
|
|
|
52
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
2,581
|
|
|
|
|
|
|
The Company has classified its contingent consideration obligations as Level 3 because
the fair value for these liabilities was determined using unobservable inputs. The liabilities were based on estimated sales of legacy products over the period of royalty payments at the royalty rate, discounted using the Companys estimated
cost of capital.
The change in the estimated fair value calculated for the liabilities valued on a recurring basis
utilizing Level 3 inputs (i.e., the Contingent consideration obligations) for the six months ended June 30, 2018 was as follows (in thousands):
|
|
|
|
|
Balance at the beginning of the period
|
|
$
|
678
|
|
Payments
|
|
|
(172
|
)
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
506
|
|
|
|
|
|
|
There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the six
months ended June 30, 2018.
-15-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
6.
Stock-Based Compensation
The Company uses the Black-Scholes option pricing model to calculate the fair value of stock option awards and options granted
under the Vicor Corporation 2017 Employee Stock Purchase Plan (ESPP) as of their grant date. Stock-based compensation expense, net for the three and six months ended June 30 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Cost of revenues
|
|
$
|
59
|
|
|
$
|
38
|
|
|
$
|
115
|
|
|
$
|
72
|
|
Selling, general and administrative
|
|
|
957
|
|
|
|
215
|
|
|
|
1,499
|
|
|
|
395
|
|
Research and development
|
|
|
164
|
|
|
|
34
|
|
|
|
302
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
1,180
|
|
|
$
|
287
|
|
|
$
|
1,916
|
|
|
$
|
541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The overall increase in stock-based compensation between the 2018 and 2017 periods was due to an increase in
stock options granted between July 1, 2017 and June 30, 2018. The increase in selling, general and administrative stock-based compensation for the three and six months ended June 30, 2018, compared to the same periods in 2017, was
also due to increased expense for certain Vicor stock options held by a
non-employee.
The fair value of these stock options, and related stock-based compensation, are adjusted monthly based on changes in the
assumptions under the Black-Scholes option pricing model, including the price of the Companys common stock, in accordance with the accounting for stock options granted to
non-employees.
Compensation expense by type of award for the three and six months ended June 30 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
$
|
1,005
|
|
|
$
|
287
|
|
|
$
|
1,598
|
|
|
$
|
541
|
|
ESPP
|
|
|
175
|
|
|
|
|
|
|
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
1,180
|
|
|
$
|
287
|
|
|
$
|
1,916
|
|
|
$
|
541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-16-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
7.
Net Income (Loss) per Share
The following table sets forth the computation of basic and diluted net income (loss) per share for the three and six months ended June 30
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Vicor Corporation
|
|
$
|
7,860
|
|
|
$
|
(459
|
)
|
|
$
|
11,803
|
|
|
$
|
(1,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share-weighted average shares (1)
|
|
|
39,709
|
|
|
|
39,172
|
|
|
|
39,594
|
|
|
|
39,121
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options (2)
|
|
|
937
|
|
|
|
|
|
|
|
812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share adjusted weighted-average shares and
assumed conversions
|
|
|
40,646
|
|
|
|
39,172
|
|
|
|
40,406
|
|
|
|
39,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.20
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.30
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.19
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.29
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Denominator represents weighted average number of shares of Common Stock and Class B Common Stock outstanding.
|
(2)
|
Options to purchase 44,793 and 79,857 shares of Common Stock for the three and six months ended June 30, 2018, respectively, and 1,510,728 shares of Common Stock for the three and six months ended June 30,
2017, respectively, were not included in the calculation of net income (loss) per share as the effect would have been antidilutive.
|
8.
Inventories
Inventories are valued at the lower of cost (determined using the
first-in,
first-out
method) or net realizable value. Fixed production overhead is allocated to the inventory cost per unit based on the normal capacity of the production
facilities. Abnormal production costs, including fixed cost variances from normal production capacity, if any, are charged to cost of revenues in the period incurred. All shipping and handling costs incurred in connection with the sale of products
are included in cost of revenues.
The Company provides reserves for inventories estimated to be excess, obsolete or
unmarketable. The Companys estimation process for assessing net realizable value is based upon its known backlog, projected future demand, historical consumption and expected market conditions. If the Companys estimated demand and/or
market expectation were to change or if product sales were to decline, the Companys estimation process may cause larger inventory reserves to be recorded, resulting in larger charges to cost of revenues.
-17-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
Inventories were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Raw materials
|
|
$
|
32,854
|
|
|
$
|
27,400
|
|
Work-in-process
|
|
|
3,513
|
|
|
|
3,596
|
|
Finished goods
|
|
|
5,386
|
|
|
|
5,503
|
|
|
|
|
|
|
|
|
|
|
Net balance
|
|
$
|
41,753
|
|
|
$
|
36,499
|
|
|
|
|
|
|
|
|
|
|
9.
Product Warranties
The Company generally offers a
two-year
warranty for all of its products, though it has
extended the warranty period to three years for certain military grade products sold after January 1, 2017. The Company is party to a limited number of supply agreements with certain customers contractually committing the Company to warranty
and indemnification requirements exceeding those to which the Company has been exposed in the past. The Company provides for the estimated cost of product warranties at the time product revenue is recognized. Factors influencing the Companys
warranty reserves include the number of units sold, historical and anticipated rates of warranty returns, and the cost per return. The Company periodically assesses the adequacy of warranty reserves and adjusts the amounts as necessary. Warranty
obligations are included in Accrued expenses in the accompanying Condensed Consolidated Balance Sheets.
Product warranty activity for the three and six months ended June 30 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Balance at the beginning of the period
|
|
$
|
346
|
|
|
$
|
185
|
|
|
$
|
290
|
|
|
$
|
214
|
|
Accruals for warranties for products sold in the period
|
|
|
10
|
|
|
|
91
|
|
|
|
133
|
|
|
|
195
|
|
Fulfillment of warranty obligations
|
|
|
(20
|
)
|
|
|
(24
|
)
|
|
|
(77
|
)
|
|
|
(97
|
)
|
Revisions of estimated obligations
|
|
|
(10
|
)
|
|
|
(8
|
)
|
|
|
(20
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
326
|
|
|
$
|
244
|
|
|
$
|
326
|
|
|
$
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
Severance Charge
In May 2018, the Companys management authorized the closure of its Granite Power Technologies, Inc. (GPT)
subsidiary, of the Brick Business Unit (BBU) segment, by the end of 2018. GPT, located in Manchester, N.H., is one of three Vicor Custom Power (VCP) entities. Certain of GPTs products will continue to be manufactured
and sold by the two remaining VCP entities. As a result, the Company recorded a
pre-tax
charge of $350,000 in the second quarter of 2018, for the cost of severance and other employee-related costs involving
cash payments based on each employees respective length of service. This was recorded as Severance charge in the Condensed Consolidated Statement of Operations. The related liability is presented as Accrued severance
charge in the Condensed Consolidated Balance Sheets.
-18-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
11.
Income Taxes
The tax provision is based on the estimated annual effective tax rate for the year, which includes estimated federal, state and foreign income
taxes on the Companys projected
pre-tax
income (loss).
The provision for income taxes and
the effective income tax rates for the three and six months ended June 30 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Provision for income taxes
|
|
$
|
363
|
|
|
$
|
267
|
|
|
$
|
497
|
|
|
$
|
168
|
|
Effective income tax rate
|
|
|
4.4
|
%
|
|
|
150.0
|
%
|
|
|
4.0
|
%
|
|
|
13.6
|
%
|
The effective tax rate was lower than the statutory tax rate in 2018 due to the utilization of
net operating carryforwards and tax credits. The provisions for income taxes in each 2017 period were primarily due to estimated foreign income taxes and for estimated state taxes in jurisdictions in which the Company does not have net operating
loss carryforwards. No tax benefit could be recognized for the majority of the Companys losses during these periods due to a full valuation allowance against all net domestic deferred tax assets. The provision and effective income tax rate
were higher in the second quarter of 2017 as the Company had previously recorded a tax benefit in the first quarter of 2017.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation, referred to as the Tax Cuts and Jobs Act
(the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) elimination of the corporate alternative minimum
tax (AMT) and changing how existing AMT credits can be realized; (3) changing rules related to the usage and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017; and
(4) implementing a territorial tax system, which generally eliminates the U.S. federal income tax on dividends from foreign subsidiaries, and imposes
a one-time transition
tax on certain
earnings of foreign subsidiaries previously untaxed in the United States.
Certain impacts of the Tax Act would generally
require accounting to be completed in the period of enactment. However, in response to the complexities of the Tax Act, the Securities and Exchange Commission (SEC) issued guidance through Staff Accounting Bulletin No. 118 to
provide companies with relief. Specifically, when the initial accounting for items under the Tax Act is incomplete, the guidance allows companies to include provisional amounts when reasonable estimates can be made. The SEC has provided up to
a one-year measurement
period for companies to finalize the accounting for the impact of the new legislation and the Company expects to finalize the accounting over the coming quarters. The Company has
recognized the provisional tax impacts related to
the re-measurement of
its deferred tax assets and liabilities,
and one-time transition
tax, for the
year ended December 31, 2017. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that
may be issued, and actions the Company may take as a result of the Tax Act. There were no changes to the provisional tax impacts referred to above in the first or second quarters of 2018.
-19-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
As of June 30, 2018, the Company continues to maintain a valuation
allowance of approximately $33,024,000 against all domestic net deferred tax assets. Management assesses the need for the valuation allowance on a quarterly basis. In assessing the need for a valuation allowance, the Company considers all positive
and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and past financial performance. Due to improving financial results, there is increasing positive evidence to
support realization of deferred tax assets. Until actual operating results continue to be consistently positive, and the Company believes it is more likely than not it can forecast sufficient future taxable income of the appropriate nature to
realize those deferred tax assets, it will continue to maintain the full valuation allowance position. If and when the Company determines the valuation allowance should be released (i.e., reduced), the adjustment would result in a tax benefit
reported in that periods consolidated statements of operations, the effect of which would be an increase in reported net income.
In May 2017, the Company received notice from the Internal Revenue Service that its federal corporate tax return for tax year
2015 had been selected for examination. The examination was completed in May 2018 resulting in no tax liability to the Company. In January 2018, the Company received notice from the New York State Department of Taxation that its New York State tax
returns for tax years 2014 through 2016 were selected for audit. Onsite fieldwork for this audit was completed in May 2018, and the Company is awaiting the results of the audit.
12.
Commitments and Contingencies
At
June 30, 2018, the Company had approximately $2,044,000 of capital expenditure commitments.
The Company is the defendant in a patent
infringement lawsuit originally filed on January 28, 2011 by SynQor, Inc. (SynQor) in the U.S. District Court for the Eastern District of Texas (the Texas Action). The complaint, as amended in September 2011, alleges
that the Companys products, including but not limited to, unregulated bus converters used in intermediate bus architecture power supply systems, infringe SynQors U.S. patent numbers 7,072,190, 7,272,021, 7,564,702, and 8,023,290
(the 190 patent, the 021 patent, the 702 patent, and the 290 patent, respectively). SynQors complaint sought an injunction against further infringement and an award of
unspecified compensatory and enhanced damages, interest, costs and attorney fees. The Company has denied that its products infringe any of the SynQor patents, asserted that the SynQor patents are invalid, and asserted that the 290 patent
is unenforceable due to inequitable conduct by SynQor or its agents during the examination of the 290 patent at the United States Patent and Trademark Office (USPTO). The Company also asserted counterclaims seeking damages
against SynQor for deceptive trade practices and tortious interference with prospective economic advantage arising from SynQors attempted enforcement of its patents against the Company. On May 23, 2016, after extensive discovery, the
Texas Action was stayed by the court pending completion of certain inter partes reexamination proceedings at the USPTO (including any appeals from such proceedings to the Federal Circuit (as defined below)) concerning the SynQor patents, which are
described below.
In response to the Texas Action, the Company initiated inter partes reexamination proceedings at the USPTO challenging
the validity of certain claims of the SynQor patents asserted in the Texas Action, including all claims that were asserted against the Company by SynQor. The current status of these proceedings is as follows. Regarding the 190 patent, the
United States Court of Appeals for the Federal Circuit (the Federal Circuit) issued a decision on March 13, 2015, determining that certain claims were invalid, and remanding the matter to the Patent Trial and Appeal Board
(PTAB) of the USPTO for further proceedings. On May 2, 2016, the PTAB issued a decision determining that all but one of the remaining claims of the 190 patent were invalid and remanding the remaining claim to a patent examiner
for further examination. On June 22, 2017, the examiner issued a determination under 37 C.F.R. § 41.77(d), finding that the remaining claim of the 190 patent was unpatentable. That decision is expected to be further reviewed by the
PTAB pursuant to 37 C.F.R. § 41.77(f). On May 2, 2016, the PTAB also issued decisions finding all challenged claims of SynQors 021 patent invalid and upholding the validity of all challenged claims of SynQors 702
and 290 patents.
On August 30, 2017, the Federal Circuit issued rulings with regard to PTABs reexamination decisions for
the 021, 702 and 290 patents. With respect to the 021 patent, the Federal Circuit affirmed the PTABs determination that all of the challenged claims of the 021 patent were invalid. The Federal Circuit remanded the
case to the PTAB for further consideration of the patentability of certain claims that had been added by amendment during the reexamination. With respect to the 702 patent, the Federal Circuit affirmed the PTABs determination that all of
the challenged claims of the 702 patent were patentable. With respect to the 290 patent, the Federal Circuit vacated the PTABs decision upholding the patentability of the 290 patent claims, and remanded the case to the PTAB
for further consideration.
-20-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
On October 31, 2017, the Company filed a request with the USPTO for ex parte
reexamination of the 702 patent, based on different prior art references than had been at issue in the previous inter parte reexamination of the 702 patent. On December 6, 2017, the USPTO issued a decision granting the
Companys request and initiating ex parte reexamination of the 702 patent. On March 21, 2018, the USPTO issued a
non-final
office action finding all of the challenged claims of the 702
patent to be unpatentable. On May 14, 2018, SynQor filed a petition asking the USPTO to vacate its prior decision granting the Companys request for ex parte reexamination. No action has been taken on the petition to date. The Company
continues to monitor the progress of this proceeding.
The Company continues to believe none of its products, including its unregulated
bus converters, infringe any valid claim of the asserted SynQor patents, either alone or when used in an intermediate bus architecture implementation. The Company believes SynQors claims lack merit and, therefore, continues to vigorously
defend itself against SynQors patent infringement allegations. The Company does not believe a loss is probable for this matter. If a loss were to be incurred, however, the Company cannot estimate the amount of possible loss or range of
possible loss at this time.
In addition to the SynQor matter, the Company is involved in certain other litigation and claims incidental
to the conduct of its business. While the outcome of lawsuits and claims against the Company cannot be predicted with certainty, management does not expect any current litigation or claims will have a material adverse impact on the Companys
financial position or results of operations.
13.
Picor Merger
On May 25, 2018, the Companys Board of Directors unanimously approved the merger of the Company with Picor
Corporation (Picor), a subsidiary of Vicor, fully consolidated for financial reporting purposes, in which the Company was the majority stockholder. The merger was completed as of May 30, 2018, at which time the separate corporate
existence of Picor ceased. To effect the merger, holders of Picor Common Stock and Picor stock options received an equivalent value of Vicor Common Stock and Vicor stock options, respectively, which caused the Picor Corporation Amended and Restated
2001 Stock Option and Incentive Plan, and options outstanding thereunder, to be assumed and restated by Vicor. While Picors subsidiary status and corporate form ceased to exist upon the closing of the merger, the operations previously
conducted by Picor, which are now legally merged into Vicor, continue to be managed and remain categorized as a segment for financial reporting purposes. There was no net impact on the Companys consolidated financial statements nor any impact
on the Companys segment reporting for the three and six months ended June 30, 2018 as a result of the merger.
14.
Segment Information
The Company has organized its business segments according to its key product lines. The BBU segment designs, develops,
manufactures, and markets the Companys legacy lines of
DC-DC
converters and configurable products, and also includes the entities comprising Vicor Custom Power and the BBU operations of Vicor Japan
Company, Ltd. (VJCL). The VI Chip segment includes VI Chip Corporation, which designs, develops, manufactures, and markets many of the Companys advanced power component products. The VI Chip segment also includes the VI Chip
business conducted in Japan through VJCL. The Picor segment, which consists of the operations of the Companys former subsidiary Picor Corporation (see Note 13, above), designs, develops, manufactures, and markets integrated circuits for use in
a variety of power management and power system applications. The Picor segment develops integrated circuits for use in the Companys BBU and VI Chip modules, to be sold as complements to the Companys BBU and VI Chip products, or for sale
to third parties for separate (i.e., stand-alone) applications.
The Companys Chief Executive Officer (i.e., the
chief operating decision maker) evaluates performance and allocates resources based on segment revenues and segment operating income (loss). The operating income (loss) for each segment includes selling, general, and administrative and research and
development expenses directly attributable to the segment. Certain of the Companys indirect overhead costs, which include corporate selling, general, and administrative expenses, are allocated among the segments based upon an estimate of costs
associated with each segment. Assets allocated to each segment are based upon specific
-21-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
identification of such assets, which include accounts receivable, inventories, fixed assets and certain other assets. The Corporate segment consists of those operations and assets shared by all
segments. The costs of certain centralized executive and administrative functions are recorded in this segment, as are certain shared assets, most notably cash and cash equivalents, deferred tax assets, long-term investments, the Companys
facilities in Massachusetts, real estate, and other assets. The Companys accounting policies and method of presentation for segments are consistent with that used throughout the Condensed Consolidated Financial Statements.
The following table provides segment financial data as of and for the three months ended June 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBU
|
|
|
VI Chip
|
|
|
Picor
|
|
|
Corporate
|
|
|
Eliminations (1)
|
|
|
Total
|
|
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
48,349
|
|
|
$
|
20,719
|
|
|
$
|
9,175
|
|
|
$
|
|
|
|
$
|
(4,047
|
)
|
|
$
|
74,196
|
|
Income (loss) from operations
|
|
|
5,227
|
|
|
|
1,284
|
|
|
|
2,436
|
|
|
|
(631
|
)
|
|
|
|
|
|
|
8,316
|
|
Total assets
|
|
|
265,952
|
|
|
|
40,845
|
|
|
|
12,756
|
|
|
|
69,889
|
|
|
|
(198,599
|
)
|
|
|
190,843
|
|
Depreciation and amortization
|
|
|
882
|
|
|
|
836
|
|
|
|
196
|
|
|
|
356
|
|
|
|
|
|
|
|
2,270
|
|
|
|
|
|
|
|
|
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
39,077
|
|
|
$
|
15,168
|
|
|
$
|
6,335
|
|
|
$
|
|
|
|
$
|
(2,871
|
)
|
|
$
|
57,709
|
|
Income (loss) from operations
|
|
|
2,535
|
|
|
|
(3,889
|
)
|
|
|
1,098
|
|
|
|
(282
|
)
|
|
|
|
|
|
|
(538
|
)
|
Total assets
|
|
|
219,195
|
|
|
|
27,621
|
|
|
|
11,287
|
|
|
|
67,764
|
|
|
|
(162,252
|
)
|
|
|
163,615
|
|
Depreciation and amortization
|
|
|
1,000
|
|
|
|
659
|
|
|
|
190
|
|
|
|
340
|
|
|
|
|
|
|
|
2,189
|
|
|
The following table provides segment financial data as of and for the six months ended
June 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
BBU
|
|
|
VI Chip
|
|
|
Picor
|
|
|
Corporate
|
|
|
Eliminations (1)
|
|
|
Total
|
|
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
88,986
|
|
|
$
|
41,600
|
|
|
$
|
17,396
|
|
|
$
|
|
|
|
$
|
(8,517
|
)
|
|
$
|
139,465
|
|
Income (loss) from operations
|
|
|
6,266
|
|
|
|
2,365
|
|
|
|
4,458
|
|
|
|
(1,087
|
)
|
|
|
|
|
|
|
12,002
|
|
Total assets
|
|
|
265,952
|
|
|
|
40,845
|
|
|
|
12,756
|
|
|
|
69,889
|
|
|
|
(198,599
|
)
|
|
|
190,843
|
|
Depreciation and amortization
|
|
|
1,794
|
|
|
|
1,647
|
|
|
|
387
|
|
|
|
711
|
|
|
|
|
|
|
|
4,539
|
|
|
|
|
|
|
|
|
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
76,612
|
|
|
$
|
28,090
|
|
|
$
|
13,193
|
|
|
$
|
|
|
|
$
|
(5,724
|
)
|
|
$
|
112,171
|
|
Income (loss) from operations
|
|
|
3,955
|
|
|
|
(7,809
|
)
|
|
|
2,466
|
|
|
|
(528
|
)
|
|
|
|
|
|
|
(1,916
|
)
|
Total assets
|
|
|
219,195
|
|
|
|
27,621
|
|
|
|
11,287
|
|
|
|
67,764
|
|
|
|
(162,252
|
)
|
|
|
163,615
|
|
Depreciation and amortization
|
|
|
1,973
|
|
|
|
1,288
|
|
|
|
370
|
|
|
|
715
|
|
|
|
|
|
|
|
4,346
|
|
(1)
|
The elimination for net revenues is principally related to inter-segment sales by Picor to BBU and VI Chip and for inter-segment sales by VI Chip to BBU. The elimination for total assets is principally related to
inter-segment accounts receivable due to BBU for the funding of VI Chip and Picor operations.
|
-22-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
15.
Impact of Recently Issued Accounting Standards
In June 2018, the FASB issued new guidance
, Improvements to Nonemployee Share-Based Payment Accounting
, which more
closely aligns the accounting for share-based payments to
non-employees
with the accounting for share-based payments to employees. This new guidance is effective for public business entities for annual and
interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted, but no earlier than an entitys adoption date of Topic 606.The Company is currently evaluating the impact this new guidance will have on its
consolidated financial statements.
In May 2017, the FASB issued guidance about which changes to the terms or conditions of
a share-based payment award require an entity to apply modification accounting in Topic 718,
Compensation Stock Compensation
. The new guidance is effective for annual and interim periods beginning after December 15, 2017, with
early adoption permitted. The Company adopted the new standard on January 1, 2018. The adoption of this new guidance did not have a material impact on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued guidance to clarify how certain cash receipts and cash payments should be presented in the
statement of cash flows. These include debt prepayment, settlement of
zero-coupon
debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of
insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees and beneficial interests in securitization transactions. The new guidance is effective for interim and
annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company adopted the new standard on January 1, 2018. The adoption of this new guidance did not have a material impact on its consolidated
financial statements and related disclosures.
In June 2016, the FASB issued new guidance which will require measurement
and recognition of expected credit losses on certain types of financial instruments. It also modifies the impairment model for
available-for-sale
debt securities and
provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early
adoption permitted. It is required to be applied on a modified-retrospective approach with certain elements being adopted prospectively. The Company does not expect the adoption of the new guidance will have a material impact on its consolidated
financial statements and related disclosures.
In February 2016, the FASB issued new guidance for lease accounting, which
will require lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new guidance establishes a
right-of-use
model
(ROU) that will require a lessee to recognize a ROU asset and a lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and accounting for sales-type and direct financing leases. The majority of the Companys leases are
for certain of its office and manufacturing space. The Company has developed an implementation plan and continues to gather information, including compiling an inventory of all leasing arrangements, to assess the impact of the new standard on its
financial statements. The new standard is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company plans to adopt the new guidance effective January 1, 2019. The new standard
must be adopted using a modified retrospective transition which includes certain practical expedients. The Company has not yet determined the impact this new guidance will have on its consolidated financial statements and related disclosures.
Other new pronouncements issued but not effective until after June 30, 2018 are not expected to have a material impact on
the Companys consolidated financial statements.
-23-
VICOR CORPORATION