Vicor Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context
Vicor designs, manufactures, and sells modular power components and systems. Its Advanced Products serve higher-volume markets including data centers and high-performance computing; Brick Products serve a broader range of established applications. The company is shifting investment and operating focus toward Advanced Products and larger customers.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $103.1 | $84.9 | $293.6 | $269.1 |
| Gross profit / margin | $47.0 / 45.5% | $42.8 / 50.4% | $131.4 / 44.8% | $137.4 / 51.1% |
| Operating income | $3.0 | $12.0 | $19.1 | $46.7 |
| Net income attributable to Vicor | $1.8 | $13.3 | $17.4 | $47.7 |
| Diluted earnings per share | $0.04 | $0.29 | $0.39 | $1.06 |
- Q3 revenue rose 21.4% year over year. Advanced Products revenue increased 36.2% to $59.2 million; Brick Products rose 6.0% to $43.9 million.
- Nine-month revenue increased 9.1%, driven by 51.3% growth in Advanced Products. Brick Products declined 24.3%.
- Profitability weakened despite revenue growth. Management cited product mix, production inefficiencies on new products, and supply-chain cost increases for lower gross-margin percentages. Operating expenses also rose, including a $6.5 million litigation accrual.
- Nine-month operating cash flow was $22.0 million, versus $40.2 million in 2021. Capital expenditures were $51.3 million, versus $30.9 million. Cash and cash equivalents declined $0.3 million to $182.1 million.
Liquidity, capital spending, and balance sheet
At September 30, 2022, cash and cash equivalents were $182.1 million and short-term investments were $19.9 million. Working capital was $293.8 million; the current ratio was 5.6, down from 7.3 at December 31, 2021. Total liabilities were $74.2 million, including $9.0 million of lease liabilities. The balance sheet shows no borrowings. Inventory increased to $94.3 million from $67.3 million at year-end, primarily in raw materials.
Capital expenditure commitments were approximately $27.8 million, principally for manufacturing equipment. The company expected another $7.6 million of spending through year-end on its 90,000-square-foot Andover facility addition and production equipment. Management believes existing liquidity and operating cash generation will fund planned needs for the foreseeable future.
Changes, outlook, and risks
- Compared with Q3 2021, Q3 2022 gross margin fell 4.9 percentage points, operating income declined $9.0 million, and net income declined $11.5 million. Litigation expense and higher SG&A were important factors.
- Compared with Q2 2022, revenue increased 0.9%, but backlog fell to $371.6 million from $410.0 million. Management attributed the decline to lower bookings and increased shipments. Advanced Products revenue was affected by supply constraints, schedule delays, and an approximately $6.0 million return-material authorization.
- Management provided no specific revenue or earnings guidance. It cited long lead times for some components, China-related shutdown disruptions, uncertain outsourced supplier output, factory-capacity constraints, and process issues in Advanced Products production. These factors may affect revenue, margins, and cash flow.
- A jury verdict on October 26, 2022 found willful infringement of one SynQor patent and awarded $6.5 million; it found no infringement of another asserted patent. Vicor recorded a $6.5 million Q3 accrual, revised its previously announced Q3 net income from $8.1 million to $1.8 million, and intends to seek post-trial relief and appeal. The filing describes possible outcomes ranging from no damages to treble damages plus attorney fees.
- The company maintains a full valuation allowance of approximately $43.3 million against domestic deferred tax assets. Management says a release may be possible if operating results and forecastability improve. The IRS had notified Vicor of its intent to examine the 2019 federal return.
- The filing identifies an immaterial correction to bond-premium amortization in other income/expense: $0.990 million for Q3 and $0.834 million for the nine-month period. It also highlights uncertainty around export controls, tariffs, trade restrictions, foreign exchange, and supply-chain conditions.
Important facts for investors to verify
- Subsequent developments in the SynQor litigation, including post-trial motions, appeal, and any change to the $6.5 million accrual.
- Whether backlog conversion, bookings, and Advanced Products production improve, and the effects of the reported return authorization and supply constraints.
- Whether elevated inventory and planned factory expansion spending translate into increased output and cash generation.
- Future gross-margin trends and the extent to which product mix, production inefficiencies, tariffs, and outside processing costs persist.
- Any change to the domestic deferred-tax valuation allowance or the outcome of the IRS examination.