Vicor Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Vicor designs and manufactures modular power components and systems. Its product lines are Advanced Products, focused on newer power architectures and higher-volume markets, and Brick Products, serving established markets. Financial amounts below are in U.S. dollars; millions unless noted.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $63.4 million | $65.7 million | Down 3.5% |
| Gross margin | $27.3 million; 43.1% | $31.1 million; 47.3% | Down $3.8 million; 4.2 percentage points |
| Operating expenses | $29.7 million | $26.6 million | Up 11.7% |
| Operating income (loss) | $(2.4) million | $4.5 million | Turned to loss |
| Net income (loss) attributable to Vicor | $(1.7) million; $(0.04) per share | $4.3 million; $0.10 diluted per share | Turned to loss |
| Operating cash flow | $(1.0) million | $(2.1) million | Cash use narrowed |
- Advanced Products revenue fell 6.4% year over year to $17.9 million; Brick Products revenue fell 2.4% to $45.5 million. Bookings increased 5.2% year over year, while backlog was $110.8 million at quarter-end, versus $103.8 million a year earlier.
- Cash and cash equivalents were $82.8 million, down from $84.7 million at December 31, 2019. Current assets were $185.2 million and current liabilities $35.2 million; working capital was $150.0 million and the current ratio was 5.3:1.
- Operating cash use of $1.0 million and investing cash use of $2.9 million, including $3.0 million of capital spending, were partly offset by $2.0 million of financing cash flow, principally stock issuance. Cash declined $1.9 million during the quarter.
- Inventory rose 8.5% from year-end to $53.4 million. The balance sheet reports lease liabilities but no borrowing or other interest-bearing debt balance.
Material changes and management commentary
- Revenue was up 0.4% sequentially, but below forecast. Management attributed shipment shortfalls and weaker gross margin to supply constraints, manufacturing delays and inefficiencies, unfavorable product mix, lower overhead absorption, and higher tariff charges.
- Operating expenses rose $3.1 million year over year. Research and development increased $2.1 million, primarily from Advanced Products prototype development; selling, general and administrative expense increased $1.0 million, including higher legal fees related to a December 2019 ransomware incident.
- Management reported that COVID-19 had not materially affected Q1 financial performance overall, though related supply constraints contributed to lower shipments, higher costs, and reduced productivity. The company remained operational at or near full manufacturing capacity, but warned that future effects were uncertain.
- Bookings declined 8.8% sequentially: Brick Products orders fell 3.1% and Advanced Products orders fell 16.1%. Management said Advanced Products bookings excluding a large prior-quarter commercial-lighting program rose 23.2%, largely from AI customers.
Outlook, risks and contingencies
- No numerical revenue, earnings, or margin guidance is provided. Management expects cash and cash equivalents plus cash generated from operations to fund planned operations, equipment purchases, and planned construction of approximately 90,000 square feet of additional Andover manufacturing space for the foreseeable future. Capital expenditure commitments were $4.0 million.
- COVID-19 risks include further supply-chain or transportation disruptions, supplier distress, customer schedule changes, employee absenteeism, reduced productivity, and possible factory restrictions or closure. Management cited liquidity, inventories, operational flexibility, and additional sourcing as mitigants, but said the potential impact and timing cannot be estimated.
- A $3.0 million-par auction-rate security is carried at $2.6 million as a long-term investment and has been illiquid since 2008. Management does not intend to sell it and does not expect to be forced to sell, but further market deterioration or credit-rating changes could require additional losses or impairment.
- Domestic deferred tax assets remain subject to a $30.4 million valuation allowance. Management said a future release may be possible if earnings resume and uncertainty, including COVID-19 and Advanced Products production issues, eases; any release would increase reported tax benefit and net income.
- The long-running SynQor patent case remains stayed while patent reexamination appeals proceed. Vicor does not believe a loss is probable; it cannot estimate a possible loss if one were incurred. Management does not expect other current litigation or claims to materially affect results.
- Management said quarterly results can fluctuate with customer forecasts and shipment timing, product mix, production volumes, tariffs, trade conditions, and broader macroeconomic factors.
Key facts for investors to verify
- Whether supply constraints and production inefficiencies ease, and whether gross margin recovers from 43.1%.
- Subsequent revenue, bookings, backlog conversion, and customer concentration, particularly in data-center, hyperscaler, and AI-related demand.
- COVID-19 effects on manufacturing capacity, workforce availability, suppliers, shipping, and customer orders.
- Inventory levels and cash generation relative to planned capital spending and the manufacturing-space expansion.
- Valuation and liquidity of the auction-rate security, the deferred-tax valuation allowance, and developments in the SynQor proceedings.