Vicor Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Unless otherwise noted, dollar amounts are in millions.
Business context
Vicor designs, manufactures and sells modular power components and power systems. Its strategy emphasizes newer Advanced Products, including 48V power-conversion solutions, while continuing to serve established markets with Brick Products. The company reports BBU, VI Chip and Picor operating segments.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $65.725 | $65.269 |
| Gross profit / margin | $31.086 / 47.3% | $30.211 / 46.3% |
| Operating income / margin | $4.493 / 6.8% | $3.686 / 5.6% |
| Net income attributable to Vicor | $4.286 | $3.943 |
| Diluted earnings per share | $0.10 | $0.10 |
| Cash from operating activities | $(2.120) | $(0.812) |
| Capital expenditures | $3.322 | $1.858 |
- Revenue increased 0.7% year over year but fell 10.8% sequentially from Q4 2018. Net income attributable to Vicor increased about 9% year over year.
- Gross margin improved year over year, reflecting higher average selling prices and product mix, partly offset by tariffs and lower manufacturing-overhead absorption.
- Revenue by segment: BBU rose 14.7% to $46.625 million; VI Chip declined 17.7% to $16.566 million; Picor declined 43.6% to $2.534 million. Vicor attributed VI Chip and Picor declines primarily to orders rescheduled into Q2 and Q3.
- Cash and cash equivalents were $66.614 million at quarter-end, down $3.943 million from year-end. Working capital was $133.055 million; the current ratio was 5.3:1.
- Inventory rose to $51.589 million from $47.370 million at year-end, mainly due to rescheduled Advanced Product shipments. Backlog was $103.832 million, versus $102.963 million at Q4 2018 and $89.975 million a year earlier.
- The balance sheet reports operating lease liabilities of $4.425 million in total. No separate borrowing or debt balance is presented in the supplied filing text.
Outlook, risks and notable items
- Management gave no specific revenue or earnings guidance. It said Q1 bookings increased 10% sequentially, driven mainly by Brick Products; Advanced Product bookings were roughly level with Q4, with limited near-term demand visibility from a key supercomputing customer.
- Management expects continued investment in Advanced Product manufacturing capacity. It planned to begin construction in 2019 on an approximately 85,000-square-foot addition to the Andover facility, with occupancy targeted for 2020. Construction could disrupt operations or increase costs; roughly $4.393 million of capital-expenditure commitments were outstanding.
- Tariff costs exceeded $1 million in Q1. The company was assessing possible surcharges if trade-related costs persist. It also cited uncertain availability and extended lead times for some components, and potential production inefficiencies if high, consistent volumes are not achieved.
- Customer shipment postponements and limited demand visibility, particularly for Power-on-Package AI applications, could affect revenue, production planning and capacity expansion. Management also noted increasing competition in 48V and data-center markets and the possibility of customer concentration as it targets larger accounts.
- Operating cash flow was negative despite positive earnings, with working-capital changes a significant use of cash. Management said cash and expected operating cash flows should fund foreseeable operating needs and planned investments.
- Vicor adopted lease accounting on January 1, 2019, recognizing about $4.329 million of right-of-use assets and $4.455 million of lease liabilities at adoption; management said the adoption did not materially affect Q1 operations or cash flows.
- A failed-auction student-loan security had $3.0 million par value and a $2.546 million carrying value, including a $0.454 million unrealized loss. It remains illiquid and classified as long-term; management said it did not intend to sell it and did not expect the lack of liquidity to impair its operating plan. Further market or credit deterioration could cause additional losses.
- The SynQor patent litigation remains stayed pending patent reexamination proceedings and appeals. Vicor said a loss was not probable, but it could not estimate a possible loss amount or range. The filing states other litigation is not expected to have a material adverse effect.
- A $30.031 million valuation allowance remained against domestic net deferred tax assets. Management said continued positive earnings could lead to a future partial or full release, which would increase income in the period recognized.
Most important facts for investors to verify
- Whether Advanced Product orders and shipments recover, particularly from the key high-performance-computing customer, and whether backlog converts on schedule.
- Whether inventory growth, negative operating cash flow and manufacturing capacity spending remain aligned with demand.
- The effects of tariffs, component availability and any potential surcharge on costs, pricing and margins.
- Progress, cost and operational impact of the planned Andover expansion and the timing of additional capacity needs.
- Developments in SynQor proceedings and the valuation and liquidity of the failed-auction security.
- Any change in the domestic deferred-tax valuation allowance and the resulting effect on reported earnings.