Vicor Corporation (NASDAQ: VICR) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results; compared with the corresponding 2019 periods unless noted. Amounts are U.S. dollars.
Business context and performance
Vicor designs and manufactures modular power components and systems. Its product lines are Advanced Products, focused on newer power architectures, and Brick Products, a broader established product range. The company is shifting investment toward Advanced Products and larger, higher-volume customers.
Second-quarter revenue growth reflected stronger Advanced Products shipments, particularly to Asian contract manufacturers serving OEM customers, and an improvement in Asian demand. U.S. customer demand and shipments remained affected by the pandemic.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $70.8m | $63.4m | $134.2m | $129.1m |
| Gross margin | $30.3m; 42.8% | $29.1m; 46.0% | $57.6m; 43.0% | $60.2m; 46.6% |
| Operating income (loss) | $2.0m | $2.4m | $(0.3)m | $6.9m |
| Net income attributable to Vicor | $2.7m | $2.6m | $0.9m | $6.8m |
| Diluted earnings per share | $0.06 | $0.06 | $0.02 | $0.17 |
| Operating cash flow | Not separately presented for the quarter | $3.7m | $5.2m |
- Q2 revenue increased 11.7% year over year. Advanced Products revenue rose 58.5% to $24.3m; Brick Products declined 3.3% to $46.4m. For the first half, Advanced Products rose 22.5% while Brick Products fell 2.8%.
- Q2 operating expenses were $28.3m, up 5.8% year over year, including higher R&D and stock-based compensation. R&D spending increased 14.1% for the first half to $26.2m.
- First-half net income fell to $0.9m from $6.8m, while operating results shifted to a $0.3m loss. The first-half 2020 tax benefit of $0.9m included stock-option tax effects; the reported effective rate is unusually large because pretax income was only $41,000.
Liquidity, capital and balance sheet
- At June 30, cash and cash equivalents were $196.7m, versus $84.7m at year-end 2019. The increase primarily reflects $109.7m net proceeds from a June public stock offering.
- Current assets were $308.7m and current liabilities $41.9m; working capital was $266.8m and the current ratio was 7.4:1. Total liabilities were $46.1m. The balance sheet lists lease liabilities but no borrowings.
- First-half operating cash flow was $3.7m; capital expenditures were $8.7m. Cash provided by financing was $117.0m, including the offering and employee stock-plan proceeds.
- Inventory was $55.6m, up $6.4m from year-end. Capital expenditure commitments were $5.9m, principally for manufacturing equipment.
- The June offering issued approximately 1.77m common shares. Proceeds are intended for manufacturing expansion and general corporate purposes.
Material changes and management commentary
- Q2 bookings were $87.5m, up 24.9% sequentially and 45.4% year over year. Backlog was $127.5m at quarter-end, up 15.1% sequentially. Approximately $8.0m of Q2 orders were rescheduled into the third and fourth quarters.
- Gross margin percentage declined year over year and sequentially. Management cited unfavorable product mix, pandemic-related supplier constraints and production inefficiencies, and $2.0m of Q2 tariff charges.
- Management said the company continued operating at or near full manufacturing capacity, while warning that COVID-19 could further disrupt employees, suppliers, customers, shipments and costs. The company reported approximately $236,000 of incremental Q2 employee safety and well-being costs.
- Vicor began construction of an approximately 90,000-square-foot addition to its Andover facility. Occupancy was expected later in 2020, with full operational capacity scheduled for late in the first half of 2021. Timing, costs and operating efficiencies are subject to execution risk.
- No numerical revenue or earnings guidance is provided. Management believes available cash and expected operating cash flow can fund planned operations, equipment purchases and construction for the foreseeable future.
Risks, contingencies and unusual items
- COVID-19 effects include customer order reductions and rescheduling, supplier constraints, lower productivity, production inefficiencies and higher costs. Management said future impact could be material and could not be reliably estimated.
- A failed-auction-rate security is carried at $2.6m versus $3.0m par, with $0.4m of unrealized losses. It is valued using Level 3 assumptions, and may be subject to further impairment or valuation losses.
- Domestic deferred tax assets of approximately $30.4m remain fully valuation-allowed. Management said a future release could increase reported income if sustained earnings and reduced uncertainty support more reliable profit forecasts.
- The long-running SynQor patent litigation remained pending in reexamination and appeal proceedings. Vicor stated it does not consider a loss probable; any possible loss amount could not be estimated. The underlying patents had expired in January 2018.
- Other execution risks include the facility expansion and transition of certain manufacturing processes from a third-party partner to internal capacity. The filing also cites customer concentration risk as the company targets larger-volume customers.
Important facts for investors to verify
- Whether bookings and backlog convert to shipments and revenue, especially the approximately $8.0m of rescheduled orders.
- Whether gross margins recover as product mix, tariffs and pandemic-related production constraints change.
- Actual expansion spending, completion timing and manufacturing yields for the Andover facility and transferred processes.
- Cash use and dilution following the $109.7m equity offering, alongside planned capital commitments.
- Developments affecting the failed-auction security’s valuation, the deferred-tax valuation allowance and the SynQor proceedings.