Vicor Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted. The filing is unaudited.
Business context and reporting period
Vicor designs, manufactures and sells modular power components and power systems, and licenses technology for royalties. Its segments are Brick Business Unit (BBU), VI Chip and Picor. The company reported strong sales growth across all segments, with management highlighting demand for advanced 48-volt-to-point-of-load products and a recovery in legacy-product bookings.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $74.2 | $57.7 | $139.5 | $112.2 |
| Gross margin | $35.9 | $25.9 | $66.1 | $49.6 |
| Gross margin rate | 48.4% | 44.9% | 47.4% | 44.2% |
| Operating income (loss) | $8.3 | $(0.5) | $12.0 | $(1.9) |
| Net income (loss) attributable to Vicor | $7.9 | $(0.5) | $11.8 | $(1.4) |
| Diluted earnings (loss) per share | $0.19 | $(0.01) | $0.29 | $(0.04) |
| Operating cash flow | Not separately stated | Not separately stated | $8.5 | $(0.7) |
- Q2 revenue rose 28.6% year over year and 13.7% from Q1 2018. Six-month revenue increased 24.3% year over year. Management attributed growth mainly to higher bookings, increased shipments and improved product mix.
- Q2 operating expenses were $27.6 million, including a $0.35 million severance charge. Six-month operating expenses were $54.1 million.
- Cash and cash equivalents were $53.9 million at June 30, up from $44.2 million at year-end 2017. Working capital was $114.0 million; the current ratio was 4.7:1.
- Six-month investing cash outflow was $3.6 million, primarily reflecting $3.6 million of capital spending. Financing cash inflow was $4.8 million, including $5.0 million from stock issuance and option exercises.
- Total liabilities were $31.9 million, including $30.8 million current liabilities. The balance sheet reports no interest-bearing debt. Capital expenditure commitments were approximately $2.0 million.
Material changes versus the prior comparable period
- Vicor moved from operating losses to profits in both the quarter and first half. Higher revenue and better product mix helped lift gross margin rates by 3.5 percentage points in Q2 and 3.2 points for the six-month period.
- Bookings increased 47.3% in Q2 and 44.4% in the first half year over year. Backlog scheduled for shipment within 12 months rose to approximately $103.1 million at quarter-end from $90.0 million at the end of Q1.
- Revenue increased in each segment. For the first half, VI Chip revenue grew 48.5%, BBU 16.2% and Picor 21.4% year over year.
- Operating cash flow improved to $8.5 million from cash use of $0.7 million in the first half of 2017, while capital spending declined to $3.6 million from $5.6 million.
- Vicor adopted ASC 606 revenue recognition on January 1, 2018. Adoption increased opening retained earnings by approximately $3.67 million and changed the timing of distributor, contract and royalty revenue. Compared with prior accounting, reported Q2 revenue was higher by $0.60 million and six-month revenue by $1.40 million; net income was higher by $0.21 million and $0.43 million, respectively. Prior-period figures were not restated.
Outlook, management commentary, risks and unusual items
- Outlook: No specific revenue or earnings guidance was provided. Management cited expanding backlog and demand for advanced products, including Power-on-Package, PRM-VTM and ChiP-family modules. It expects legacy markets to grow at most at the pace of the overall economy and said operating expenses may remain high as a share of revenue for the foreseeable future.
- Execution and market risks: Profitability depends on sustained production volumes to absorb fixed manufacturing overhead. Management noted extended electronics-component lead times, uncertain availability of some commodity components, and risks of supply shortages and higher input costs.
- Competition and customer timing: The 48-volt market is attracting additional vendors, including larger competitors. Customer order and shipment timing is outside Vicor’s control; the company’s strategy also involves serving a smaller number of larger customers in computing and communications.
- Unusual items and operations: Vicor recorded a $0.35 million severance charge after authorizing closure of Granite Power Technologies by year-end 2018; certain products will continue through two other Vicor Custom Power entities. Picor was legally merged into Vicor in May, with no reported consolidated financial or segment-reporting impact.
- Tax: The six-month effective tax rate was 4.0%, reflecting use of tax-loss carryforwards and credits. Vicor continued to maintain a $33.0 million valuation allowance against domestic net deferred tax assets; release could increase reported income if realization becomes more likely.
- Investment and legal contingencies: A $3.0 million-par auction-rate security remained illiquid after failed auctions and was carried at $2.58 million using Level 3 valuation inputs. Vicor said further market deterioration could cause additional losses. The company continues to defend SynQor patent litigation, believes a loss is not probable, and cannot estimate a possible loss range.
- Management stated that cash and expected operating cash flows should fund planned operations and capital equipment purchases for the foreseeable future. Disclosure controls were concluded effective at the reasonable assurance level; the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether bookings and the $103.1 million backlog convert into shipments and cash, and whether growth persists across BBU, VI Chip and Picor.
- Whether improved gross margins and factory utilization are sustainable amid supply constraints, product mix changes and customer schedule variability.
- The effects of ASC 606 on distributor returns, sales allowances and the comparability of future reported revenue and earnings.
- Progress and costs from the Granite Power Technologies closure, and the remaining $2.0 million capital expenditure commitments.
- Any change in the value or liquidity of the auction-rate security, and developments in the SynQor litigation and New York State tax audit.