Vicor Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited. 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 applications.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $78.1M | $70.8M | $212.3M | $199.9M |
| Gross profit / margin | $33.3M / 42.7% | $33.0M / 46.6% | $91.0M / 42.9% | $93.2M / 46.6% |
| Operating income | $6.1M | $6.1M | $5.8M | $12.9M |
| Net income attributable to Vicor | $5.8M | $5.9M | $6.7M | $12.8M |
| Diluted EPS | $0.13 | $0.14 | $0.15 | $0.31 |
- Q3 revenue rose 10.4% year over year, led by Advanced Products, up 25.2%; Brick Products increased 2.6%. For the nine-month period, Advanced Products rose 23.7%, while Brick Products declined 1.0%.
- Despite higher revenue, gross margin fell 3.9 percentage points year over year in Q3 and 3.7 points year to date. Management cited product mix, production inefficiencies and cost variances, pandemic-related supply constraints, and tariffs.
- Q3 operating expenses were $27.2M, up 1.1% year over year. Nine-month R&D expense increased 10.9% to $38.2M, reflecting compensation and Advanced Products development spending.
- Net income declined 2.6% in Q3 and 47.5% for the nine months. Nine-month results included a $249,000 income-tax benefit, versus an $805,000 provision in 2019; the Q3 2020 tax provision was $651,000.
Cash flow, liquidity and capital
- At September 30, cash and cash equivalents were $203.6M, up from $84.7M at December 31, 2019. Current assets were $309.8M and current liabilities $38.0M; working capital was $271.8M and the current ratio 8.2:1.
- Nine-month operating cash flow was $15.2M, compared with $16.5M in 2019. Capital expenditure was $16.8M, versus $9.1M. Operating cash flow less property and equipment additions was approximately negative $1.6M.
- Cash increased by $118.9M, principally reflecting $109.7M of net proceeds from a June common-stock offering and $10.8M from employee stock plans. The offering proceeds are intended for manufacturing expansion and general corporate purposes.
- No interest-bearing borrowings are reported in the balance sheet. Reported liabilities include $4.4M of lease liabilities, along with accounts payable, accruals, deferred revenue and other items.
- Capital expenditure commitments were approximately $12.6M; the company also budgeted approximately $63.8M for a 90,000-square-foot facility addition and new production equipment. Management said available cash and operating cash flow should fund planned needs for the foreseeable future.
Outlook, risks and notable items
- No formal revenue or earnings guidance was provided. Q3 bookings increased 3.4% sequentially to $90.5M; backlog reached a record approximately $140.0M, up 9.8% sequentially. Management reported stronger Advanced Products demand, particularly from Asian contract manufacturers, and described improving U.S. orders; demand remained uneven by product and geography.
- COVID-19 continued to cause supply-chain constraints, production inefficiencies and higher costs. Vicor operated near full manufacturing capacity, but noted that employee absences, supplier or customer financial stress, transportation disruption, or further restrictions could affect production, orders and results.
- Import tariffs were $1.9M in Q3 2020. Management also cited U.S.-China trade dynamics and macroeconomic uncertainty as factors affecting bookings and demand.
- Construction and the planned shift of certain outsourced manufacturing processes to in-house production may cause disruption, delays, yield challenges or higher costs. The company depends on its third-party partner during equipment installation and qualification and may continue to rely on it for surge capacity.
- A $2.6M failed-auction security remains illiquid and is valued using Level 3 inputs; it has a $3.0M par value and a $409,000 unrealized loss. Management did not expect the illiquidity to impede its operating plan, but further market deterioration or credit-rating changes could cause additional losses.
- Vicor is defending a long-running SynQor patent case. The case remains stayed while patent proceedings continue; the company said a loss was not probable and it could not estimate a possible loss. It also reported other ordinary-course claims not expected to have a material adverse impact.
- A domestic deferred-tax valuation allowance of approximately $30.4M remained in place. Management said it could release some or all of it if sustained earnings and reduced uncertainty make future profits more reliably forecastable; any release would increase income in that period.
Most important facts for investors to verify
- Whether bookings and the record backlog convert to shipments and revenue, particularly for Advanced Products and large customers.
- Whether gross margins recover as supply constraints, production inefficiencies, product mix and tariff costs change.
- Actual spending, timing and returns from the facility expansion and manufacturing-process transition, compared with the stated commitments and budget.
- COVID-19, customer concentration, geographic demand and trade-related risks, as well as the company’s ability to maintain production capacity.
- Valuation and liquidity of the failed-auction security, and developments in the SynQor litigation and domestic tax valuation allowance.