Vicor Corporation — Q3 2018 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2018. Vicor designs, manufactures and sells modular power components and systems, and licenses technology. Its reporting segments are BBU, VI Chip and Picor. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $78.0 | $56.9 | $217.5 | $169.1 |
| Gross margin | $39.0; 50.0% | $25.1; 44.2% | $105.1; 48.3% | $74.7; 44.2% |
| Operating income (loss) | $13.0 | $0.1 | $25.0 | $(1.8) |
| Net income (loss) attributable to Vicor | $13.0 | $(0.01) | $24.8 | $(1.4) |
| Diluted earnings (loss) per share | $0.32 | $(0.00) | $0.61 | $(0.04) |
- Q3 revenue increased 37.2% year over year; nine-month revenue increased 28.7%. Management attributed growth to increased bookings across business units, higher shipment volumes and demand for 48-volt-to-point-of-load products. VI Chip and Picor growth was tied largely to those solutions.
- Q3 gross margin improved to 50.0%, primarily from higher revenue, product mix and pricing. Operating expenses were $26.0 million in Q3 and $80.1 million for nine months; they rose in dollars but declined as a share of revenue.
- Operating cash flow was $22.8 million for the first nine months, versus $0.6 million in 2017. Investing cash use was $6.9 million, principally capital additions. Financing provided $8.2 million, including $8.4 million from stock issuance, partly offset by contingent-consideration payments.
- Cash and cash equivalents were $68.2 million at September 30, up from $44.2 million at year-end 2017. Working capital was $129.9 million and the current ratio was 5.2:1. The balance sheet lists no interest-bearing debt.
- Inventory was $43.4 million, up 19.0% from year-end, principally to support increased bookings. Capital expenditure commitments were $9.5 million. Management said operating cash and cash equivalents should fund planned operations and equipment purchases for the foreseeable future.
Material changes and unusual items
- Vicor adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method. Revenue on stocking-distributor shipments is now generally recognized at shipment, with estimated returns and price credits recorded as allowances. The adoption increased opening retained earnings by approximately $3.67 million. 2017 comparisons were not restated; ASC 606 increased reported 2018 revenue by $1.0 million in Q3 and $2.4 million for nine months versus amounts calculated without adoption, so reported growth is not fully like-for-like.
- Management authorized closure of Granite Power Technologies by year-end 2018 and recorded a $0.35 million second-quarter severance and employee-related charge. Certain products will continue through Vicor’s other custom-power entities.
- Picor merged into Vicor in May 2018. Its operations remain a separately reported segment; the filing says the merger had no net consolidated financial statement or segment-reporting impact.
- The nine-month effective tax rate was 2.8%. Vicor continued to maintain a $28.5 million valuation allowance against domestic net deferred tax assets; a future release could materially increase reported income, but timing and amount depend on sustained profitability and other factors.
Outlook, commentary and risks
- No numerical revenue or earnings guidance is provided. Management reported sequential booking increases over eleven quarters and Q3-end backlog of approximately $116.1 million, up from $103.1 million at the end of Q2. It described accelerating market uptake of Power-on-Package and other advanced products, while noting customer decisions and shipment timing are outside its control.
- Profitability depends on sustaining high, uniform production volumes to absorb fixed manufacturing overhead. Vicor is expanding advanced-product capacity at its Andover facility, including a planned approximately 90,000-square-foot addition targeted for completion by the end of 2019 and production in early 2020. The company is also evaluating another, larger facility; construction could disrupt operations or raise costs.
- Electronic-component lead times and availability remain uncertain, with some shortages potentially affecting production and margins into 2019. Section 301 tariffs on certain Chinese imports had no material Q3 impact; Vicor expects to absorb the costs for the foreseeable future but may consider customer surcharges if costs rise materially.
- Competition is increasing in the 48-volt market. Management also identified risks involving converting design wins into sales, customer concentration and schedule changes, product development, manufacturing efficiency, and retaining qualified personnel.
- Vicor holds a $3.0 million-par auction-rate security valued at $2.6 million, with failed auctions since 2008 and a $0.4 million unrealized loss. Management does not expect its illiquidity to affect current operations, but further market deterioration or credit impairment could cause additional losses.
- In the long-running SynQor patent case, the underlying district court action remained stayed pending patent proceedings. The USPTO issued a September 2018 final office action finding challenged claims of the ’702 patent unpatentable; further proceedings remained. Vicor said loss was not probable, but it could not estimate a possible loss if incurred.
- Other notable items: the company had $9.5 million of capital commitments; disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Investor verification points
- Assess whether bookings and backlog convert to timely shipments and sustainable revenue and margins, especially for advanced products.
- Compare results on a consistent basis after accounting for ASC 606’s effect on distributor revenue and the un-restated 2017 figures.
- Track component availability, tariff costs, inventory levels and the capacity expansion’s funding, timing and potential operational disruption.
- Review developments in the SynQor litigation and patent reexaminations, and the valuation and liquidity of the failed-auction security.
- Monitor sustained profitability and any change to the domestic deferred-tax-asset valuation allowance.