Vicor Corporation (VICR) — Q3 2019 Form 10-Q
Business context and reporting period. Vicor designs and manufactures modular power components and systems. This unaudited filing covers the quarter and nine months ended September 30, 2019; financial statement amounts below are in millions of dollars unless noted. The company reorganized reporting in Q2 2019 and now reports one segment, with Advanced Products and Brick Products as product lines.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $70.8 | $78.0 | $199.9 | $217.5 |
| Gross profit / margin | $33.0 / 46.6% | $39.0 / 50.0% | $93.2 / 46.6% | $105.1 / 48.3% |
| Operating income | $6.1 | $13.0 | $12.9 | $25.0 |
| Net income attributable to Vicor | $5.9 | $13.0 | $12.8 | $24.8 |
| Diluted EPS | $0.14 | $0.32 | $0.31 | $0.61 |
- Q3 revenue declined 9.3% year over year, but increased 11.7% sequentially from Q2. Q3 Advanced Products revenue was $24.3 million (down 10.1% year over year); Brick Products revenue was $46.5 million (down 8.9%).
- Nine-month revenue decreased 8.1%. Advanced Products revenue fell 24.2% to $58.7 million, while Brick Products revenue increased 0.8% to $141.1 million.
- Cash and cash equivalents were $81.2 million at September 30, up from $70.6 million at year-end 2018. Working capital was $145.3 million; the current ratio was 5.7:1. The balance sheet reports no borrowings or debt balance.
- Nine-month operating cash flow was $16.5 million, versus $22.8 million in 2018. Capital expenditures were $9.1 million, versus $6.9 million; operating cash flow less capital expenditures was approximately $7.4 million. Cash increased $10.7 million over the period.
- Total liabilities were $35.2 million, including $4.4 million of lease liabilities. Inventory was $49.7 million, up 4.9% from year-end.
Material changes, outlook, and risks
- Year-over-year earnings and margins weakened alongside lower revenue. Management attributed gross-margin pressure to lower revenue, reduced manufacturing-overhead absorption, product mix, inventory reserves, and tariffs. Tariff costs were approximately $1.5 million in Q3 and $3.9 million for the nine months.
- Bookings were down 33.5% year over year in Q3 and 28.0% for the nine months, including a 53.4% nine-month decline for Advanced Products. Q3 bookings rose 0.5% sequentially, as Advanced Products bookings increased 40.2% and Brick Products bookings fell 9.7%. Backlog was $90.1 million at quarter-end, down from $100.7 million at Q2-end and $103.0 million at 2018 year-end.
- Management described sequential Q3 improvement as driven in part by resumed shipments to contract manufacturers for an existing datacenter customer. Advanced Products shipments increased 58.5% sequentially; Brick Products shipments declined 3.4%.
- Vicor is prioritizing Advanced Products for higher-growth markets, including 48V datacenter/server power and AI-related applications, while seeking to maintain a profitable Brick Products business. Management cited customer interest and design wins, but cautioned that customer timing and limited visibility make Advanced Products bookings and shipments uncertain. No specific revenue or earnings guidance was provided.
- The company expects to begin construction in spring 2020 on an approximately 87,100-square-foot addition to its Andover facility, with occupancy expected later in 2020; it is also evaluating further capacity beyond 2021. Quarter-end capital-expenditure commitments were $2.6 million. Management expects cash and operating cash flow to fund planned needs, but construction could disrupt operations or increase costs.
- Other risks include U.S.-China trade and tariff dynamics, uncertain macroeconomic conditions and European weakness, volatile customer forecasts, component shortages and extended lead times, and the need for sustained production volumes to absorb fixed manufacturing costs. Management noted that duty-drawback recovery is being evaluated but its amount and timing are unknown.
- A $3.0 million par-value failed-auction security was carried at $2.6 million and classified as long-term; it has had failed auctions since 2008. Management said it did not expect the investment’s illiquidity to affect operations, but further market or credit deterioration could cause additional losses.
- The SynQor patent case remains stayed pending patent proceedings. Vicor said it does not believe a loss is probable, but cannot estimate a possible loss if one were incurred. Management reported no material change in previously disclosed risk factors and stated disclosure controls were effective.
Investor verification points
- Whether bookings, backlog, and Advanced Products customer shipments stabilize or recover, given the sharp year-over-year declines and limited customer visibility.
- Whether gross margins improve as production volumes, product mix, inventory reserves, and tariff costs change; verify any tariff-recovery progress.
- Whether the planned Andover expansion proceeds on schedule and within funding and operational expectations.
- Whether the failed-auction security’s fair value or credit assessment changes, and whether any material developments occur in the SynQor litigation.
- Whether continued profitability supports any reduction in the $30.0 million domestic deferred-tax-asset valuation allowance; the filing reported a $30.0 million allowance and no release.