Vicor(VICR) - 2023 Q1 - Quarterly Report

Part I — Financial Information This section covers Vicor Corporation's unaudited financial statements and management's analysis Item 1 - Financial Statements (Unaudited) This section presents Vicor Corporation's unaudited consolidated financial statements and accompanying notes Condensed Consolidated Balance Sheets This section provides a snapshot of the company's assets, liabilities, and equity at specific reporting dates Condensed Consolidated Balance Sheet Highlights (in thousands): | Metric | March 31, 2023 | December 31, 2022 | Change | | :----------------------------- | :------------- | :---------------- | :----- | | Total Assets | $544,255 | $536,901 | $7,354 | | Total Liabilities | $63,596 | $72,565 | $(8,969) | | Total Equity | $480,659 | $464,336 | $16,323 | | Cash and cash equivalents | $192,897 | $190,611 | $2,286 | | Inventories | $107,382 | $101,410 | $5,972 | | Accounts payable | $16,790 | $22,207 | $(5,417) | | Short-term deferred revenue | $9,765 | $13,197 | $(3,432) | Condensed Consolidated Statements of Operations This section details the company's revenues, expenses, and net income over specific periods Condensed Consolidated Statements of Operations Highlights (Three Months Ended March 31, in thousands, except per share amounts): | Metric | 2023 | 2022 | Change | YoY Change | | :----------------------------------- | :--- | :--- | :----- | :--------- | | Net revenues | $97,816 | $88,282 | $9,534 | 10.8% | | Cost of revenues | $51,282 | $50,681 | $601 | 1.2% | | Gross margin | $46,534 | $37,601 | $8,933 | 23.8% | | Total operating expenses | $36,092 | $32,821 | $3,271 | 10.0% | | Income from operations | $10,442 | $4,780 | $5,662 | 118.4% | | Total other income, net | $1,950 | $162 | $1,788 | 1103.7% | | Income before income taxes | $12,392 | $4,942 | $7,450 | 150.7% | | Provision (benefit) for income taxes | $1,141 | $(48) | $1,189 | -2477.1% | | Consolidated net income | $11,251 | $4,990 | $6,261 | 125.5% | | Net income attributable to Vicor Corporation | $11,244 | $4,999 | $6,245 | 124.9% | | Basic EPS | $0.25 | $0.11 | $0.14 | 127.3% | | Diluted EPS | $0.25 | $0.11 | $0.14 | 127.3% | Condensed Consolidated Statements of Comprehensive Income This section presents the company's net income and other comprehensive income components Condensed Consolidated Statements of Comprehensive Income Highlights (Three Months Ended March 31, in thousands): | Metric | 2023 | 2022 | Change | YoY Change | | :----------------------------------- | :--- | :--- | :----- | :--------- | | Consolidated net income | $11,251 | $4,990 | $6,261 | 125.5% | | Foreign currency translation losses, net of tax | $(15) | $(194) | $179 | -92.3% | | Unrealized income (loss) on available-for-sale securities, net of tax | $9 | $(316) | $325 | -102.8% | | Other comprehensive loss | $(6) | $(510) | $504 | -98.8% | | Consolidated comprehensive income | $11,245 | $4,480 | $6,765 | 151.0% | | Comprehensive income attributable to Vicor Corporation | $11,239 | $4,503 | $6,736 | 149.6% | Condensed Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Highlights (Three Months Ended March 31, in thousands): | Metric | 2023 | 2022 | Change | YoY Change | | :----------------------------------- | :--- | :--- | :----- | :--------- | | Net cash provided by operating activities | $10,113 | $4,585 | $5,528 | 120.6% | | Net cash (used for) provided by investing activities | $(10,089) | $2,317 | $(12,406) | -535.4% | | Net cash provided by financing activities | $2,261 | $1,810 | $451 | 24.9% | | Net increase in cash and cash equivalents | $2,286 | $8,632 | $(6,346) | -73.5% | | Cash and cash equivalents at end of period | $192,897 | $191,050 | $1,847 | 1.0% | Condensed Consolidated Statements of Equity This section details changes in the company's equity, including net income and stock-based compensation Condensed Consolidated Statements of Equity Highlights (in thousands): | Metric | December 31, 2022 | March 31, 2023 | Change | | :----------------------------------- | :---------------- | :------------- | :----- | | Total Vicor Corporation Stockholders' Equity | $464,088 | $480,405 | $16,317 | | Noncontrolling interest | $248 | $254 | $6 | | Total Equity | $464,336 | $480,659 | $16,323 | | Net income | N/A | $11,244 | N/A | | Stock-based compensation expense | N/A | $2,817 | N/A | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements Note 1. Basis of Presentation This note describes the accounting principles and presentation methods used for the interim financial statements - The unaudited interim financial statements are prepared in accordance with GAAP for interim financial information and SEC rules, including normal recurring adjustments[22] - Operating results for the three months ended March 31, 2023, are not necessarily indicative of the results expected for any other interim period or the full year[23] - The balance sheet at December 31, 2022, is derived from audited financial statements but does not include all information required for complete financial statements[23] Note 2. Inventories This note details the composition and valuation of the company's inventory balances Inventories (in thousands): | Category | March 31, 2023 | December 31, 2022 | Change | | :--------------- | :------------- | :---------------- | :----- | | Raw materials | $85,833 | $82,181 | $3,652 | | Work-in-process | $12,101 | $10,456 | $1,645 | | Finished goods | $9,448 | $8,773 | $675 | | Total Inventories | $107,382 | $101,410 | $5,972 | Note 3. Long-Term Investments This note describes the company's long-term investments, including a 'Failed Auction Security' - The Company holds one 'Failed Auction Security' with a par value of $3,000,000, which has experienced failed auctions since February 2008[25] - The security is Aaa/AA+ rated, collateralized by student loans, and guaranteed by the U.S. Department of Education[25] - Management believes the security can be liquidated without significant loss, but the recovery period exceeds 12 months, leading to its classification as long-term[25] Long-Term Investment Details (in thousands): | Metric | March 31, 2023 | December 31, 2022 | | :---------------------- | :------------- | :---------------- | | Estimated Fair Value | $2,631 | $2,622 | | Unrealized Losses (Cost $3,000) | $369 | $378 | Note 4. Fair Value Measurements This note explains the methodology and hierarchy used for fair value measurements of financial instruments - Fair value is measured using a three-level hierarchy based on the observability of inputs[31] - The 'Failed Auction Security' is valued using Level 3 inputs (significant unobservable inputs)[32][34] - The estimated fair value of the Failed Auction Security increased by $9,000 in Q1 2023 due to a credit gain[34] Note 5. Revenues This note disaggregates the company's net revenues by product line, geography, and customer category Net Revenues by Product Line (Three Months Ended March 31, in thousands): | Product Line | 2023 | 2022 | Change | YoY Change | | :------------------ | :--- | :--- | :----- | :--------- | | Brick Products | $46,525 | $35,357 | $11,168 | 31.6% | | Advanced Products | $51,291 | $52,925 | $(1,634) | -3.1% | | Total Net Revenues | $97,816 | $88,282 | $9,534 | 10.8% | Net Revenues by Geography (Three Months Ended March 31, in thousands): | Geography | 2023 | 2022 | | :---------------- | :--- | :--- | | United States | $34,966 | $24,687 | | Europe | $11,573 | $9,810 | | Asia Pacific | $50,291 | $53,016 | | All other | $986 | $769 | Net Revenues by Category (Three Months Ended March 31, in thousands): | Revenue Category | 2023 | 2022 | | :------------------------------------------------------- | :--- | :--- | | Direct customers, contract manufacturers and non-stocking distributors | $72,499 | $71,872 | | Stocking distributors, net of sales allowances | $20,789 | $14,508 | | Non-recurring engineering | $2,430 | $1,578 | | Royalties | $2,020 | $306 | | Other | $78 | $18 | - The company recognized approximately $1,609,000 in revenue in Q1 2023 from deferred revenue at the beginning of the period, compared to $155,000 in Q1 2022[40] Note 6. Stock-Based Compensation This note details the company's stock-based compensation expense by category and award type Stock-Based Compensation Expense (Three Months Ended March 31, in thousands): | Expense Category | 2023 | 2022 | Change | YoY Change | | :----------------------------------- | :--- | :--- | :----- | :--------- | | Cost of revenues | $486 | $251 | $235 | 93.6% | | Selling, general and administrative | $1,520 | $1,207 | $313 | 25.9% | | Research and development | $811 | $536 | $275 | 51.3% | | Total stock-based compensation | $2,817 | $1,994 | $823 | 41.3% | Compensation Expense by Award Type (Three Months Ended March 31, in thousands): | Award Type | 2023 | 2022 | Change | YoY Change | | :--------------------------------------- | :--- | :--- | :----- | :--------- | | Stock options | $2,496 | $1,759 | $737 | 41.9% | | ESPP | $321 | $235 | $86 | 36.6% | Note 7. Rental Income This note provides information on the company's rental income Rental Income (Three Months Ended March 31, in thousands): | Metric | 2023 | 2022 | | :------------- | :--- | :--- | | Rental income | $198 | $198 | Note 8. Income Taxes This note outlines the company's income tax provision, effective tax rate, and valuation allowances Income Tax Provision (Benefit) and Effective Rate (Three Months Ended March 31, in thousands): | Metric | 2023 | 2022 | | :----------------------------------- | :--- | :--- | | Provision (benefit) for income taxes | $1,141 | $(48) | | Effective income tax rate | 9.2% | (1.0)% | - Effective tax rates were lower than statutory rates primarily due to a full valuation allowance against domestic deferred tax assets[47][89] - As of March 31, 2023, the Company has approximately $47,413,000 against all net domestic deferred tax assets[48] - The valuation allowance is maintained due to uncertainties in forecasting operating results, supply/factory capacity constraints, Advanced Products production issues, and market unpredictability[48] Note 9. Net Income per Share This note presents the basic and diluted net income per share calculations Net Income Per Share (Three Months Ended March 31): | Metric | 2023 | 2022 | Change | YoY Change | | :----------------------------------- | :--- | :--- | :----- | :--------- | | Basic net income per share | $0.25 | $0.11 | $0.14 | 127.3% | | Diluted net income per share | $0.25 | $0.11 | $0.14 | 127.3% | - Options to purchase 1,035,618 shares in 2023 and 291,880 shares in 2022 were excluded from diluted EPS calculations as they were antidilutive[52] Note 10. Commitments and Contingencies This note discloses the company's capital expenditure commitments and ongoing legal proceedings - As of March 31, 2023, the Company had approximately $19,325,000 of cancelable and non-cancelable capital expenditure commitments[53] - The Company is a defendant in a patent infringement lawsuit filed by SynQor, Inc[54] - A jury found the Company willfully infringed the '702 patent and awarded SynQor $6,500,000 in damages[57] - The Company recorded a litigation-related accrual of $6,500,000 in the third quarter of 2022 based on the jury award[59] - Both parties have filed post-trial motions, and the Company anticipates appealing any adverse rulings and the dismissal of its counterclaims[58] Note 11. Impact of Recently Issued Accounting Standards This note discusses the potential impact of new accounting pronouncements on the financial statements - New accounting pronouncements issued but not yet effective are not expected to have a material impact on the Company's consolidated financial statements[61] Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Vicor Corporation's Q1 2023 financial condition and results of operations Overview This section provides an overview of Vicor's business, products, and market position in modular power components - Vicor designs, develops, manufactures, and markets modular power components and systems, leveraging advanced technologies and proprietary solutions[64] - The company's core competencies are associated with 48V DC distribution, offering cost and performance advantages[64] - Products are categorized as 'Advanced Products' (newer, high-growth, low-mix, high-volume, targeting data centers, hyperscalers, AI) and 'Brick Products' (established, mature, high-mix, low-volume, serving aerospace, defense, industrial)[65][66][67] - Vicor has established a leadership position in the emerging market segment for powering high-performance processors used for AI applications[67] - Quarterly operating results are difficult to forecast due to customer demand fluctuations, supply chain uncertainties, and external factors[68] Ongoing / Potential Impacts of the COVID-19 Pandemic on the Company This section discusses the minimal impact of COVID-19 on operations and the company's resilience strategies - The number of Company employees diagnosed with COVID-19 and corresponding absenteeism are negligible, with no current impact on factory productivity[71] - The Company is closely monitoring the operating performance and financial health of its customers, business partners, and suppliers due to potential pandemic-related hardships[72] - Management believes the Company's high liquidity, flexible operational model, existing raw material inventories, and increased use of second sources for critical manufacturing inputs will enable effective business conduct during the pandemic[73] Summary of First Quarter 2023 Financial Performance Compared to Fourth Quarter 2022 Financial Performance This section compares Vicor's Q1 2023 financial performance against Q4 2022, highlighting key revenue and expense changes Q1 2023 vs. Q4 2022 Financial Performance Highlights (in thousands, except per share amounts): | Metric | Q1 2023 | Q4 2022 | Change | QoQ Change | | :----------------------------------- | :------ | :------ | :----- | :--------- | | Net revenues | $97,816 | $105,493 | $(7,677) | -7.3% | | Brick Products net revenues | N/A | N/A | N/A | 10.9% | | Advanced Products net revenues | N/A | N/A | N/A | -19.3% | | Gross margin | $46,534 | $49,139 | $(2,605) | -5.3% | | Gross margin as % of net revenues | 47.6% | 46.6% | 1.0 pp | N/A | | Operating expenses | $36,092 | $41,020 | $(4,928) | -12.0% | | Net income | $11,244 | $8,062 | $3,182 | 39.5% | | Diluted EPS | $0.25 | $0.18 | $0.07 | 38.9% | | Backlog | $271,283 | $304,392 | $(33,109) | -10.9% | | Inventories | $107,382 | $101,410 | $5,972 | 5.9% | - Export sales represented approximately 64.3% of total net revenues in Q1 2023, up from 59.8% in Q4 2022[75] - The increase in gross margin percentage was primarily due to reduced freight-in and tariff spending of $3,927,000 (net of approximately $3,000,000 in duty drawback recovery)[77] - Operating expenses decreased primarily due to a $4,719,000 decrease in legal fees and a $209,000 decrease in research and development engineering supplies[81] Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 This section compares Vicor's Q1 2023 financial performance against Q1 2022, detailing revenue, expense, and income changes Net Revenues by Product Line (Three Months Ended March 31, in thousands): | Product Line | 2023 | 2022 | Change | YoY Change | | :------------------ | :--- | :--- | :----- | :--------- | | Advanced Products | $51,291 | $52,925 | $(1,634) | -3.1% | | Brick Products | $46,525 | $35,357 | $11,168 | 31.6% | | Total Net Revenues | $97,816 | $88,282 | $9,534 | 10.8% | - Gross margin as a percentage of net revenues increased to 47.6% in Q1 2023 from 42.6% in Q1 2022, driven by higher sales volume, improved production efficiencies, and reduced freight-in and tariff spending of $3,791,000 (net of $3,000,000 duty drawback recovery)[79] - Selling, general, and administrative expenses increased by $1,655,000 (8.9%) due to higher compensation, advertising, commissions, and legal fees (SynQor litigation)[83][84] - Research and development expenses increased by $1,616,000 (11.3%) due to higher compensation and project/pre-production materials for Advanced Products[86][87] - Total other income, net, increased by $1,788,000, primarily due to a $1,590,000 increase in net interest income and favorable foreign currency gains[87] - Income before income taxes increased to $12,392,000 in Q1 2023 from $4,942,000 in Q1 2022[88] - Net income attributable to Vicor Corporation increased to $11,244,000 ($0.25 diluted EPS) in Q1 2023 from $4,999,000 ($0.11 diluted EPS) in Q1 2022[90] Liquidity and Capital Resources This section analyzes the company's cash position, working capital, and capital expenditure commitments Liquidity Metrics (in thousands): | Metric | March 31, 2023 | December 31, 2022 | | :----------------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $192,897 | $190,611 | | Current ratio | 6.8:1 | 5.6:1 | | Working capital | $312,698 | $298,055 | - Primary cash sources in Q1 2023 were $10,113,000 from operations and $2,261,000 from employee stock plans[92] - Primary cash use in Q1 2023 was $10,089,000 for property and equipment purchases[92] - The Company has approximately $19,325,000 in capital expenditure commitments, primarily for manufacturing equipment, which it intends to fund with existing cash and operations[96] - Approximately $8,541,000 remains available for common stock repurchases under the November 2000 Plan; no repurchases were made in Q1 2023[95] Critical Accounting Policies and Estimates This section confirms no material changes in critical accounting judgments and assumptions during the period - There were no material changes in critical accounting judgments and assumptions during the period ended March 31, 2023[98] Item 3 - Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to market risks, including interest rate and foreign currency fluctuations - The Company's exposure to market risk on interest rate fluctuations for cash and short-term investments is not significant due to their short-term nature[101] - The long-term 'Failed Auction Security' (par value $3,000,000) could lead to impairment charges in future periods if its fair value decline is deemed other than temporary[101] - Foreign currency exchange rate risk primarily relates to the operations of Vicor Japan Company, Ltd., for which the functional currency is the Japanese Yen[102] Item 4 - Controls and Procedures This section confirms the effectiveness of disclosure controls and reports no material changes in internal control - Management, with the participation of the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2023[103] - A control system provides only reasonable, not absolute, assurance and is subject to inherent limitations such as faulty judgments, errors, collusion, or management override[104] - There was no change in internal control over financial reporting that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting during the fiscal quarter ended March 31, 2023[107] Part II — Other Information This section includes legal proceedings, risk factors, exhibits, and corporate signatures Item 1 - Legal Proceedings This section refers to Note 10 for details on the company's legal proceedings, such as the SynQor patent infringement lawsuit - Refer to Note 10, 'Commitments and Contingencies,' in the Notes to Condensed Consolidated Financial Statements for information on legal proceedings[109] Item 1A - Risk Factors This section states no material changes to the risk factors disclosed in the company's 2022 Annual Report on Form 10-K - There have been no material changes in the risk factors described in Part I, Item 1A – 'Risk Factors' of the Company's Annual Report on Form 10-K for the year ended December 31, 2022[109] Item 6 — Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate documents, certifications, and XBRL files - The report includes certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002[110] - Various Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents) are included as exhibits[110] Signature(s) This section contains the signatures of the company's principal executive and financial officers, certifying the report filing - The report was signed by Patrizio Vinciarelli, Chairman of the Board, President and Chief Executive Officer, and James F. Schmidt, Vice President, Chief Financial Officer, on May 3, 2023[115]