Vicor(VICR) - 2023 Q2 - Quarterly Report

Part I Part I — Financial Information This section covers unaudited condensed consolidated financial statements and management's discussion and analysis Item 1 - Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, income, cash flows, equity, and detailed notes Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity at specific reporting dates Condensed Consolidated Balance Sheets at June 30, 2023 and December 31, 2022 | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (%) | | :-------------------------------- | :--------------------------- | :------------------------------- | :--------- | | Total Assets | $560,661 | $536,901 | 4.4% | | Total Liabilities | $59,642 | $72,565 | (17.8%) | | Total Equity | $501,019 | $464,336 | 7.9% | | Cash and cash equivalents | $203,829 | $190,611 | 6.9% | | Inventories | $106,606 | $101,410 | 5.1% | | Short-term deferred revenue and customer prepayments | $6,620 | $13,197 | (49.9%) | Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net income over specific reporting periods Three Months Ended June 30 | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (%) | | :-------------------------------- | :------------------ | :------------------ | :--------- | | Net revenues | $106,747 | $102,186 | 4.5% | | Gross margin | $55,173 | $46,849 | 17.8% | | Income from operations | $17,863 | $11,298 | 58.1% | | Consolidated net income | $17,102 | $10,580 | 61.6% | | Net income attributable to Vicor Corporation | $17,101 | $10,593 | 61.4% | | Diluted EPS | $0.38 | $0.24 | 58.3% | Six Months Ended June 30 | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (%) | | :-------------------------------- | :------------------ | :------------------ | :--------- | | Net revenues | $204,563 | $190,468 | 7.4% | | Gross margin | $101,707 | $84,450 | 20.4% | | Income from operations | $28,305 | $16,078 | 76.0% | | Consolidated net income | $28,353 | $15,570 | 82.1% | | Net income attributable to Vicor Corporation | $28,345 | $15,592 | 81.8% | | Diluted EPS | $0.63 | $0.35 | 80.0% | Condensed Consolidated Statements of Comprehensive Income This statement presents consolidated net income and other comprehensive income components for the periods Three Months Ended June 30 | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (%) | | :-------------------------------- | :------------------ | :------------------ | :--------- | | Consolidated net income | $17,102 | $10,580 | 61.6% | | Other comprehensive loss | $(215) | $(451) | (52.3%) | | Consolidated comprehensive income | $16,887 | $10,129 | 66.7% | Six Months Ended June 30 | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (%) | | :-------------------------------- | :------------------ | :------------------ | :--------- | | Consolidated net income | $28,353 | $15,570 | 82.1% | | Other comprehensive loss | $(221) | $(961) | (77.0%) | | Consolidated comprehensive income | $28,132 | $14,609 | 92.6% | Condensed Consolidated Statements of Cash Flows This statement summarizes cash inflows and outflows from operating, investing, and financing activities Six Months Ended June 30 | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (%) | | :-------------------------------- | :------------------ | :------------------ | :--------- | | Net cash provided by operating activities | $29,153 | $15,408 | 89.2% | | Net cash used for investing activities | $(18,627) | $(11,878) | 57.0% | | Additions to property, plant and equipment | $(18,627) | $(36,878) | (49.5%) | | Net increase in cash and cash equivalents | $13,218 | $5,259 | 150.4% | Condensed Consolidated Statements of Equity This statement outlines changes in shareholders' equity, including net income and stock-based compensation Equity Changes (Six Months Ended June 30, 2023) | Metric | Amount (in thousands) | | :-------------------------------- | :-------------------- | | Balance on December 31, 2022 | $464,336 | | Net income attributable to Vicor Corporation | $28,345 | | Stock-based compensation expense | $5,829 | | Other comprehensive loss | $(207) | | Balance on June 30, 2023 | $501,019 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the condensed consolidated financial statements 1. Basis of Presentation This note describes the accounting principles and rules used for preparing the interim financial statements - The accompanying unaudited Condensed Consolidated Financial Statements are prepared in accordance with GAAP for interim financial information and SEC rules, including normal recurring adjustments[24] - Operating results for the three and six months ended June 30, 2023, are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 2023[25] 2. Inventories This note details the composition of inventories, including raw materials, work-in-process, and finished goods Inventories (in thousands) | Category | June 30, 2023 | December 31, 2022 | Change (%) | | :--------------- | :------------ | :---------------- | :--------- | | Raw materials | $85,404 | $82,181 | 3.9% | | Work-in-process | $11,257 | $10,456 | 7.7% | | Finished goods | $9,945 | $8,773 | 13.4% | | Total | $106,606 | $101,410 | 5.1% | 3. Long-Term Investments This note describes the company's long-term investments, including a 'Failed Auction Security' and its fair value - The Company holds one 'Failed Auction Security' with a par value of $3,000,000, which has experienced failed auctions since February 2008[27] Failed Auction Security Fair Value (in thousands) | Date | Estimated Fair Value | | :--------------- | :------------------- | | June 30, 2023 | $2,591 | | December 31, 2022 | $2,622 | - The security is Aaa/AA+ rated, collateralized by student loans, and guaranteed by the U.S. Department of Education. Management believes it can be liquidated without significant loss, but the recovery period exceeds 12 months[27] 4. Fair Value Measurements This note explains the methodology and hierarchy used for fair value measurements of financial assets - The Company uses a three-level hierarchy to estimate fair value measurements for financial assets[34] Fair Value Measurements (June 30, 2023, in thousands) | Asset | Level 1 | Level 2 | Level 3 | Total Fair Value | | :---------------------- | :------ | :------ | :------ | :--------------- | | Money market funds | $— | $146,425 | $— | $146,425 | | Failed Auction Security | $— | $— | $2,591 | $2,591 | - The estimated fair value of the Level 3 Failed Auction Security is determined using a probability-weighted discounted cash flow model[36] 5. Revenues This note provides a breakdown of net revenues by product line and geographical region Net Revenues by Product Line (Three Months Ended June 30, in thousands) | Product Line | 2023 | 2022 | Change (%) | | :--------------- | :--- | :--- | :--------- | | Advanced Products | $67,513 | $67,663 | (0.2%) | | Brick Products | $39,234 | $34,523 | 13.6% | | Total | $106,747 | $102,186 | 4.5% | Net Revenues by Product Line (Six Months Ended June 30, in thousands) | Product Line | 2023 | 2022 | Change (%) | | :--------------- | :--- | :--- | :--------- | | Advanced Products | $118,804 | $120,588 | (1.5%) | | Brick Products | $85,759 | $69,880 | 22.7% | | Total | $204,563 | $190,468 | 7.4% | Net Revenues by Geography (Six Months Ended June 30, 2023, in thousands) | Geography | Brick Products | Advanced Products | Total | | :---------- | :------------- | :---------------- | :---- | | United States | $39,485 | $29,537 | $69,022 | | Europe | $14,501 | $10,061 | $24,562 | | Asia Pacific | $29,974 | $79,063 | $109,037 | | All other | $1,799 | $143 | $1,942 | | Total | $85,759 | $118,804 | $204,563 | - Revenue recognized from deferred revenue at the beginning of the period was approximately $3,845,000 for the six months ended June 30, 2023, compared to $931,000 for the same period in 2022[42] 6. Stock-Based Compensation This note details the stock-based compensation expense recognized for stock options and ESPP Stock-Based Compensation Expense (Three Months Ended June 30, in thousands) | Type | 2023 | 2022 | Change (%) | | :----------- | :--- | :--- | :--------- | | Stock options | $2,701 | $2,351 | 14.9% | | ESPP | $311 | $271 | 14.8% | | Total | $3,012 | $2,622 | 14.9% | Stock-Based Compensation Expense (Six Months Ended June 30, in thousands) | Type | 2023 | 2022 | Change (%) | | :----------- | :--- | :--- | :--------- | | Stock options | $5,197 | $4,110 | 26.4% | | ESPP | $632 | $506 | 24.9% | | Total | $5,829 | $4,616 | 26.3% | 7. Rental Income This note reports rental income generated from an operating lease agreement for a California facility - Rental income from an operating lease agreement for a California facility was $198,000 for each of the three-month periods and $396,000 for each of the six-month periods ended June 30, 2023 and 2022[45] 8. Income Taxes This note outlines the provision for income taxes, effective tax rates, and deferred tax asset valuation allowance Provision for Income Taxes and Effective Tax Rates (Three Months Ended June 30) | Metric | 2023 | 2022 | Change (pp) | | :------------------------ | :--- | :--- | :---------- | | Provision for income taxes | $2,537 | $802 | 216.3% | | Effective income tax rate | 12.9% | 7.0% | 5.9 pp | Provision for Income Taxes and Effective Tax Rates (Six Months Ended June 30) | Metric | 2023 | 2022 | Change (pp) | | :------------------------ | :--- | :--- | :---------- | | Provision for income taxes | $3,678 | $754 | 387.8% | | Effective income tax rate | 11.5% | 4.6% | 6.9 pp | - The Company maintains a full valuation allowance of approximately $47,413,000 against all net domestic deferred tax assets as of June 30, 2023, due to uncertainties in forecasting operating results, supply/factory capacity constraints, and Advanced Products production issues[48][51] - The IRS examination of the Company's 2019 Federal income tax return is closing with no material adjustments[52] 9. Net Income per Share This note presents basic and diluted net income per share calculations for the reporting periods Net Income per Share (Three Months Ended June 30) | Metric | 2023 | 2022 | Change (%) | | :------------ | :--- | :--- | :--------- | | Basic EPS | $0.39 | $0.24 | 62.5% | | Diluted EPS | $0.38 | $0.24 | 58.3% | Net Income per Share (Six Months Ended June 30) | Metric | 2023 | 2022 | Change (%) | | :------------ | :--- | :--- | :--------- | | Basic EPS | $0.64 | $0.35 | 82.9% | | Diluted EPS | $0.63 | $0.35 | 80.0% | - Options to purchase 1,574,000 shares (Q2 2023) and 1,307,000 shares (H1 2023) were not included in diluted EPS calculations as their effect would have been antidilutive[54] 10. Commitments and Contingencies This note discloses capital expenditure commitments and details of ongoing legal proceedings - As of June 30, 2023, the Company had approximately $16,768,000 in cancelable and non-cancelable capital expenditure commitments, primarily for manufacturing equipment[55] - In a patent infringement lawsuit by SynQor, Inc., a jury found the Company willfully infringed the '702 patent and awarded SynQor $6,500,000 in damages[60] - A litigation-related accrual of $6,500,000 was recorded in the third quarter of 2022 based on the jury award. The Company anticipates appealing adverse rulings and the dismissal of its counterclaims[61][62] 11. Impact of Recently Issued Accounting Standards This note assesses 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[64] Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition, operational results, business strategy, and liquidity Cautionary Note Regarding Forward-Looking Statements This note advises that the report contains forward-looking statements subject to risks and uncertainties - The report contains forward-looking statements subject to various risks and uncertainties, and actual results may differ materially[66] - The Company does not undertake any obligation to update forward-looking statements, except as required by law[66] Overview This section describes Vicor's business, product categories, and factors influencing operating results - Vicor designs, develops, manufactures, and markets modular power components, with a core competency in 48V DC distribution[67] - Products are categorized into 'Advanced Products' (e.g., Factorized Power Architecture, targeting high-growth markets like AI and data centers with a low-mix, high-volume model) and 'Brick Products' (integrated power converters for mature markets with a high-mix, low-volume model)[68][69][70] - Operating results are subject to significant fluctuations due to customer demand, supply chain uncertainties, and macroeconomic factors[71] - The Company has taken steps to mitigate supply chain disruptions, including moving outsourced manufacturing steps in-house and expediting deliveries[71] - The impact of COVID-19 on Company employees and factory productivity is currently negligible, supported by high liquidity and a flexible operational model[75][76] Summary of Second Quarter 2023 Financial Performance Compared to First Quarter 2023 Financial Performance This section compares key financial metrics for Q2 2023 against Q1 2023, highlighting revenue and margin changes Q2 2023 vs Q1 2023 Financial Performance (in thousands) | Metric | Q2 2023 | Q1 2023 | Change (%) | | :-------------------------------- | :------ | :------ | :--------- | | Net revenues | $106,747 | $97,816 | 9.1% | | Advanced Products net revenues | N/A | N/A | 31.6% (increase) | | Brick Products net revenues | N/A | N/A | (15.7%) (decrease) | | Gross margin | $55,173 | $46,534 | 18.6% | | Gross margin as % of net revenues | 51.7% | 47.6% | 4.1 pp | | Backlog | $217,275 | $271,283 | (19.9%) | | Net income | $17,101 | $11,244 | 52.1% | | Diluted EPS | $0.38 | $0.25 | 52.0% | - The increase in gross margin was primarily due to higher sales volume, improved sales mix, and reductions in supply chain costs, including $851,000 in outsourced manufacturing costs and $529,000 in freight-in and tariff spending (net of duty drawback recovery)[77] Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022 This section compares the company's financial performance for the second quarter of 2023 versus 2022 Q2 2023 vs Q2 2022 Financial Performance (in thousands) | Metric | 2023 | 2022 | Change (%) | | :-------------------------------- | :--- | :--- | :--------- | | Net revenues | $106,747 | $102,186 | 4.5% | | Advanced Products net revenues | $67,513 | $67,663 | (0.2%) | | Brick Products net revenues | $39,234 | $34,523 | 13.6% | | Gross margin | $55,173 | $46,849 | 17.8% | | Gross margin as % of net revenues | 51.7% | 45.8% | 5.9 pp | | Selling, general and administrative expenses | $20,375 | $20,035 | 1.7% | | Research and development expenses | $16,935 | $15,516 | 9.1% | | Income before income taxes | $19,639 | $11,382 | 72.5% | | Net income attributable to Vicor Corporation | $17,101 | $10,593 | 61.4% | - Gross margin increase was primarily due to higher sales volume and reductions in supply chain costs, including $3,904,000 in outsourced manufacturing costs and $4,142,000 in freight-in and tariff spending (net of duty drawback recovery)[79] - Research and development expenses increased primarily due to higher compensation and increased prototype development costs for Advanced Products[83][86] Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022 This section compares the company's financial performance for the first six months of 2023 versus 2022 H1 2023 vs H1 2022 Financial Performance (in thousands) | Metric | 2023 | 2022 | Change (%) | | :-------------------------------- | :--- | :--- | :--------- | | Net revenues | $204,563 | $190,468 | 7.4% | | Advanced Products net revenues | $118,804 | $120,588 | (1.5%) | | Brick Products net revenues | $85,759 | $69,880 | 22.7% | | Gross margin | $101,707 | $84,450 | 20.4% | | Gross margin as % of net revenues | 49.7% | 44.3% | 5.4 pp | | Selling, general and administrative expenses | $40,598 | $38,603 | 5.2% | | Research and development expenses | $32,804 | $29,769 | 10.2% | | Income before income taxes | $32,031 | $16,324 | 96.2% | | Net income attributable to Vicor Corporation | $28,345 | $15,592 | 81.8% | - Advanced Products revenue decreased due to manufacturing constraints and schedule delays, while Brick Products revenue increased due to favorable market conditions and available capacity[90] - Gross margin increase was driven by higher sales volume and reductions in supply chain costs, including $5,444,000 in outsourced manufacturing costs and $7,934,000 in freight-in and tariff spending (net of duty drawback recovery)[91] - Research and development expenses increased primarily due to higher compensation and increased prototype development costs for Advanced Products[94][96] Liquidity and Capital Resources This section discusses the company's cash position, working capital, and capital expenditure commitments - Cash and cash equivalents increased to $203,829,000 as of June 30, 2023[102] Liquidity Metrics | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Ratio of total current assets to total current liabilities | 7.6:1 | 5.6:1 | | Working capital | $328,810,000 | $298,055,000 | - Net cash provided by operating activities for the six months ended June 30, 2023, was $29,153,000[105] - The Company had approximately $16,768,000 in capital expenditure commitments as of June 30, 2023, which it intends to fund with existing cash and cash equivalents and cash generated from operations[107] - No shares were repurchased under the November 2000 Plan during the six months ended June 30, 2023, with approximately $8,541,000 remaining available for repurchases[106] Critical Accounting Policies and Estimates This section confirms no material changes to critical accounting judgments and assumptions during the period - There have been no material changes in critical accounting judgments and assumptions during the period ended June 30, 2023[109] Item 3 — Quantitative and Qualitative Disclosures About Market Risk This section details market risks from interest rate fluctuations, foreign currency exchange rates, and investment impairment - The Company is exposed to market risks from changes in interest rates and fluctuations in foreign currency exchange rates[110] - Exposure to market risk on interest rate fluctuations for cash, cash equivalents, and short-term investments is not significant[110] - The long-term 'Failed Auction Security' (Level 3 investment) could lead to impairment charges if a decline in fair value is deemed 'other than temporary'[110] - Foreign currency exchange rate risk primarily relates to the operations of Vicor Japan Company, Ltd. (VJCL), for which the functional currency is the Japanese Yen[111] Item 4 — Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures with no material changes in internal control - The Company's disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2023[114] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2023[116] - Management acknowledges that control systems provide only reasonable, not absolute, assurance of achieving their objectives[115] Part II Part II — Other Information This section includes information on legal proceedings, risk factors, other disclosures, and exhibits Item 1 — Legal Proceedings This section refers to Note 10 for details on legal proceedings, including the SynQor patent lawsuit - Refer to Note 10. Commitments and Contingencies in Part I, Item 1 for details on legal proceedings[119] Item 1A — Risk Factors This section confirms no material changes to the risk factors previously disclosed in the annual report - No material changes in the risk factors described in the Company's Annual Report on Form 10-K for the year ended December 31, 2022[119] Item 5 — Other Information This section reports no new or terminated Rule 10b5-1 trading arrangements by directors or officers - No director or Section 16 officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2023[120] Item 6 — Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate documents and certifications - The exhibits include corporate documents (Restated Certificate of Incorporation, Bylaws), CEO and CFO certifications (Sections 302 and 906), and Inline XBRL data files[121] Signature(s) This section confirms the report was signed by the CEO and CFO of Vicor Corporation on August 4, 2023 - The report was signed by Patrizio Vinciarelli (CEO) and James F. Schmidt (CFO) on August 4, 2023[126]