VICOR CORPORATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Note Regarding Forward-Looking Statements The Company's consolidated operating results are affected by a wide variety of factors that could materially and adversely affect revenues and profitability, including the risk factors described in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . As a result of these and other factors, the Company may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect its business, consolidated financial condition, and operating results, and the share price of its Common Stock. This document and other documents filed by the Company with theSecurities and Exchange Commission ("SEC") include forward-looking statements regarding future events and the Company's future results that are subject to the safe harbor afforded under the Private Securities Litigation Reform Act of 1995 and other safe harbors afforded under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Forward-looking statements are based on our current beliefs, expectations, estimates, forecasts, and projections for the future performance of the Company and are subject to risks and uncertainties. Forward-looking statements are identified by the use of words denoting uncertain, future events, such as "anticipate," "assume," "believe," "continue," "could," "estimate," "expect," "future," "goal," "if," "intend," "may," "plan," "potential," "project," "prospective," "seek," "should," "target," "will," or "would," as well as similar words and phrases, including the negatives of these terms, or other variations thereof. Forward-looking statements also include, but are not limited to, statements regarding: our expectations that the Company has adequate resources to respond to financial and operational risks associated with the novel coronavirus "COVID-19," and our ability to effectively conduct business during the pandemic; our ongoing development of power conversion architectures, switching topologies, materials, packaging, and products; the ongoing transition of our business strategically, organizationally, and operationally from serving a large number of relatively low-volume customers across diversified markets and geographies to serving a small number of relatively large volume customers; our intent to enter new market segments; the levels of customer orders overall and, in particular, from large customers and the delivery lead times associated therewith; anticipated new and existing customer wins; the financial and operational impact of customer changes to shipping schedules; the derivation of a portion of our sales in each quarter from orders booked in the same quarter; our intent to expand the percentage of revenue associated with licensing our intellectual property to third parties; our plans to invest in expanded manufacturing capacity, including the expansion of our Andover facility and the introduction of new manufacturing processes, and the timing, location, and funding thereof; our belief that cash generated from operations together with our available cash and cash equivalents and short-term investments will be sufficient to fund planned operational needs, capital equipment purchases, and planned construction, for the foreseeable future; our outlook regarding tariffs and the impact thereof on our business; our belief that we have limited exposure to currency risks; our intentions regarding the declaration and payment of cash dividends; our intentions regarding protecting our rights under our patents; and our expectation that no current litigation or claims will have a material adverse impact on our financial position or results of operations. These forward-looking statements are based upon our current expectations and estimates associated with prospective events and circumstances that may or may not be within our control and as to which there can be no assurance. Actual results could differ materially from those implied by forward-looking statements as a result of various factors, including but not limited to those described above, as well as those described in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 under Part I, Item 1 - "Business," under Part I, Item 1A - "Risk Factors," under Part I, Item 3 - "Legal Proceedings," and under Part II, Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" and those described in this Quarterly Report on Form 10-Q, particularly under Part I, Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations." The discussion of our business contained herein, including the identification and assessment of factors that may influence actual results, may not be exhaustive. Therefore, the information presented should be read together with other documents we file with theSEC from time to time, including our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K, which may supplement, modify, supersede, or update the factors discussed in this Quarterly Report on Form 10-Q. Any forward-looking statement made in this Quarterly Report on Form 10-Q is based on information currently available to us and speaks only as of the date on which it is made. We do not undertake any obligation to update any forward-looking statements as a result of future events or developments, except as required by law. -21-
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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of OperationJune 30, 2021 Overview We design, develop, manufacture, and market modular power components and power systems for converting electrical power for use in electrically-powered devices. Our competitive position is supported by innovations in product design and achievements in product performance, largely enabled by our focus on the research and development of advanced technologies and processes, often implemented in proprietary semiconductor circuitry, materials, and packaging. Many of our products incorporate patented or proprietary implementations of high-frequency switching topologies enabling power system solutions that are more efficient and much smaller than conventional alternatives. Our strategy emphasizes demonstrable product differentiation and a value proposition based on competitively superior solution performance, advantageous design flexibility, and a compelling total cost of ownership. While we offer a wide range of alternating current ("AC") and direct current ("DC") power conversion products, we consider our core competencies to be associated with 48V DC distribution, which offers numerous inherent cost and performance advantages over lower distribution voltages. However, we also offer products addressing other DC voltage standards (e.g., 380V for power distribution in data centers, 110V for rail applications, 28V for military and avionics applications, and 24V for industrial automation). Based on design, performance, and form factor considerations, as well as the range of evolving applications for which our products are appropriate, we categorize our product portfolios as either "Advanced Products" or "Brick Products." The Advanced Products category consists of our more recently introduced products, which are largely used to implement our proprietary Factorized Power Architecture ™ ("FPA"), an innovative power distribution architecture enabling flexible, rapid power system design using individual components optimized to perform a specific conversion function. The Brick Products category largely consists of our broad and well-established families of integrated power converters, incorporating multiple conversion stages, used in conventional power systems architectures. Given the growth profiles of the markets we serve with our Advanced Products line and our Brick Products line, our strategy involves a transition in organizational focus, emphasizing investment in our Advanced Products line and targeting high growth market segments with a low-mix, high-volume operational model, while maintaining a profitable business in the mature market segments we serve with our Brick Products line with a high-mix, low-volume operational model. The applications in which our Advanced Products and Brick Products are used are typically in the higher-performance, higher-power segments of the market segments we serve. With our Advanced Products, we generally serve large Original Equipment Manufacturers ("OEMs"), Original Design Manufacturers ("ODMs"), and their contract manufacturers, with sales currently concentrated in the data center and hyperscaler segments of enterprise computing, in which our products are used for voltage distribution on server motherboards, in server racks, and across datacenter infrastructure. We have established a leadership position in the emerging market segment for powering high-performance processors used for acceleration of applications associated with artificial intelligence ("AI"). Our customers in the AI market segment include the leading innovators in processor and accelerator design, as well as early adopters in cloud computing and high performance computing. We also target applications in aerospace and aviation, defense electronics, industrial automation, instrumentation, test equipment, solid state lighting, telecommunications and networking infrastructure, and vehicles (notably in the autonomous driving, electric vehicle, and hybrid vehicle niches of the vehicle segment). With our Brick Products, we generally serve a fragmented base of large and small customers, concentrated in aerospace and defense electronics, industrial automation, industrial equipment, instrumentation and test equipment, and transportation (notably in rail and heavy equipment applications). With our strategic emphasis on larger, high-volume customers, we expect to experience over time a greater concentration of sales among relatively fewer customers. Our quarterly consolidated operating results can be difficult to forecast and have been subject to significant fluctuations. We plan our production and inventory levels based on management's estimates of customer demand, customer forecasts, and other information sources. Customer forecasts, particularly those of OEM, ODM, and contract manufacturing customers to which we supply Advanced Products in high volumes, are subject to scheduling changes on short notice, contributing to operating inefficiencies and excess costs. In addition, external factors such as supply chain uncertainties, which are often associated with the cyclicality of the electronics industry, regional macroeconomic and trade-related circumstances, and force majeure events (most recently evidenced by the COVID-19 pandemic), have caused our operating results to vary meaningfully. Our quarterly gross margin as a percentage of net revenues may vary, depending on production volumes, average selling prices, average unit costs, the mix of products sold during that quarter, and the level of importation of raw materials subject to tariffs. Our quarterly operating margin as a percentage of net revenues also may vary with changes in revenue and product level profitability, but our operating costs are largely associated with compensation and related employee costs, which are not subject to sudden or significant changes. -22-
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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of OperationJune 30, 2021 Ongoing / Potential Impacts of the COVID-19 Pandemic on the Company As of the date of this report, the number of employees diagnosed with COVID-19 and the corresponding absenteeism due to COVID-19 are negligible. While the productivity of our factory is not currently impacted by COVID-19, productivity may be reduced if quarantine rates increase or if the number of employees diagnosed with COVID-19 requires further implementation of restrictive health and safety measures, including factory closure. We continue to operate with three shifts in our factory, and, with very few exceptions, our engineering, sales, and administrative personnel are working from the Company's offices. We are closely monitoring the operating performance and financial health of our customers, business partners, and suppliers, but an extended period of operational constraints brought about by the pandemic could cause financial hardship within our customer base and supply chain. Such hardship may continue to disrupt customer demand and limit our customers' ability to meet their obligations to us. Similarly, such hardship within our supply chain could continue to restrict our access to raw materials or services. Additionally, restrictions or disruptions of transportation, such as reduced availability of cargo transport by ship or air, could result in higher costs and inbound and outbound delays. During 2020, we took steps to address certain supply chain risks, and we believe our actions mitigated those risks, particularly for the second half of 2020; however, there are no assurances that those steps will continue to mitigate risks in 2021 and beyond. Although there is uncertainty regarding the extent to which the pandemic will continue to impact our operational and financial results in the future, the Company's high level of liquidity, flexible operational model, existing raw material inventories, and increased use of second sources for critical manufacturing inputs together support management's belief the Company will be able to effectively conduct business until the pandemic passes. We are monitoring the rapidly changing circumstances, and may take additional actions to address COVID-19 risks as they evolve and/or increase again. Because much of the potential negative impact of the pandemic is associated with risks outside of our control, we cannot estimate the extent of such impact on our financial or operational performance, or when such impact might occur. Summary of Second Quarter 2021 Financial Performance Compared to First Quarter 2021 Financial Performance The following summarizes our financial performance for the second quarter of 2021, compared to the first quarter of 2021: • Net revenues increased 7.4% to$95,376,000 for the second quarter of 2021, from$88,796,000 for the first quarter of 2021, as total bookings for the quarter increased 51.0% as compared to the first quarter of 2021, primarily due to a 99.3% increase in Advanced Products bookings in the second quarter of 2021 compared to the first quarter of 2021. Advanced Products revenue rose 19.7% sequentially compared to the first quarter of 2021. This growth, though, continued to be constrained by limited component availability due to global semiconductor supply allocation issues experienced during the quarter, along with certain internal processing and testing constraints. • Export sales represented approximately 64.3% of total net revenues in the second quarter of 2021 as compared to 69.4% in the first quarter of 2021. • Gross margin increased to$49,871,000 for the second quarter of 2021 from$44,700,000 for the first quarter of 2021, and gross margin, as a percentage of net revenues, increased to 52.3% for the second quarter of 2021 from 50.3% for the first quarter of 2021. Both the increase in gross margin dollars and the increased gross margin percentage were primarily due to the increase in net revenues, an improved product mix, a reduction in cost variances and process yield improvements. • Backlog, which represents the total value of orders for products for which shipment is scheduled within the next 12 months, was approximately$210,565,000 at the end of the second quarter of 2021, as compared to$157,134,000 at the end of the first quarter of 2021. The increase in backlog was primarily due to the increased bookings, discussed above. -23-
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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of OperationJune 30, 2021 • Operating expenses for the second quarter of 2021 decreased$118,000 , or 0.4%, to$29,862,000 from$29,980,000 for the first quarter of 2021, due to a decrease in selling, general, and administrative expenses of$365,000 , partially offset by an increase in research and development expenses of$247,000 . • We reported net income for the second quarter of 2021 of$19,394,000 , or$0.43 per diluted share, compared to net income of$15,092,000 or$0.34 per diluted share, for the first quarter of 2021. • For the second quarter of 2021, depreciation and amortization totaled$2,812,000 , and capital additions totaled$14,994,000 , as compared to depreciation and amortization of$2,806,000 and$9,264,000 of capital additions, for the first quarter of 2021. • Inventories increased by approximately$2,873,000 , or 5.3%, to$57,129,000 atJune 30, 2021 , compared to$54,256,000 atMarch 31, 2021 .
Three Months Ended
Increase
2021 2020 $ %
Brick Products $ 54,352 $ 46,428 $ 7,924 17.1 %
Advanced Products 41,024 24,333 16,691 68.6 %
Total $ 95,376 $ 70,761 $ 24,615 34.8 %
The increase in net revenues for Advanced Products was primarily the result of
growth in the data center and high performance computing business, while the
Brick Products increase was primarily due to continued favorable market
conditions. The increases in net revenues for both product lines are also
reflected in the bookings patterns of the second quarter of 2021. Total bookings
for the second quarter of 2021 increased 70.8% from the second quarter of 2020,
primarily due to an increase of Advanced Products and Brick Products bookings of
181.6% and 4.6%, respectively. The increase in bookings largely reflected our
customers' response to the 20% to 30% increase in lead-times for our Brick
Products and Advanced Products, respectively, plus growth in our data center
business, for Advanced Products.
Gross margin for the second quarter of 2021 increased
-24-
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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of OperationJune 30, 2021
Selling, general, and administrative expenses were
Increase (decrease)
Legal fees $ 510 213.6 % (1 )
Advertising 307 44.2 % (2 )
Compensation 191 1.8 % (3 )
Travel expense 89 53.0 % (4 )
Depreciation and amortization 63 8.1 %
Commissions (92 ) (10.6 )% (5 )
Other, net 66 3.0 %
$ 1,134 7.3 %
(1) Increase primarily attributable to an increase in activity related to the
(2) Increase primarily attributable to increases in sales support expenses,
direct mailings, and advertising in trade publications.
(3) Increase primarily attributable to annual compensation adjustments in May
2021, partially offset by a decrease in stock-based compensation expense
compared to the second quarter of 2020.
(4) Increase primarily attributable to a resumption of travel by the Company's
sales and marketing personnel.
(5) Decrease primarily attributable to the decline in net revenues subject to
commissions.
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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of OperationJune 30, 2021
Research and development expenses were
Increase (decrease)
Compensation $ 375 4.1 % (1)
Project and
pre-production
materials 321 16.6 % (2)
Supplies 79 24.7 %
Facilities allocations 55 9.4 %
Freight 40 153.3 %
Overhead absorption (523 ) (200.2 )% (3)
Other, net 96 8.7 %
$ 443 3.5 %
(1) Increase primarily attributable to annual compensation adjustments in May
2021, partially offset by a decrease in stock-based compensation expense
compared to the second quarter of 2020.
(2) Increase primarily attributable to increased prototype development costs for
Advanced Products.
(3) Decrease primarily attributable to an increase in research and development
("R&D") personnel incurring time on production activities, compared to R&D
activities.
The significant components of ''Other income (expense), net'' for the three months endedJune 30 , and the changes between the periods were as follows (in thousands): Increase 2021 2020 (decrease) Interest income$ 276 $ 17 $ 259 Rental income 198 198 - Foreign currency (losses) gains, net (12 ) 3 (15 ) (Losses) gains on disposals of equipment (106 ) 6 (112 ) Other, net 17 9 8$ 373 $ 233 $ 140
Our exposure to market risk fluctuations in foreign currency exchange rates
relates to the operations of
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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of OperationJune 30, 2021
The provision (benefit) for income taxes and the effective income tax rates for
the three months ended
2021 2020
Provision (benefit) for income taxes
4.9 % (17.9 )%
The effective tax rates were lower than the statutory tax rates for the three
months ended June 30, 2021 and 2020 primarily due to the Company's full
valuation allowance position against domestic deferred tax assets. The provision
(benefit) for income taxes for the three months ended June 30, 2021 and 2020
included estimated federal, state and foreign income taxes in jurisdictions in
which the Company does not have sufficient tax attributes to fully offset
taxable income.
See Note 8 to the Condensed Consolidated Financial Statements for disclosure
regarding our current assessment of the valuation allowance against all domestic
deferred tax assets, and the possible release (i.e., reduction) of the allowance
in the future.
We reported net income for the second quarter of 2021 of $19,394,000 , or $0.43
per diluted share, compared to $2,667,000 , or $0.06 per diluted share, for the
second quarter of 2020.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Net revenues for the six
months ended June 30, 2021 were $184,172,000 , an increase of $50,010,000 , or
37.3%, from $134,162,000 for the six months ended June 30, 2020 . Net revenues,
by product line, for the six months ended June 30, 2021 and the six months ended
June 30, 2020 were as follows (dollars in thousands):
Increase
2021 2020 $ %
Brick Products
Total$ 184,172 $ 134,162 $ 50,010 37.3 %
The increases in net revenues for Brick Products and Advanced Products were
principally due to increases in new orders for Advanced Products of 126.9% and
Brick Products of 13.9% for the six months ended
-27-
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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of OperationJune 30, 2021
Selling, general and administrative expenses were
Increase (decrease)
Compensation $ 1,196 5.7 % (1)
Advertising expense 251 18.6 % (2)
Legal fees 188 16.3 % (3)
Depreciation and amortization 102 6.7 % (4)
Facilities allocations 95 13.3 %
Travel expense (205 ) (30.0 )% (5)
Other, net 92 1.6 %
$ 1,719 5.4 %
(1) Increase primarily attributable to annual compensation adjustments in May
2021 and higher stock-based compensation expense associated with stock
options awarded in
(2) Increase primarily attributable to increases in sales support expenses,
direct mailings, and advertising in trade publications.
(3) Increase primarily attributable to an increase in activity related to the
(4) Increase attributable to net additions of furniture and fixtures and
capitalization of building improvements.
(5) Decrease primarily attributable to reduced travel by our sales and marketing
personnel, due to travel restrictions caused by the
COVID-19
pandemic.
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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of OperationJune 30, 2021
Research and development expenses were
Increase (decrease)
Compensation $ 968 5.4 % (1)
Facilities allocations 198 17.0 % (2)
Freight 66 115.5 %
Computer expense 60 19.0 %
Project and
pre-production
materials (354 ) (7.9 )% (3)
Overhead absorption (830 ) (174.2 )% (4)
Other, net 26 1.0 %
$ 134 0.5 %
(1) Increase primarily attributable to annual compensation adjustments in May
2021 and higher stock-based compensation expense associated with stock
options awarded in
(2) Increase primarily attributable to an increase in utilities and building
maintenance expenses.
(3) Decrease primarily attributable to lower prototype development costs for
Advanced Products.
(4) Decrease primarily attributable to an increase in R&D personnel incurring
time on production activities, compared to R&D activities.
The significant components of ''Other income (expense), net'' for the six months
ended
Increase
2021 2020 (decrease)
Interest income $ 469 $ 70 $ 399
Rental income 396 396 -
(Losses) gains on disposals of equipment (106 ) 6 (112 )
Foreign currency losses, net (174 ) (117 ) (57 )
Other, net 20 26 (6 )
$ 605 $ 381 $ 224 Our exposure to market risk fluctuations in foreign currency exchange rates
relates to the operations of VJCL, for which the functional currency is the
Japanese Yen, and all other subsidiaries in
-29-
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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of OperationJune 30, 2021
The provision (benefit) for income taxes and the effective income tax rates for
the six months ended
2021 2020
Provision (benefit) for income taxes
2.4 % (2,195.1 )%
The effective tax rates were lower than the statutory tax rates for the six
months ended June 30, 2021 and 2020 primarily due to the Company's full
valuation allowance position against domestic deferred tax assets. The provision
(benefit) for income taxes for the six months ended June 30, 2021 and 2020
included estimated federal, state and foreign income taxes in jurisdictions in
which the Company does not have sufficient tax attributes to fully offset
taxable income.
See Note 8 to the Condensed Consolidated Financial Statements for disclosure
regarding our current assessment of the valuation allowance against all domestic
deferred tax assets, and the possible release (i.e., reduction) of the allowance
in the future.
We reported net income for the six months ended June 30, 2021 of $34,486,000 , or
$0.77 per diluted share, as compared to $932,000 , or $0.02 per diluted share,
for the six months ended June 30, 2020 .
Liquidity and Capital Resources
As of June 30, 2021 , we had $159,763,000 in cash and cash equivalents and
$70,469,000 of highly liquid short-term investments. The ratio of total current
assets to total current liabilities was 7.0:1 as of June 30, 2021 and 7.8:1 as
of December 31, 2020 . Working capital, defined as total current assets less
total current liabilities, increased $22,834,000 to $299,253,000 as of June 30,
2021 from $276,419,000 as of December 31, 2020 .
The changes in working capital from December 31, 2020 to June 30, 2021 were as
follows (in thousands):
Increase
(decrease)
Cash and cash equivalents $ (1,979 )
Short-term investments 20,303
Accounts receivable 14,013
Inventories, net (140 )
Other current assets (99 )
Accounts payable (7,960 )
Accrued compensation and benefits (1,700 )
Accrued expenses (994 )
Sales allowances (1,322 )
Short-term lease liabilities 70
Income taxes payable (751 )
Short-term deferred revenue 3,393
$ 22,834
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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of OperationJune 30, 2021
The primary sources of cash for the six months ended
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Vicor Corporation June 30, 2021
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