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 ourAndover 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. -19-
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Table of Contents
VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 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.
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VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2021
Impact of
COVID-19
Pandemic
On January 30, 2020 , the World Health Organization designated the
COVID-19
outbreak a "Public Health Emergency of International Concern" (i.e., a health
emergency requiring coordinated action by the governments of effected
countries). On January 31, 2020 , the U.S. Department of Health and Human
Services declared a public health emergency for the entire United States ,
thereby facilitating a nationwide public health response. On March 11, 2020 ,
COVID-19
was declared a pandemic by the World Health Organization , an indication of its
global severity. Governments worldwide have responded with measures intended to
contain the further spread of
COVID-19,
including mandatory closures of businesses, schools, and organizations.
On March 23, 2020 , the Commonwealth of Massachusetts ordered
non-essential
businesses closed and prohibited gatherings of more than 10 people, extending
the Commonwealth's emergency declaration made on March 10, 2020 . Our
headquarters and primary manufacturing facility are located in Massachusetts .
However, the Company is designated as essential by the U.S. Department of
Homeland Security , given our role in supporting industrial sectors considered
"critical infrastructure." As such, we have continued to operate at, or close
to, full manufacturing capacity, although there can be no assurance we will be
able to continue to operate at such levels of manufacturing capacity.
Widespread uncertainty associated with the pandemic has contributed to reduced
business activity worldwide. We experienced production constraints throughout
2020 that resulted in delays, inefficiencies, and higher costs, which, in the
aggregate, had a detrimental influence on our financial results for the four
quarters of 2020. While still present to a certain extent, these constraints had
a reduced impact on our financial results for the first quarter of 2021. Given
ongoing uncertainty, there is no assurance that our financial performance will
not continue to be negatively influenced as a result of the pandemic.
Since early March 2020 , we have taken actions intended to protect the health and
safety of our employees, customers, business partners, and suppliers. Following
guidance from the U.S. Centers for Disease Control and Prevention , the U.S.
Occupational Health and Safety Administration , state and local health
authorities, and existing internal crisis management policies, we developed and
implemented comprehensive health and safety measures at all of our locations,
including: establishing a central response team; distributing information and
carrying out education initiatives; implementing social distancing requirements,
including the installation of transparent panels to physically separate
individuals when in close proximity; distributing breathing masks, disposable
gloves, disinfectant wipes, and thermometers to employees; implementing
temperature checks at the entrances to our manufacturing facility; extensive and
frequent disinfecting of our workspaces; modifying our meal services to minimize
physical contact; enabling work-from-home arrangements for those employees who
do not need to be physically on premises to perform their work effectively; and
suspending travel. We expect to maintain these measures until we determine the
pandemic is adequately contained for purposes of our business, and we may take
further actions we consider to be in the best interests of our employees,
customers, business partners, and suppliers, or in response to further
government mandates or requirements.
As of the date of this report, while we have seen a small increase in cases
again recently, cases are below the levels experienced in the December through
January time frame, and absenteeism has declined since the December through
January time frame. The productivity of our factory 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 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 the year; however, there are no assurances that those steps will
continue to mitigate risks in 2021 and beyond.
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VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2021
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 (supplemented by the approximately
$109.7 million of net proceeds from the public offering of shares of our Common
Stock during the second quarter of 2020), 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. 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 First Quarter 2021 Financial Performance Compared to Fourth Quarter
2020 Financial Performance
The following summarizes our financial performance for the first quarter of
2021, compared to the fourth quarter of 2020:
• Net revenues increased 5.3% to $88,796,000 for the first quarter of 2021,
from $84,302,000 for the fourth quarter of 2020, as total bookings for
the quarter increased 8.1% as compared to the fourth quarter of 2020,
primarily due to a 17.5% increase in Brick Products bookings in the first
quarter of 2021 compared to the fourth quarter of 2020. Advanced Products
revenue rose 2.2% sequentially compared to the fourth quarter of 2020.
This growth, though, was constrained by limited component availability
due to global semiconductor supply allocation issues experienced during
the quarter. Brick Products revenue rose 7.6% sequentially compared to
the fourth quarter of 2020, reflecting a resumption of shipments to our
European customers, after the pandemic-related trough of 2020, while
shipments to Asian customers grew 18.5%.
• Export sales represented approximately 69.4% of total net revenues in the
first quarter of 2021 as compared to 63.9% in the fourth quarter of 2020.
This increase reflects higher shipments for Advanced Products to both
European and Asian customers.
• Gross margin increased to $44,700,000 for the first quarter of 2021 from
$40,451,000 for the fourth quarter of 2020, and gross margin, as a
percentage of net revenues, increased to 50.3% for the first quarter of
2021 from 48.0% for the fourth quarter of 2020. Both the increase in
gross margin dollars and gross margin percentage were primarily due to
the increase in net revenues, improved efficiencies and cost variances,
and lower tariff charges.
• Backlog, which represents the total value of orders received for products
for which shipment is scheduled within the next 12 months, was
approximately $157,134,000 at the end of the first quarter of 2021, as
compared to $147,550,000 at the end of the fourth quarter of 2020. The
increase in backlog was primarily due to the increased bookings,
discussed above.
• Operating expenses for the first quarter of 2021 increased $1,134,000 , or
3.9%, to $29,980,000 from $28,846,000 for the fourth quarter of 2020, due
to increases in selling, general, and administrative expenses and
research and development expenses of $827,000 and $307,000 , respectively.
• We reported net income for the first quarter of 2021 of $15,092,000 , or
$0.34 per diluted share, compared to net income of $11,193,000 or $0.25
per diluted share, for the fourth quarter of 2020.
• For the first quarter of 2021, depreciation and amortization totaled
$2,806,000 , and capital additions totaled $9,264,000 , as compared to
depreciation and amortization of $2,881,000 and $11,816,000 of capital
additions, for the fourth quarter of 2020.
• Inventories decreased by approximately $3,013,000 , or 5.3%, to
$54,256,000 at March 31, 2021 , compared to $57,269,000 at December 31,
2020 .
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VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2021 Three Months Ended March
31, 2021 Compared to Three Months Ended March
31, 2020
Net revenues for the first quarter of 2021 were
Increase
2021 2020 $ %
Brick Products
Total$ 88,796 $ 63,401 $ 25,395 40.1 % Net revenues from Brick Products and Advanced Products increased 19.6%, and 92.0%, respectively, for the first quarter of 2021 as compared to the first quarter of 2020, primarily due to the recovery of Asian customers, notably inChina , from the macroeconomic uncertainty of 2020 and the impact of the pandemic on shipments and bookings during the first quarter of 2020. The increases in net revenues for both product lines are also reflected in the bookings patterns of the first quarter of 2021. Total bookings for the first quarter of 2021 increased 41.2% from the first quarter of 2020, primarily due to an increase of Advanced Products and Brick Products bookings of 63.6% and 26.1%, respectively, for the first quarter of 2021 compared to the first quarter of 2020. Gross margin for the first quarter of 2021 increased$17,369,000 , or 63.6%, to$44,700,000 , from$27,331,000 for the first quarter of 2020. Gross margin, as a percentage of net revenues, increased to 50.3% for the first quarter of 2021, compared to 43.1% for the first quarter of 2020. The increase in gross margin dollars and gross margin percentage was primarily due to the increase in net revenues, improved efficiencies and cost variances, and lower tariff charges. -23-
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VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2021 Selling, general, and administrative expenses were
Increase (decrease)
Compensation $ 1,005 9.8 % (1)
Bank fees 79 68.3 %
Facilities allocations 58 15.9 %
Travel expense (294 ) (56.9 )% (2)
Legal fees (322 ) (35.3 )% (3)
Other, net 59 1.4 %
$ 585 3.6 %
(1) Increase primarily attributable to annual compensation adjustments in May
2020 and higher stock-based compensation expense associated with
stock option awards.
(2) Decrease primarily attributable to reduced travel by our sales and marketing
personnel, due to travel restrictions caused by the
COVID-19
pandemic.
(3) Decrease attributable to higher expense in the first quarter of 2020
primarily due to the December 2019 ransomware incident.
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VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2021 Research and development expenses were
Increase (decrease)
Project and
pre-production
materials $ (675 ) (26.5 )% (1)
Overhead absorption (307 ) (142.6 )% (2)
Facilities allocations 143 24.7 % (3)
Compensation 593 6.7 % (4)
Other, net (63 ) (4.1 )%
$ (309 ) (2.3 )%
(1) Decrease primarily attributable to lower prototype development costs for
Advanced Products.
(2) Decrease primarily attributable to a decrease in research and development
("R&D") personnel incurring time on production activities, compared to R&D
activities.
(3) Increase primarily attributable to an increase in utilities and building
maintenance expenses.
(4) Increase primarily attributable to annual compensation adjustments in May
2020 and higher stock-based compensation expense associated with
stock option awards.
The significant components of "Other income (expense), net" for the three months endedMarch 31 , and the changes between the periods were as follows (in thousands): Increase 2021 2020 (decrease) Rental income$ 198 $ 198 $ - Interest income 193 53 140 Foreign currency losses, net (163 ) (121 ) (42 ) Other, net 4 18 (14 )$ 232 $ 148 $ 84
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 Operation
March 31, 2021 The benefit for income taxes and the effective income tax rates for the three
months ended
2021 2020
Benefit for income taxes $ (143 ) $ (494 )
Effective income tax rate (1.0 )% (22.2 )%
The effective tax rates were lower than the statutory tax rates for the three
months ended March 31, 2021 and 2020 primarily due to the Company's full
valuation allowance position against domestic deferred tax assets. The benefit
for income taxes for the three months ended March 31, 2021 and 2020 included
estimated foreign income taxes and estimated state taxes in jurisdictions in
which the Company does not have sufficient net operating loss carryforwards.
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 first quarter of 2021 of $15,092,000 , or $0.34
per diluted share, compared to net loss of $(1,735,000) , or $(0.04) per share,
for the first quarter of 2020.
Liquidity and Capital Resources
As of March 31, 2021 , we had $127,411,000 in cash and cash equivalents and
$95,719,000 of highly liquid short-term investments. The ratio of total current
assets to total current liabilities was 7.7:1 as of March 31, 2021 and 7.8:1 as
of December 31, 2020 . Working capital, defined as total current assets less
total current liabilities, increased $12,740,000 to $289,159,000 as of March 31,
2021 from $276,419,000 as of December 31, 2020 .
The changes in working capital from December 31, 2020 to March 31, 2021 were as
follows (in thousands):
Increase
(decrease)
Cash and cash equivalents $ (34,331 )
Short-term investments 45,553
Accounts receivable 6,698
Inventories, net (3,013 )
Other current assets 198
Accounts payable (2,244 )
Accrued compensation and benefits (391 )
Accrued expenses (529 )
Sales allowances (656 )
Short-term lease liabilities 58
Income taxes payable 96
Short-term deferred revenue
and customer prepayments 1,301
$ 12,740
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VICOR CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2021 The primary sources of cash for the three months ended
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Vicor Corporation March 31, 2021
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