# VICOR CORP (VICR) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from VICOR CORP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/751978/000095017024022018/vicr-20231231.htm
Accession: 0000950170-24-022018
Filing date: 2024-02-28
Report date: 2023-12-31
Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference.
Confidence: high

Company profile: /company/VICR/
All MD&A years: /company/VICR/mda/
Previous year: /company/VICR/mda/fy2022/ (FY 2022)
Next year: /company/VICR/mda/fy2024/ (FY 2024)

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in

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the United States (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, and our associated judgments, including those related to inventories, income taxes, contingencies, and litigation. We base our estimates, assumptions, and judgments on historical experience, knowledge of current conditions, and on various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We also have other policies we consider key accounting policies (See Note 2 to the Consolidated Financial Statements – Significant Accounting Policies –Impact of recently issued accounting standards). However, the application of these other policies does not require us to make significant estimates and assumptions difficult to support quantitatively.

Inventories

We employ a variety of methodologies to evaluate inventory that is estimated to be excess, obsolete or unmarketable, in order to write down that inventory to net realizable value. Our estimation process for assessing net realizable value is based upon forecasted future usage which we derive based on backlog, historical consumption, and expected market conditions. For both Brick and Advanced product lines, the methodology used compares on-hand quantities to forecasted usage and historical consumption, such that amounts of inventory on hand in excess of management’s estimate of expected future utility, are fully reserved. While we have used our best efforts and believe we have used the best available information to estimate future demand, due to uncertainty in the economy and our business and the inherent difficulty in forecasting future usage, it is possible actual demand for our products will differ from our estimates. If actual future demand or market conditions are less favorable than those projected by management, additional inventory reserves for existing inventories may need to be recorded in future periods.

Evaluation of the Realizability of Deferred Tax Assets

Significant management judgment is required in determining whether deferred tax assets will be realized in full or in part. We assess the need for a valuation allowance on a quarterly basis. We record a valuation allowance to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and past financial performance. Despite recent positive operating results, the Company faces uncertainties in forecasting its operating results due to vendor supply and factory capacity constraints, certain process issues with the production of Advanced Products and the unpredictability in certain markets, product transitions, new program introductions and adoption times of new technology offerings. This operating uncertainty also makes it difficult to predict the availability and utilization of tax benefits over the next several years. As a result, management has concluded, as of December 31, 2023, it is more likely than not the Company’s net domestic deferred tax assets will not be realized, and a full valuation allowance against all net domestic deferred tax assets is still warranted as of December 31, 2023. The valuation allowance against these deferred tax assets may require adjustment in the future based on changes in the mix of temporary differences, changes in tax laws, and operating performance. If the positive operating results continue, and the Company’s concerns about industry uncertainty and world events, supply and factory capacity constraints, program adoption and process issues with the production of Advanced Products are resolved, and the amount of tax benefits the Company is able to utilize to the point that the Company believes future taxable income can be more reliably forecasted, the Company may release all or a portion of the valuation allowance in the near-term. Certain state tax credits, though, will likely never be released by the valuation allowance. If and when the Company determines the valuation allowance should be released (i.e., reduced), the adjustment would result in a tax benefit reported in that period’s Consolidated Statements of Operations, the effect of which would be an increase in reported net income.

The amount of any such tax benefit associated with release of our valuation allowance in a particular quarter may be material.

New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) that we adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of recently issued accounting standards will not have a material impact on our future financial condition and results of operations. See Note 2 – Significant Accounting Policies – Impact of recently issued accounting standards, to the Consolidated Financial Statements for a description of recently issued and adopted accounting pronouncements, including the dates of adoption and expected impact on our financial position and results of operations.

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Other new pronouncements issued but not effective until after December 31, 2023 are not expected to have a material impact on our consolidated financial statements.

Year ended December 31, 2023 compared to Year ended December 31, 2022

Consolidated net revenues for 2023 were $405,059,000, an increase of $5,980,000, or 1.5%, as compared to $399,079,000 for 2022.

Net revenues, by product line, for the years ended December 31 were as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","","","","Increase (decrease)"],["","","2023","","","2022","","","$","","","%"],["Advanced Products","","$","223,893","","","$","243,321","","","$","(19,428",")","","","(8.0",")%"],["Brick Products","","","181,166","","","","155,758","","","","25,408","","","","16.3","%"],["Total","","$","405,059","","","$","399,079","","","$","5,980","","","","1.5","%"]]
[[/GREPCENT_TABLE]]

The decrease in net revenues for Advanced Products was primarily due to manufacturing constraints, customer demand and schedule delays. The increase in net revenues for Brick Products was primarily due to favorable market conditions and pricing, and available capacity for manufacturing Brick Products.

Gross margin for 2023 increased $24,370,000, or 13.5%, to $204,929,000 from $180,559,000 in 2022. Gross margin as a percentage of net revenues increased to 50.6% in 2023 from 45.2% in 2022. The increase in gross margin dollars and gross margin percentage was primarily due to higher sales volume, improved sales mix, and certain reductions in supply chain costs, including a reduction of $9,950,000 in outsourced manufacturing costs partially offset by incremental costs of bringing production in-house for certain Advanced Products, and a reduction of freight-in and tariff spending of $12,747,000 (net of approximately $6,954,000 in duty drawback recovery of previously paid tariffs in the twelve months ended December 31, 2023 and $229,000 in duty drawback recovery in the twelve months ended December 31, 2022).

Selling, general, and administrative expenses were $85,714,000 for 2023, a decrease of $550,000, or 0.6%, as compared to $86,264,000 for 2022. As a percentage of net revenues, selling, general, and administrative expenses decreased to 21.2% in 2023 from 21.6% in 2022.

The components of the $550,000 decrease in selling, general, and administrative expenses were as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","Increase (decrease)"],["Legal fees","","$","(6,000",")","","","(41.9",")%","","(1",")"],["Travel expense","","","303","","","","13.8","%","","(2",")"],["Depreciation and amortization","","","348","","","","8.1","%","","(3",")"],["Advertising expenses","","","605","","","","14.0","%","","(4",")"],["Commissions","","","792","","","","27.4","%","","(5",")"],["Outside services","","","1,253","","","","46.5","%","","(6",")"],["Compensation","","","1,592","","","","3.4","%","","(7",")"],["Other, net","","","557","","","","7.0","%"],["","","$","(550",")","","","(0.6",")%"]]
[[/GREPCENT_TABLE]]

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(1)
Decrease primarily attributable to a decrease in activity related to the SynQor litigation offset by increases in certain corporate legal matters.

(2)
Increase primarily attributable to an increase in travel by the Company’s sales and marketing personnel.

(3)
Increase attributable to net additions of furniture and fixtures and capitalization of building improvements.

(4)
Increase primarily attributable to increases in sales support expenses, direct mailings, and advertising in trade publications.

(5)
Increase primarily attributable to an increase in net revenues subject to commissions.

(6)
Increase primarily attributable to an increase in the use of consultants.

(7)
Increase primarily attributable to annual compensation adjustments in May 2023 and higher stock-based compensation expense associated with stock options awarded in May 2023.

Research and development expenses increased $7,263,000, or 12.0%, to $67,857,000 in 2023 from $60,594,000 in 2022. As a percentage of net revenues, research and development expenses increased to 16.8% in 2023 from 15.2% in 2022.

The components of the $7,263,000 increase in research and development expenses were as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","Increase (decrease)"],["Project and pre-production materials","","$","3,632","","","","42.3","%","","(1",")"],["Compensation","","","2,685","","","","6.6","%","","(2",")"],["Depreciation and amortization","","","352","","","","14.5","%","","(3",")"],["Computer and software expense","","","331","","","","31.1","%","","(4",")"],["Outside services","","","291","","","","42.0","%","","(5",")"],["Deferred costs","","","(231",")","","","(63.2",")%","","(6",")"],["Other, net","","","203","","","","2.8","%"],["","","$","7,263","","","","12.0","%"]]
[[/GREPCENT_TABLE]]

(1)
Increase primarily attributable to increased prototype development costs for Advanced Products.

(2)
Increase primarily attributable to annual compensation adjustments in May 2023 and higher stock-based compensation expense associated with stock options awarded in May 2023.

(3)
Increase attributable to net additions of furniture and fixtures and capitalization of building improvements.

(4)
Increase primarily attributable to an increase in computer and software expenses.

(5)
Increase primarily attributable to an increase in the use of consultants.

(6)
Decrease primarily attributable to an increase in deferred costs capitalized for certain non-recurring engineering projects for which the related revenues had been deferred.

Litigation-contingency expense was $6,500,000 for 2022, which related to the SynQor litigation, as compared to $0 for 2023. See Note 15 to the Consolidated Financial Statements for additional information.

The significant changes in the components of "Other income (expense), net" for the years ended December 31 were as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","","","","","","","Increase"],["","","2023","","","2022","","","(decrease)"],["Interest income, net","","$","8,217","","","$","1,313","","","$","6,904"],["Rental income, net","","","792","","","","792","","","","\u2014"],["Foreign currency losses, net","","","(161",")","","","(653",")","","","492"],["Other, net","","","38","","","","34","","","","4"],["","","$","8,886","","","$","1,486","","","$","7,400"]]
[[/GREPCENT_TABLE]]

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Our exposure to market risk fluctuations in foreign currency exchange rates relates to the operations of Vicor Japan Company, Ltd. ("VJCL"), for which the functional currency is the Japanese Yen, and all other subsidiaries in Europe and Asia, for which the functional currency is the U.S. Dollar. These subsidiaries in Europe and Asia experienced more favorable foreign currency exchange rate fluctuations in 2023 compared to 2022. In 2023, interest income, net increased due to higher interest rates received on the cash and cash equivalents balance held by the Company. In 2022, "Interest income, net" includes an immaterial error correction of $834,000 related to the amortization of bond premiums on available-for-sale securities.

Income before income taxes was $60,244,000 in 2023, as compared to $28,687,000 in 2022.

The provision for income taxes and the effective income tax rate for the years ended December 31 were as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","2023","","","2022"],["Provision for income taxes","","$","6,644","","","$","3,261"],["Effective income tax rate","","","11.0","%","","","11.4","%"]]
[[/GREPCENT_TABLE]]

The effective tax rates were lower than the statutory tax rates for the year ended December 31, 2023 and 2022 primarily due to the Company’s full valuation allowance position against domestic deferred tax assets during both years. The provision for income taxes for the years ended December 31, 2023 and 2022 included estimated federal, state and foreign income taxes in jurisdictions in which the Company does not have sufficient tax attributes.

See Note 14 to the 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 year ended December 31, 2023 of $53,595,000, or $1.19 per diluted share, as compared to $25,446,000, or $0.57 per diluted share, for the year ended December 31, 2022.

Liquidity and Capital Resources

At December 31, 2023, we had $242,219,000 in cash and cash equivalents. The ratio of current assets to current liabilities was 9.5:1 at December 31, 2023, as compared to 5.6:1 at December 31, 2022. Net working capital increased $78,142,000 to $376,197,000 at December 31, 2023 from $298,055,000 at December 31, 2022.

The primary working capital changes were due to the following (in thousands):

[[GREPCENT_TABLE]]
[["","","Increase (decrease)"],["Cash and cash equivalents","","$","51,608"],["Accounts receivable","","","(12,798",")"],["Inventories","","","5,169"],["Other current assets","","","13,783"],["Accounts payable","","","10,107"],["Accrued compensation and benefits","","","(369",")"],["Accrued expenses","","","3,511"],["Sales allowances","","","(1,821",")"],["Short-term lease liabilities","","","(414",")"],["Income taxes payable","","","(674",")"],["Short-term deferred revenue and customer prepayments","","","10,040"],["","","$","78,142"]]
[[/GREPCENT_TABLE]]

The primary sources of cash for the year ended December 31, 2023 were $74,528,000 of cash generated from operations and $10,602,000 of cash received in connection with the exercise of options to purchase our Common Stock awarded under our stock option plans and the issuance of Common Stock under our 2017 Employee Stock Purchase Plan. The primary use of cash during the year ended December 31, 2023 was $33,452,000 for the purchase of machinery and equipment and internal-use software.

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In November 2000, our Board of Directors authorized the repurchase of up to $30,000,000 of Common Stock (the “November 2000 Plan”). The November 2000 Plan authorizes us to make such repurchases from time to time in the open market or through privately negotiated transactions. The timing of such repurchases and the number of shares purchased in each transaction are at the discretion of management based on its view of economic and financial market conditions. We did not repurchase shares of Common Stock under the November 2000 Plan during the year ended December 31, 2023. As of December 31, 2023, we had approximately $8,541,000 remaining for share repurchases under the November 2000 Plan.

As of December 31, 2023, we had a total of approximately $15,014,000 of cancelable and non-cancelable capital expenditure commitments, principally for manufacturing and production equipment, which we intend to fund with existing cash, and approximately $2,168,000 of capital expenditure items and internal-use software which had been received and included in Property, plant and equipment in the accompanying Consolidated Balance Sheets, but not yet paid for. Our primary needs for liquidity are for making continuing investments in manufacturing and production equipment. We believe cash generated from operations together with our available cash and cash equivalents will be sufficient to fund planned operational needs and capital equipment purchases for the foreseeable future.

We do not consider the impact of inflation and changing prices on our business activities or fluctuations in the exchange rates for foreign currency transactions to have been significant during the last three fiscal years.