Table of Contents
P3YP3Y0.010.010.010.01falseFY0000751978--12-31The deferred tax assets associated with cumulative foreign currency translation gains and cumulative unrealized losses on available for sale securities are completely offset by a tax valuation allowance as of December 31, 2020, 2019, and 2018. 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Table of Contents
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to             
Commission file number
0-18277
VICOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
04-2742817
(State or other jurisdiction of
incorporation or organization)
 
(IRS employer
identification no.)
25 Frontage Road, Andover, Massachusetts
 
01810
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code:
(978470-2900
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading Symbol(s)
  
Name of each exchange on which registered
Common Stock, par value
$0.01 per share
  
VICR
  
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☑    
No  ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    
No  ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☑    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2
of the Exchange Act.
 
Large Accelerated Filer ☑
  
Accelerated Filer ☐
  
Non-accelerated
Filer ☐
   Smaller Reporting Company 
Emerging growth company 
              
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Exchange Act).    Yes  ☐    No  
The aggregate market value of the voting and
non-voting
common equity of the registrant held by
non-affiliates
(for this purpose, persons and entities other than executive officers and directors) of the registrant, as of the registrant’s most recently completed second fiscal quarter (June 30, 2020) was approximately $1,454,187,000.
 
Title of Each Class
 
Number of Shares of Common Stock
Outstanding as of February
18, 2021
Common Stock   31,658,143
Class B Common Stock   11,758,218
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive proxy statement (the “Definitive Proxy Statement”) to be filed with the Securities and Exchange Commission pursuant to Regulation 14A and relating to the Company’s 2021 annual meeting of stockholders are incorporated by reference into Part III.
 
 
 

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PART I
In this Annual Report on
Form 10-K,
unless the context indicates otherwise, references to “Vicor
®
,” “the Company,” “our company,” “we,” “us,” “our,” and similar references, refer to Vicor Corporation and its subsidiaries, unless otherwise specified.
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 Item 1A of this Annual Report on Form
10-K.
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, operating results, and the share price of its listed common stock. This document and other documents filed by the Company with the Securities 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 we have 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 and the total of our cash and cash equivalents and short-term investments will be sufficient to fund operations and capital investments 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 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.” 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 the SEC from time to time, including 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 Annual Report on Form
10-K.
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.
 
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ITEM 1.
BUSINESS
Overview
Vicor Corporation designs, develops, manufactures, and markets modular power components and power systems for converting electrical power (expressed as “watts,” and represented by the symbol “W”, with wattage being the product of voltage, expressed as “volts,” and represented by the symbol “V,” and current, expressed as “amperes,” and represented by the symbol “I”). In electrically-powered devices utilizing alternating current (“AC”) voltage from a primary AC source (for example, a wall outlet), a power system converts AC voltage into the stable direct current (“DC”) voltage necessary to power subsystems and/or individual applications and devices (known as “loads”). In many electronic devices, this DC voltage may be further converted to one or more voltages and currents required by a range of loads. In equipment utilizing DC voltage from a primary DC source (for example, a battery) or a secondary source (such as an
AC-DC
converter), the initial DC voltage similarly may require further conversion. A power system most commonly incorporates four voltage conversion functions: transformation, isolation, rectification, and regulation.
Transformation refers to the process of increasing or decreasing an AC voltage; isolation refers to the electrical separation, for safety, of primary and secondary voltages in a transformer; rectification refers to the process of converting a voltage from AC to DC and/or from DC to AC; and regulation refers to the process of providing a near constant voltage under a range of line and load conditions. Because numerous applications requiring different voltages, currents, and varied power ratings may exist within an electronically-powered device, and system power architectures themselves vary, we offer an extensive range of products and accessories in numerous application-specific configurations. We believe our product offering is among the most comprehensive in the market segments we serve.
Our strategy, competitive positioning, and product offerings are all based on highly differentiated product performance, reflecting our anticipation of the evolution of system power architectures and customer performance requirements. Since the Company was founded, we have pursued continuous 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. Reflecting this strategy, we categorize our offerings as either “Advanced Products” or “Brick Products,” generally based on design, performance, and form factor considerations, as well as the range of evolving applications for which the products are appropriate.
Our competition varies, depending on the market segment and application. Generally, we compete with developers and manufacturers of integrated circuits and semiconductor-based modules when addressing the needs of customers in enterprise computing and other market segments with implementations of our proprietary Factorized Power Architecture
TM
(“FPA”) using Advanced Products. In contrast, we generally compete with manufacturers of integrated power supplies when addressing the needs of customers, across a wide range of market segments, implementing conventional power systems architectures (e.g., Centralized Power Architecture (“CPA”), Distributed Power Architecture (“DPA”), and Intermediate Bus Architecture (“IBA”)) using Brick Products.
Our website, www.vicorpower.com, sets forth detailed information describing our products, the applications for which they may be used, and our suite of design tools. The information contained on our website is not a part of, nor incorporated by reference into, this Annual Report on
Form 10-K
and shall not be deemed “filed” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
We are headquartered in Andover, Massachusetts, where our manufacturing facility is located. Our wholly-owned subsidiary, VICR Securities Corporation also is located in Andover, Massachusetts. Our other domestic offices are located in Santa Clara, California, Lombard, Illinois, and Lincoln, Rhode Island. Our two Vicor Custom Power
TM
subsidiaries, Freedom Power Systems, Inc. and Northwest Power, Inc., are located in Cedar Park, Texas, and Milwaukie, Oregon, respectively.
 
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We have established individual subsidiaries or unincorporated branch offices outside of the United States, which we call Technical Support Centers (“TSCs”), to conduct preparatory and auxiliary services in support of the Company. Vicor Japan Company, Ltd. (“VJCL”), our 92.5%-owned Japanese subsidiary, which is engaged in sales and customer support activities exclusively for the sale of certain products customized by VJCL for the Japanese market, is headquartered in Tokyo, Japan.
In August 2020, our subsidiary, VLT, Inc., which was a vehicle for licensing technologies, was merged with and into the Company, and its operations and personnel were reassigned. In June 2019, our subsidiary, VI Chip Corporation (“VI Chip”), was merged with and into the Company, and its operations and personnel were reassigned. In December 2019, we closed Vicor B.V., a wholly-owned subsidiary incorporated in the Netherlands, which provided logistical and administrative support for certain sales in the European Union. In May 2018, our subsidiary, Picor Corporation (“Picor”), was merged with and into the Company, and its operations and personnel were reassigned. In December 2018, we merged Granite Power Technologies, Inc., a Vicor Custom Power subsidiary located in Manchester, New Hampshire, with and into the Company, transferring its operations and reassigning certain personnel.
All of our subsidiaries and their legal domicile are set forth in Exhibit 21.1 to this Annual Report on Form
10-K.
The activities of all of the above named entities are consolidated in the financial statements presented herein.
Vicor was incorporated in Delaware in 1981, and we completed an initial public offering in May 1991. The Company has two classes of common stock outstanding: shares of our “Common Stock,” listed on The NASDAQ Stock Market under the ticker symbol VICR, and shares of our Class B common stock, which are not subject to registration pursuant to the Exchange Act and are not listed on any exchange.
Our Strategy
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 (“TCO”). Since the Company was founded, our competitive position has been maintained by continuous 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, which enable the design of power system solutions more efficient and much smaller than conventional alternatives. This efficiency and small size is enabled by our proprietary switching circuitry and magnetic structures, as well as our use of highly differentiated packaging.    
Power system performance is based primarily on conversion efficiency (i.e., the ratio of output power (i.e., watts) to input power) and power density (i.e., the amount of output power divided by the volume of the power system). Higher efficiency and density contribute to superior thermal performance, as the
by-product
of power conversion and distribution is heat, which must be dissipated in order to assure the performance of the power system solution itself and the overall system to which it is delivering power. Power system performance also is based on the electrical characteristics of the power system (and their effect on and compatibility with the customer’s application). Important electrical characteristics include transient responsiveness (i.e., the reaction of a power system to a sudden change in voltage or current levels) and noise profile (i.e., the level of electromagnetic interference created by power conversion). We believe the superior performance of our power systems is the most important element of our differentiation strategy.
Our strategy complements performance superiority with design flexibility (i.e., ease of use), as our products can be utilized individually or combined, given their level of integration, to create power system solutions specific to a customer’s precise needs. We articulate this positioning through our “Power Component Design Methodology,” an element of our differentiation strategy, which is our approach to providing our customers the
 
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modular products, design tools, and engineering support to enable the rapid design of advanced power system solutions by customers and, thereby, accelerate their own product development cycles. Our value proposition is supported by a compelling TCO, representing the cost of acquiring and operating a power system over its useful life, driven by competitive product pricing, high reliability, and demonstrably lower electricity costs.
Our earliest market focus was on telecommunications infrastructure, which uses a standard DC distribution voltage of 48V (nominally 48V to 54V), the highest distribution voltage that meets Safety
Extra-Low
Voltage (“SELV”) standard requirements, while leaving sufficient margin for over-voltage protection circuits. While we 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) and a broad range of customer requirements, we consider our core competencies to be associated with 48V distribution, which offers numerous inherent cost and performance advantages over lower distribution voltages, while remaining within the 60V SELV safety limit.
Our product portfolio also includes families of
“front-end”
devices, which address applications requiring the transformation of AC voltages to regulated DC voltages. Examples of such applications include powering data center server racks, large-scale LED lighting, specialized laboratory, diagnostic, and test equipment, small-cell wireless base stations, and higher power equipment for defense and industrial use.
Reflecting our strategy, we categorize our offerings as either Advanced Products or Brick Products, generally based on design, performance, and form factor considerations, as well as the range of evolving applications for which the respective categories are appropriate. The Advanced Products category consists of our most innovative products, which are used to implement our proprietary distribution architecture, FPA, a highly differentiated approach to power distribution that enables flexible, rapid power system design using individual components optimized to perform a specific function. The Brick Products category largely consists of integrated power converters (i.e., “bricks”), incorporating multiple conversion stages, used in conventional power systems architectures including CPA, DPA, and IBA.
Given the growth profiles and performance requirements of the market segments served with Advanced Products and Brick Products, our strategy involves a transition in organizational focus, emphasizing investment in Advanced Products design and manufacturing, targeting high growth market segments with a
low-mix,
high-volume operational model, while maintaining a profitable business in mature market segments we serve with Brick Products with a
high-mix,
low-volume
operational model.
Our Products
Reflecting our Power Component Design Methodology, we offer a comprehensive range of modular building blocks enabling rapid design of a power system specific to a customer’s precise needs. Based on design, performance, and form factor considerations, as well as the range of evolving applications for which the products are appropriate, we categorize our product portfolios as either Advanced Products or Brick Products. We also sell a range of electrical and mechanical accessories for use with our products.
Advanced Products
We continue to invest in the research and development of power system technologies and product concepts addressing two accelerating trends, the first toward higher required conversion efficiencies, and the second toward more and diverse
on-board
voltages, higher performance demands of complex loads, and, in particular, higher current requirements of those loads. These trends are most visible in the microprocessor-based applications we target with Advanced Products, for which energy consumption, energy efficiency, processor performance, and computing density are critical priorities. Recognizing the performance and scale limitations of conventional power distribution architectures and products, we introduced FPA and a range of enabling products incorporating our latest advances in power distribution concepts, switching topologies, materials, and packaging.
 
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FPA, which is focused on, but not limited to, 48V DC distribution solutions, increases power system conversion efficiency, density, and power delivery performance by “factorizing” (i.e., separating) the power conversion process into individual components, reducing the design limitations, thermal management challenges, and scaling trade-offs associated with conventional architectures for DC voltage distribution. All such architectures follow a sequence whereby a DC voltage is first transformed, or reduced, and that lower voltage subsequently conducted (i.e., “bussed”) across the circuit to the “load” (i.e., the point of use), where the voltage is regulated and lowered once more, to the required operating voltage of the load. In a FPA implementation, the sequence is reversed. Regulation occurs first, and the regulation module can be placed in the optimal position for space utilization and thermal management. A regulated voltage approaching 48V is bussed across the circuit to the transformation module, which performs what we refer to as current multiplication, adjacent to the load. Bussing high voltage minimizes the current levels across the circuit, thereby minimizing the potential for distribution losses and reducing the volume of the conduit (e.g., the copper wire). Placing the relatively low noise, low heat current multiplication module adjacent to the load further minimizes the potential for distribution losses associated with bussing a low operating voltage to the load and reduces the potential influence of the power system on the performance of the load.
A typical FPA implementation for delivering 48V DC from a server backplane to a 1.0V microprocessor would consist of three modules: a PRM
(Pre-Regulator
Module) regulator, a VTM
(Voltage Transformation Module) current multiplier, and a proprietary communications controller. In contrast, a commodity IBA design for delivering 48V DC from a server backplane to a 1.0V microprocessor requires an additional conversion stage, to reduce 48V to 12V, and, at the point of load, a voltage regulation module (i.e., a “VRM” consisting of multiple switching regulators, each representing a phase and consisting of two switching transistors, one or more capacitors, and an inductor, with the transistors switched by pulse width modulation controller). For a 200W two stage, multiphase application, a 12V commodity IBA implementation would require an intermediate bus converter, to reduce 48V to 12V, and a VRM solution consisting of parallel phases (i.e., multiple switching regulators) to reduce and regulate the current for use at 1.0V by the microprocessor. Such a commodity IBA implementation requires a significantly higher component count, consumes more motherboard area, requires more copper conduit, generates more heat due to switching and distribution losses, offers inferior dynamic response, and can be meaningfully less efficient than a 48V FPA implementation.
The advantages of FPA over legacy power distribution architectures are most evident in high performance computing applications. Our
“Power-on-Package”
power system solutions meet the computational performance requirements of artificial intelligence (“AI”). The microprocessors typically used in AI, particularly in more computationally demanding “machine learning” or “training” applications, are graphics processing units (“GPUs”) and custom application-specific integrated circuits (“ASICs”). Unlike central processing units (“CPUs”), which are designed for serial execution of complex and broad instruction sets, GPUs and AI ASICs are designed for massively parallel (i.e., concurrent) processing of repetitive transactions or calculations. As such, GPUs and AI ASICs generally operate at processing frequencies requiring the higher levels of average and peak current delivered by our
FPA-based
solutions. Our most popular
Power-on-Package
solution, consists of one MCD
©
(Modular Current Driver) unit, providing high-bandwidth,
low-noise
regulation, and two MCM
©
(Modular Current Multiplier) units, providing high performance current multiplication.
Power-on-Package
delivers unprecedented current levels to GPUs and AI ASICs, in part due to the placement of the MCMs directly on the substrate onto which the processor is mounted, thereby minimizing distribution losses associated with high current levels. Placement of MCM units on the substrate also reduces the number of GPU or ASIC processor substrate pins required for power, allowing for their use by other functions (e.g., memory input/output (“I/O”)). This three-module laterally-mounted
Power-on-Package
configuration, powering an AI accelerator card requiring 350W, delivers 0.7V, 650A average current, and up to 1,200A peak current to the GPU or AI ASIC, with superior transient response and unmatched power density.
We are unaware of any competitive solution for AI acceleration offering the power system performance and density of
Power-on-Package,
as
IBA-based
solutions must increase the number of conversion phases to reach
 
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high current levels, thereby increasing component count and motherboard area used, which contributes to higher switching and distribution losses, inferior dynamic response, and associated heat generation.
Our latest innovation for powering processors is vertical power delivery, which involves mounting our highest-performance solutions on the underside of the motherboard, opposite the GPU or AI ASIC, thereby enabling a further reduction in distribution losses at the load, yielding higher efficiency and unprecedented power density. Vertically-mounting the solution allows unrestricted access to microprocessor input/output I/O pins on the top side of the motherboard, thereby improving I/O speed and memory access, which are a priority for GPUs and AI ASICs in AI applications. We are in the final development stages of our vertical power delivery solutions and expect to be shipping released products to customers in 2021.
Our proprietary technologies enable us to offer a range of Advanced Products, in various package formats across functional families, applicable to other market segments and power distribution architectures other than FPA. Within computing, these market segments include AC to DC voltage conversion and DC voltage distribution in server racks and high voltage conversion across datacenter infrastructure. We also offer Advanced Product power system solutions for aerospace and aviation (e.g., for use in satellites, unmanned aerial vehicles, and various airframes, including battery-powered aircraft, for which small size, light weight, and design flexibility are advantageous); defense electronics (e.g., for use in airborne, seaborne, or field communications and radar, for which reliability in harsh environments is a priority); industrial automation, instrumentation, and test equipment (e.g., for use in robotics and semiconductor testing, for which high power levels and precision performance are required); solid state lighting (e.g., for use in large scale displays and signage, for which, again, small size, light weight, and design flexibility are advantageous); telecommunications and networking infrastructure (e.g., for use in high-throughput data distribution and pole-mounted small-cell base stations); and vehicles (e.g., in autonomous driving applications, electric vehicles, and hybrid electric vehicles).
Annual revenue associated with the sale of Advanced Products was approximately 35.8%, 28.6%, and 35.9% of the Company’s consolidated revenue for the years ended December 31, 2020, 2019, and 2018, respectively. Sales of Advanced Products recovered in 2020, reflecting the resumption of orders from both AI system vendors and hyperscalers, as the market segment recovered from an unexpected and sustained period of low demand across the computing market that began in 2018 and continued through 2019. This low demand was caused by the buildup of excess inventory levels at contract manufacturers during the second half of 2018 and planning uncertainty associated with the ongoing trade dispute between China and the U.S., the two largest geographic markets we serve. Despite the impact of the
COVID-19
pandemic, the data center market has experienced relatively less disruption than other market segments we serve, as the rapid expansion of cloud-based computing and
AI-driven
applications drove sustained demand for our solutions through 2020.    
We anticipate the percentage of periodic revenue associated with the sale of Advanced Products will increase in the future, given our strategic and organizational focus and the relatively higher expected growth of the market segments we serve.
Brick Products
Brick-format converters provide the integrated transformation, rectification, isolation, regulation, filtering, and/or input protection necessary to power and protect loads, across a range of conventional power architectures. We offer a wide range of brick-format
DC-DC
converters, as well as complementary components providing AC line rectification, input filtering, power factor correction, and transient protection. Wide ranges of input voltages, output voltages, and output power are offered, allowing end users to select components appropriate to their individual applications. The products differ in dimensions, temperature grades, maximum power ratings, performance characteristics, pin configuration, and, in certain cases, characteristics specific to the targeted market.
We also integrate these converters and components into complete power systems representing standard or custom
AC-DC
and
DC-DC
solutions for our customers’ power needs. We refer to such standard products as our
 
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“Configurable” product line, while our two Vicor Custom Power subsidiaries design, sell, and service custom power system solutions.
We market our standard Brick Products emphasizing “mass customization,” using highly automated, efficient, domestic manufacturing to serve customers with product design and performance requirements, across a wide range of worldwide market segments, which could not be met by high-volume oriented competitors. We focus on distributed power implementations, for which our brick-format products are well-suited, in market segments such as aerospace and defense electronics, industrial automation, industrial equipment, instrumentation and test equipment, and transportation (e.g., rail). Our customers range from independent manufacturers of highly specialized electronic devices to larger original equipment manufacturers (“OEMs”) and their contract manufacturers. Some of our Brick Product lines have been in production for over a decade, reflecting the maturity of the markets we serve, the long-established relationships we have with many customers, and the long-standing suitability of our products to demanding applications.
Annual revenue associated with the sale of Brick Products, representing the sum of sales to third-parties of the products previously sold under the former Brick Business Unit operating segment during periods prior to the second quarter of 2019, inclusive of such sales of our Vicor Custom Power and VJCL subsidiaries, was approximately 64.2%, 71.4%, and 64.1% of the Company’s consolidated revenue for the years ended December 31, 2020, 2019, and 2018, respectively.
Customers and Backlog
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 Product lines, our customers are 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, although 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 Product lines, we serve 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 a greater concentration of sales among relatively fewer customers.
As of December 31, 2020, the Company’s order backlog was approximately $147,550,000, compared to $104,164,000 as of December 31, 2019. Backlog, as presented here, consists of orders for products for which shipment is scheduled within the following 12 months, subject to our scheduling and cancellation policies.
The lead times between receipt and acceptance of an order and our shipment of the product have increased, largely as a consequence of the
COVID-19
pandemic. Although demand visibility and supply chain conditions across the global electronics industry stabilized in 2019, the rapid onset of the
COVID-19
pandemic during the first quarter of 2020 caused widespread delays in production and delivery. In response, during the second quarter of 2020, we extended our quoted lead times for delivery to customers to beyond 20 weeks. Since the second quarter of 2020, our supply chain has been stable, with limited instances of delays or interruptions. However, until the pandemic is substantially contained worldwide and supply chain uncertainties are further reduced, we intend to maintain these quoted lead times.
A portion of our revenue in any quarter is, and will continue to be, derived from “turns” volume, representing either orders booked and shipped in the same quarter or orders for which customers have requested accelerated delivery from a later quarter to the current quarter. This volume generally has been associated with orders for Brick Products. Over the past three years, the volume of orders booked and shipped within a quarter has declined steadily, reflecting lengthened delivery lead times across the electronics industry. However, over the
 
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same period, the volume of orders for which customers have requested accelerated delivery has increased, which we believe to be a reflection of improved conditions in many of the market segments we serve with Brick Products. An additional influence on turns volume has been our transition to larger OEM customers, which typically schedule large volumes for delivery over multiple quarters and frequently reschedule deliveries for either earlier or later shipment. Average quarterly turns volume averaged approximately 14% of 2020 revenue, approximately 27% of 2019 revenue, and approximately 20% of 2018 revenue.
Competition and Market Characteristics
The competitive characteristics of the markets we serve with Advanced Products and Brick Products can differ significantly. For example, in the higher-performance segments of computing we serve, our Advanced Products most often compete with solutions offered by large integrated device manufacturers (“IDMs”), which offer integrated circuits (“ICs”) and semiconductor-based modules. These IDMs generally offer far broader product portfolios, possess far greater global manufacturing and support resources, and have the ability to aggressively price their products to defend market share. Accordingly, Advanced Products are positioned as highly differentiated alternatives to commodity solutions for customers seeking high levels of performance. The customers we serve with Advanced Products, typically on a direct basis, are in market segments generally characterized by an emphasis on product performance differentiation, a compelling TCO, relatively extended and highly competitive design cycles, and product life cycles of generally less than three years. In contrast, the Brick Products competitive landscape is relatively fragmented, with large-scale, low-cost global suppliers of commodity solutions and many smaller manufacturers focused on specialized products or narrowly defined market segments or geographies. The market segments we serve with Brick Products, typically through sales representatives and distribution partners, generally are characterized by relatively short design cycles, relatively long (i.e., greater than three years) product life cycles, and, given the maturity of many market segments and applications, degrees of commoditization and price competition. As such, Brick Products are positioned with an emphasis on mass customization, through which we offer products with specific features and performance profiles typically not available from catalog-oriented competitors.
The size and growth characteristics of the markets we serve with Advanced Products and Brick Products also can differ significantly, and the range and quality of market data is problematic, making summary statements about these markets challenging. We believe our Advanced Products generally compete with power modules and power ICs developed and manufactured by IDMs and other fabless vendors of power semiconductors. We believe our Brick Products generally compete with similarly integrated switching power supply products developed and manufactured by large global competitors and a fragmented group of small regional competitors. The switching power supply market can be segmented by product type (i.e.,
DC-DC
converters,
AC-DC
converters, and
DC-AC
inverters), by output power levels, and by numerous vertical markets (i.e., industry-specific applications).
For 2020, exports to China and Hong Kong exceeded $93,000,000, representing approximately 31.4% of total revenue and an approximately 60.4% increase over the 2019 total. We believe this increased volume was primarily associated with the stimulus spending of the Chinese government, although we also believe an unquantifiable amount of this volume may have been associated with accelerated purchasing by customers anticipating further deterioration of the trade relationship between China and the U.S. Our belief is based on input from our distribution partners in China, as well as the mix of products exported over the past three years, reflecting the transfer by our OEM customers for Advanced Products (and their contract manufacturers) of the majority of production programs from China and Hong Kong to other countries in order to avoid inbound and outbound tariffs. Exports to China and Hong Kong peaked at approximately $109,000,000 in 2018, but that figure included approximately $50,000,000 of exports of Advanced Products to OEM customers and their contract manufacturers. As stated, the majority of the programs associated with this amount have been transferred to other countries. Current exports to China and Hong Kong are heavily oriented toward Brick Products for industrial and rail applications, as well as certain aerospace and defense electronics applications permitted under U.S. export control regulations (our products are designated EAR99 commodities under the Export Administration Regulations of the U.S. Department of Commerce and are not subject to export licenses).
 
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Despite our minor share in the overall merchant market and the competitive presence of numerous, far larger vendors in the market segments we serve with both Advanced Products and Brick Products, we believe we maintain an advantageous competitive position in those market segments. Notably, we believe we have the largest share of 48V power distribution opportunities within the segments of the computing market segments we serve. However, numerous competitors across these market segments have significantly greater engineering, financial, manufacturing, and marketing and sales resources, as well as longer operating histories and longer customer relationships than we do.
Marketing and Sales
We reach and serve customers through several sales channels: a direct sales force; a network of independent sales representative organizations in North America and South America; independent, authorized
non-stocking
distributors in Europe and Asia; and four authorized stocking distributors world-wide: Arrow Electronics, Inc.,
Digi-Key
Corporation, Future Electronics Incorporated, and Mouser Electronics, Inc. All sales channels are supported by regional TSCs, each offering application engineering and sales support for our channel partners. Domestic TSCs are located in: Andover, Massachusetts; Lombard, Illinois; and Santa Clara, California. International TSCs are located in: Beijing, China; Hong Kong, China; Shanghai, China; Shenzhen, China; Munich, Germany; Bangalore, India; Milan, Italy; Tokyo, Japan; Seoul, South Korea; Taipei, Taiwan (Republic of China); and Camberley, United Kingdom. Customers do not place purchase orders with TSCs, but do so directly with the Company or with our channel partners. In Japan, customers place purchase orders with authorized distributors or, for certain custom products, VJCL.
We generally sell our products on the basis of our standard terms and conditions, and we most commonly warrant our products for a period of two years. Effective January 1, 2017, we extended the warranty period to three years for a range of H Grade, M Grade, and MI Family
DC-DC
products sold after that date. In a limited number of circumstances, we have entered into supply contracts with certain high-volume customers calling for extended warranty terms. With our distribution partners, we also enter into contracts providing for our product warranties to transfer to the end customer upon final sale of our product(s) by the distributor.
Because of the technically complex nature of our products and the applications they address, we maintain an extensive staff of Field Applications Engineers to support our own sales and customer support activities, as well as those of our channel partners. Field Application Engineers, based in our TSCs, provide direct technical support worldwide by reviewing new applications and technical matters with our channel partners in support of existing and potential customers. Product Line Engineers, located in our Andover headquarters, support Field Application Engineers assigned to all of our TSCs.
Our direct sales force focuses on higher-volume opportunities involving Advanced Products with global OEMs (and the Original Design Manufacturers (“ODMs”) and contract manufacturers serving these OEMs). Because of the high level of product differentiation and the increasing complexity and challenges of customer requirements, we have experienced, and may continue to experience, extended design cycles before production orders are received.    
We also reach customers through the electronic commerce capabilities of our website, www.vicorpower.com. Registered, qualified customers in the United States, Canada, and certain European countries are able to purchase selected products online.
Our
web-based
resources are an important element of our efforts to interact with and support customers. Within our website,
PowerBench
TM
is a workspace of tools and references allowing engineers to select, architect, and implement power systems using our products. Our highly differentiated
Whiteboard
TM
tool allows users to configure and analyze their own power system designs or those from an extensive library of designs addressing a wide range of applications. Users can modify the operating condition for each component of their design to match the intended application and perform efficiency and loss analysis of individual components
 
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and the full power system. We continue to enhance and expand the range and capabilities of engineering tools we make available online to customers and prospective customers.
As stated, our strategy involves maintaining high levels of customer engagement and support for design and engineering, which has resulted in significant expansion of our sales and application engineering infrastructure over historical levels, notably across Asia. We incurred approximately $43,396,000, $43,387,000, and $42,533,000 in marketing and sales expenses in 2020, 2019, and 2018, respectively, representing approximately 14.6%, 16.5%, and 14.6% of revenues in 2020, 2019, and 2018, respectively.
Manufacturing, Quality Assurance, and Supply Chain Management
Our manufacturing facility, of approximately 230,000 square feet, is located in Andover, Massachusetts, where we are headquartered. In this facility, we manufacture Brick Products, with the exception of custom products produced by our Vicor Custom Power and VJCL subsidiaries, and Advanced Products, with the exception of certain products manufactured, packaged, and tested by third party wafer foundries and packaging contractors in the United States and Asia.
Our primary manufacturing processes involve steps common to automated assembly of electronics devices. We also have developed and employ proprietary manufacturing processes that contribute to the differentiated performance of our devices, including the innovative metal finishing of our SM ChiP
©
modules discussed below. During the third quarter of 2020, we began construction of an addition of approximately 90,000 square feet to our existing manufacturing facility. We plan to take occupancy of this addition during the first half of 2021.
As previously disclosed, we partner with a highly-specialized third-party developer of metal finishing processes and equipment, which performs certain elements of our proprietary manufacturing process using equipment designed by the developer. In 2019 and 2020, we entered into service and equipment purchase agreements with this partner. While commodity services are available from numerous alternate providers, we entered into these agreements due to the level of our collaboration to date with the partner in the refinement of certain proprietary processes we employ and our joint commitment to environmentally sound manufacturing minimizing toxic waste. Approximately
one-half
of the addition to our manufacturing facility will be allocated to installation of highly-automated equipment scheduled to be delivered by the partner, beginning the first half of 2021, which will enable the vertical integration of all manufacturing process steps for
SM-ChiP
modules. We expect the
pre-production
qualification of this installed equipment will begin late during the first half of 2021, with production volumes to follow later in the year. We have relied on this partner’s services to meet our requirements for
SM-ChiP
production to date, and we expect to do so through 2021, after which we expect to have fully-operational production capabilities on site.
We continue to make investments in automated manufacturing equipment, particularly for expansion of production capacity for Advanced Products. During 2019, through investment in additional capital equipment, we increased our total manufacturing capacity in our Andover facility by approximately 35%. The addition of manufacturing lines and the vertical integration of metal finishing processes are expected to increase our Advanced Products capacity by an additional 100%, based on additional machine capacity and accelerated cycle times due to vertical integration.
Product quality and reliability are critical to our success and, as such, we emphasize quality and reliability in our design and manufacturing activities. We follow industry best practices in manufacturing and are compliant with ISO 9001 certification standards (as set forth by the International Organization for Standardization). Our quality assurance practices include rigorous testing and, as necessary,
burn-in
and temperature cycling (i.e., extended operation of a product to confirm performance) of our products using automated equipment. Incoming components, assemblies, and other parts are subjected to several levels of inspection procedures, and we maintain robust data on our raw material inventories in order to support our quality assurance procedures.
Components and materials used in our products are purchased from a variety of domestic and international vendors. Generally, the global electronics supply chain recovered during 2020 from the impact of the
COVID-19
 
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pandemic, but lead times for delivery of certain raw materials remain extended. Most of these raw materials are available from multiple sources, whether directly from suppliers or indirectly through distributors, and, during 2020 we continued to opportunistically expand certain raw material inventories to offset the uncertainties associated with availability and lead times.
Certain Advanced Products and semiconductor devices used in our production are manufactured by a limited number of wafer foundries, with packaging and test services provided by a limited number of third parties. We rely on these wafer foundries and packaging and test providers for supply continuity of these critical semiconductor devices. During the fourth quarter of 2020 and to date in the first quarter of 2021, the semiconductor test and packaging segment of the global electronics supply chain has experienced well-publicized capacity constraints, and, as a result, we recently have experienced unpredicted delays in receipt of certain semiconductor components from our packaging and test vendors. To date, these delays have not had a material impact on our ability to meet customer delivery requirements. In response to current schedule uncertainties, we are seeking alternate providers of packaging and test services and may further increase inventory levels for these semiconductor components, when possible. Should these capacity constraints continue or worsen and we are unable to obtain the necessary volumes of required semiconductor components, we may not be able to meet delivery commitments for certain customers and may not be able to reduce delivery lead times for the foreseeable future.    
To date, we have not experienced material delays or reduced raw material availability as a result of trade disputes between the U.S. and China, including the imposition in 2018 of import tariffs under the provisions of Section 301 of the Trade Act of 1974 (19 U.S.C. § 2411) (“Section 301 Tariffs”) on certain Chinese goods imported into the United States. For the year ended December 31, 2020, costs associated with tariffs totaled approximately $7,259,000 an increase of 37% over the $5,280,000 in costs incurred for the year ended December 31, 2019. We continue to assess the impact of these costs and are actively evaluating alternative sources of raw materials. We also have filed “duty drawback” applications with U.S. Customs and Border Protection for the recovery of tariffs paid on raw materials used to produce products we subsequently exported. At this time, we are not able to estimate the amount of such recovery or the timing thereof.
Intellectual Property
Our competitive positioning has been, and will continue to be, supported by our long-standing commitment to research and development of power distribution architectures, power conversion technologies, advanced packaging and manufacturing, and innovative approaches to solving customer problems. Our research and development activities have resulted in important domestic and foreign patents protecting our products and enabling technologies, as well as proprietary trade secrets associated with our use of certain components and materials of our own design and proprietary manufacturing, packaging, and testing processes. We incurred approximately $50,916,000, $46,588,000, and $44,286,000 in research and development expenses in 2020, 2019, and 2018, respectively, representing approximately 17.2%, 17.7%, and 15.2% of revenues in 2020, 2019, and 2018, respectively.
We believe our intellectual property affords advantages by building fundamental and multilayered barriers to competitive encroachment upon key features and performance benefits of our principal product families. Our patents cover the fundamental switching topologies used to achieve the performance attributes of our converter product lines; converter array architectures; product packaging design; product construction; high frequency magnetic structures; and automated equipment and methods for circuit and product assembly.
As of December 31, 2020, in the United States, we have been issued 117 total patents. These patents have expirations scheduled between 2021 and 2038. We also have a number of patent applications pending in the United States and certain countries of Europe and Asia, including applications that would extend the life of current patents. We have vigorously protected our rights under these patents and will continue to do so. Although we believe patents are an effective way of protecting our technology, there can be no assurances our patents will prove to be enforceable in any given jurisdiction.
 
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In addition to generating revenue from product sales, we seek to license our intellectual property. In granting licenses, we generally retain the right to use our patented technologies and manufacture and sell our products in all licensed geographic areas and fields of use. Revenues from licensing arrangements have not exceeded 10% of our consolidated revenues in any of the last three fiscal years.
Human Capital Management
High-caliber employees are important to achieving Vicor’s mission of providing the highest performance power solutions to meet the requirements of the most demanding applications. In order to maintain leadership in power systems design in a highly competitive employment market, attracting and retaining the best team worldwide is critical. Accordingly, we offer compelling compensation and benefits, foster a culture of innovation in which employees are empowered to do (and are rewarded for) their best work, and seek to establish Vicor as a meaningful contributor to the communities in which we operate, further strengthening the bonds between employees and the Company.
As of December 31, 2020, we had 1,049 full-time employees, of which 940 were in the U.S. and 109 were in our international locations. None of our employees are represented by a labor union or covered by a collective bargaining agreement.
We recruit from colleges and universities, with a focus on specific engineering disciplines. In collaboration with certain universities, we maintain a student
“Co-Op”
program, whereby qualifying undergraduate and graduate students work at our Andover facilities for one or two semesters, receiving course credit towards their graduation. In recent years, we have had as many as approximately two dozen participants per semester, with a substantial percentage of participants receiving offers of full-time employment.
Our compensation program is designed to attract and reward talented individuals who possess the skills necessary to support our business objectives, assist in the achievement of our strategic goals, and create long-term value for our stockholders. We provide employees with compensation packages that include a competitive base salary or wage rate and benefits such as life and health (medical, dental, and vision) insurance, supplemental insurance, paid time off, paid parental leave, and a 401(k) plan (with Company match). Generally (and subject to local laws), new employees are awarded
non-qualified
options for the purchase of the Company’s common stock. Depending on an employee’s role, he or she may be eligible for annual incentive bonuses and periodic awards of
non-qualified
options based on the performance of the Company and that of the employee. We believe a compensation program with appropriate long-term incentives aligns employee and stockholder interests in increasing the value of the Company.
We emphasize and encourage employee development and training. To empower employees to reach their potential, we provide a range of development programs and opportunities, including
in-house
training programs and tuition reimbursement for those pursuing outside certification or degrees.
We seek to support the communities in which we operate and believe this commitment contributes to our efforts to attract and retain employees. We support our employees in volunteer initiatives. We also partner with a range of
non-profit
organizations and have had notable success in our collaboration for over two decades with the Crest Collaborative of Methuen, MA, a local advocacy agency, in providing enriching employment opportunities for adults participating in that agency’s programs.
For more information on our employee and community initiatives, please see our Corporate Social Responsibility webpage at
www.vicorpower.com/about-the-company/corporate-social-responsibility
.
Available Information
We maintain a website with the address www.vicorpower.com and make available free of charge through this website our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
 
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and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. We also make available on our website our Code of Business Conduct, as well as the charters for the Audit and Compensation Committees of our Board of Directors.    
While our website sets forth extensive information, including information regarding our products and the applications in which they may be used, such information is not a part of, nor incorporated by reference into, this Annual Report on
Form 10-K
and shall not be deemed “filed” under the Exchange Act.
 
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ITEM 1A.
RISK FACTORS
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Actual results could differ materially from those projected in the forward-looking statements as a result of, among other factors, the risk factors set forth below.
Operational Risks
Our future operating results are difficult to predict and are subject to fluctuations.
Our operating results, including revenues, gross margins, operating expenses, and net income (loss), have fluctuated on a quarterly and annual basis. Our strategic focus on higher volume opportunities with OEMs, ODMs, and contract manufacturers has caused the actions of a relative few such customers to disproportionately influence our operating results. Unanticipated delays in purchase orders from, and shipments to, certain large customers have resulted in lower than expected revenue. Similarly, our strategic focus on the development of market-leading technologies and manufacturing processes, often implemented in proprietary semiconductor circuitry, materials, and packaging, has exposed the Company to the risks and costs of delays in such development and the use of a relatively few number of suppliers of proprietary circuits and materials or providers of proprietary services.
Despite recent profitability trends, we cannot predict if we will maintain sustained profitability. Our future operating results may be materially influenced by a number of factors, many of which are beyond our control, including:
 
   
changes in demand for our products and for our customers’
end-products
incorporating our products, as well as our ability to respond efficiently to such changes in demand, including changes in delivery lead times and the volume of product for which orders are accepted and the product shipped within an individual quarter;
 
   
our ability to manage our supply chain, inventory levels, and our own manufacturing capacity or that of third-party partners, particularly in the event of delays or cancellations of significant customer orders or in the event of delays or cost increases associated within our supply chain;
 
   
our ability to effectively coordinate changes in the mix of products we manufacture and sell, while managing our ongoing transition in organizational focus and manufacturing infrastructure to Advanced Products from Brick Products;
 
   
our ability to provide and maintain a high level of sales and engineering support to an increasing number of demanding, high volume customers;
 
   
the ability of our third party suppliers, and service subcontractors to provide us sufficient quantities of high quality products, components, and/or services on a timely and cost-effective basis;
 
   
the effectiveness of our ongoing efforts to continuously reduce manufacturing costs and manage operating expenses;
 
   
our ability to utilize our manufacturing facilities and personnel at efficient levels, maintaining sufficient production capacity and necessary manufacturing yields;
 
   
our ability to plan, schedule, and execute capacity expansion, including the anticipated addition in 2021 of approximately 90,000 square feet to our Andover manufacturing facility;
 
   
the timing of our new product introductions and our ability to meet customer expectations for timely delivery of fully qualified products;
 
   
the timing of new product introductions or other competitive actions (e.g., product price reductions) by our competitors;
 
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the ability to hire, retain, and motivate qualified employees to meet the demands of our customers;
 
   
intellectual property disputes;
 
   
litigation-related costs, which may be significant;
 
   
adverse economic conditions in the U.S. and those foreign countries in which we operate, as well as our ability to respond to unanticipated developments, such as the imposition of tariffs or trade restrictions; and
 
   
adverse budgetary conditions within the U.S. government, particularly the Department of Defense, which continue to influence spending on current and anticipated programs into which we sell or anticipate to sell our products;
 
   
costs related to compliance with increasing worldwide governance, quality, environmental, and other regulations;
 
   
costs and consequences of disruption by third-parties of our global computer network and related resources;
 
   
the effects of events outside of our control, including public health emergencies, natural disasters, terrorist activities, political risks, international conflicts, information security breaches, communication interruptions, and other
force majeure
.
As a result of these and other factors, we cannot assure you we will not experience significant fluctuations in future operating results on a quarterly or annual basis. In addition, if our operating results do not meet the expectations of investors, the market price of our Common Stock may decline.
Global economic uncertainty associated with the
COVID-19
pandemic could materially and adversely affect our business and consolidated operating results.
During 2020, economic conditions varied by region, and were rapidly and significantly influenced by the
COVID-19
pandemic. The
COVID-19
pandemic and the response of governments worldwide to contain its spread negatively influenced our financial and operational performance for all four quarters of 2020, and future developments may have a potentially more substantial negative influence on our financial and operational performance over an unknown period of time.
Our deliveries to and orders from North American industrial and defense electronics customers declined sharply at the onset of the pandemic, during the first quarter of 2020, given reduced manufacturing activity and broad uncertainty. The second half of 2020 saw a recovery of North American activity to
pre-pandemic
levels. We believe domestic demand will further improve once the
COVID-19
pandemic is substantially contained and uncertainties are reduced, but we cannot predict when this will occur.
Trading conditions in China (inclusive of Hong Kong, our largest international market), had deteriorated through 2019 due to macroeconomic and trade-related uncertainties. At the beginning of 2020, trading conditions were significantly further affected by the
COVID-19
pandemic, with much of the country’s manufacturing disrupted for January and February 2020. By late March 2020, after aggressive measures to contain the coronavirus, the Chinese government quickly implemented economic stimulus measures, and we experienced a rapid recovery of demand from China and Hong Kong. This demand was sustained through the remainder of 2020. As addressed in our discussion herein of market characteristics, exports to China and Hong Kong for 2020 totaled approximately $93,000,000, representing approximately 31.4% of total revenue for the year. We believe this volume was primarily associated with the stimulus spending of the Chinese government, although we also believe an unquantifiable amount of this volume may have been associated with accelerated purchasing by customers anticipating further deterioration of the trade relationship between China and the U.S., which, if it were to occur, could substantially limit purchases by such customers. Our belief is based on input from our
 
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distribution partners in China, as well as the mix of products exported over the past three years, reflecting the transfer by our OEM customers for Advanced Products (and their contract manufacturers) of the majority of production programs from China and Hong Kong to other countries in order to avoid inbound and outbound tariffs. Exports to China and Hong Kong peaked at approximately $109,000,000 in 2018, but that figure included approximately $50,000,000 of exports of Advanced Products to OEM customers and their contract manufacturers. As stated, the majority of the programs associated with this amount have been transferred to other countries.
We anticipate demand in 2021 from China and Hong Kong will approximate recent quarterly levels, based on information from our customers and distribution partners, and assuming the
COVID-19
pandemic is substantially contained. Should China’s economic stimulus policies change or if there is a further deterioration of trade relations between the U.S. and China, such demand may decline. However, we cannot predict if or when circumstances may change, nor can we predict the amount by which bookings or shipments may change.
We have taken action to protect the health and safety of our workforce and to otherwise minimize the potential impact of the coronavirus on our operations, the costs of which, to date, have not had a material effect on our financial performance. We expect to maintain the measures put in place until we determine the
COVID-19
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 government mandate or requirement. Such further actions may have a negative influence on our costs and productivity and, in turn, our financial and operational performance.
Our customers, business partners, and suppliers have been and may continue to be adversely affected by the
COVID-19
pandemic, which also may contribute to a negative influence on our future financial and operational performance.
Global economic and political uncertainties, notably those associated with trade policy, could materially and adversely affect our business and consolidated operating results.
For the years ended December 31, 2020, 2019, and 2018, revenues from sales outside the United States were 64.4%, 53.7%, and 62.0%, respectively, of our total revenues. Net sales to customers in China and Hong Kong, our largest international market, accounted for approximately 31.4% in 2020, approximately 22.1% in 2019, and approximately 37.4% in 2018, respectively, of total net sales. We expect international sales, notably in Asia, will continue to be a significant component of total sales, since many of the OEMs and ODMs we target as customers are domiciled offshore, and such customers increasingly utilize offshore contract manufacturers, and rely upon those contract manufacturers to place orders directly with us. We also expect international revenue from our distributors to continue to increase.
To date, we have not experienced material delays or reduced raw material availability as a result of trade disputes between the U.S. and China, including the imposition in 2018 of import tariffs under the provisions of Section 301 of the Trade Act of 1974 (19 U.S.C. § 2411) (“Section 301 Tariffs”) on certain Chinese goods imported into the United States. However, the costs of Section 301 Tariffs have had a material impact on our profitability. For the year ended December 31, 2020, Section 301 Tariffs totaled approximately $7,259,000, an increase of 37% over the $5,280,000 incurred for 2019. For 2020 and 2019, Section 301 Tariffs totaled approximately 2.4% and 2.0%, respectively, of annual revenue, representing a material reduction in our gross profit margin as a percentage of annual revenue.
We continue to evaluate alternative sources of raw materials, and, in late 2020, we qualified
non-Chinese
vendors for certain high-volume raw materials and components. We anticipate a reduction in Section 301 Tariffs we incur during 2021, given the ongoing transition to
non-Chinese
vendors, but we are not able to estimate the amount of such reduction, if any. Similarly, we cannot predict if or when the U.S. government may reduce or eliminate Section 301 Tariffs.
 
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We also have filed “duty drawback” applications with U.S. Customs and Border Protection for the recovery of Section 301 Tariffs paid on raw materials and components used to produce products we subsequently exported. At this time, we have received no such recovery, and we are not able to estimate the amount of any recovery or the timing thereof.
In 2019, China implemented reciprocal inbound tariffs of up to 25% on products exported from the U.S., including all of our products. We do not believe these tariffs, incurred by our Chinese and Hong Kong distributors, have had a material impact on the unit volume or dollar value of our exports to China, which we attribute to the differentiated performance of our products in market segments in which we have an established presence. However, we cannot predict the long-term influence of these tariffs on our competitive position in China, especially in light of the increased pressure by the Chinese government on Chinese manufacturers to meet the “China 2025” mandate for targeted development of Chinese technology sectors. Under this mandate, domestic technology vendors are explicitly favored over foreign vendors such as Vicor. We believe we experienced reduced demand in certain segments (e.g., rail), notably in 2019, reflecting the significant role of state-owned enterprises in those segments. We regularly assess the competitive position and profitability of certain product lines sold in China and Hong Kong, and may choose to reduce our product offerings if competitive conditions and reduced profitability so warrant.
Uncertain macroeconomic conditions, extended trade disputes, and the relative strength of the U.S. Dollar may reduce
end-demand
for our customers’ products and, in turn, their purchases of our products, thereby reducing our revenues and earnings. In addition, such adverse conditions may, among other things, result in increased price competition for our products, notably in our Brick Product categories, increased risk of excess and obsolete inventories, increased risk in the collectability of our accounts receivable from our customers, increased risk in potential reserves for doubtful accounts and write-offs of accounts receivable, and higher operating costs as a percentage of revenues.
Our operating results recently have been influenced by a limited number of customers, and our future results may be similarly influenced.
Since the introduction of our Advanced Products, the Company has derived the majority of its revenue from Advanced Products in any given year from either one customer or a limited number of customers, whether through sales directly to the customer(s) or indirectly to the customers’ contract manufacturers. This concentration of revenue is a reflection of the relatively early stage of adoption of the Advanced Products and the associated technologies and power system architectures, and our targeting of market leading innovators as initial customers.
Our current sales and marketing efforts are focused primarily on accelerating the adoption of Advanced Products by a diversified customer base, across a number of identified market segments. While we believe we have been successful to date in diversifying our Advanced Products customer base beyond early adopters, we cannot assure you our strategy will be successful and further diversification of customers will be achieved.
We may not be able to procure necessary key components or raw materials, or we may purchase excess raw material inventory or unusable inventory, which increases the risk of reserve charges to reduce the value of any inventory deemed excess or obsolete, thereby reducing our profitability.
The power systems industry, and the electronics industry as a whole, can be subject to pronounced, lengthy business cycles and otherwise subject to sudden and sharp changes in demand. Our success, in part, is dependent on our ability to forecast and procure inventories of components and materials to match production schedules and customer delivery requirements. Many of our products require raw materials supplied by a limited number of vendors and, in some instances, a single vendor. During certain periods, key components or materials required to build our products may become unavailable in the timeframe required for us to meet our customers’ needs. Our inability to secure sufficient raw materials to manufacture products for our customers has reduced, in the past, our revenue and profitability and could do so again.
 
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We may choose, and have chosen, to mitigate our inventory risks by increasing the levels of inventory for certain components and materials. Such increased inventory levels may increase the potential risk for excess or obsolete inventories, should our forecasts fail to materialize or if there are negative factors impacting our customers’ end markets, leading to order cancellation. If we identify excess inventory or determine certain inventory is obsolete (i.e., unusable), we likely will record additional inventory reserves (i.e., expenses representing the
write-off
of the excess or obsolete inventory), which could have an adverse effect on our gross margins and on our operating results.
We rely on third-party vendors and subcontractors for supply of components, assemblies, and services and, therefore, cannot control the availability or quality of such components, assemblies, and services.
We depend on third-party vendors and subcontractors to supply components, assemblies, and services used to manufacture our products, some of which are supplied by a single vendor. We have experienced shortages of certain semiconductor components and delays in service delivery, have incurred additional and unexpected costs to address the shortages and delays, and have experienced our own delays in production and shipping.
If suppliers or subcontractors cannot provide their products or services on time or to our specifications, we may not be able to meet the demand for our products and our delivery times may be negatively affected. In addition, we cannot directly control the quality of the products and services provided by third parties. In order to expand revenue, we likely will need to identify and qualify new suppliers and subcontractors to supplant or replace existing suppliers and subcontractors, which may be a time-consuming and expensive process. In addition, any qualification of new suppliers may require customers of our products utilizing products and services from new suppliers and service providers to undergo a
re-qualification
process. Such circumstances likely would lead to disruptions in our production, increased manufacturing costs, delays in shipping to our customers, and/or increases in prices paid to third parties for products and services.
As previously disclosed, we rely on a third-party partner to provide certain manufacturing steps associated with a proprietary Advanced Products packaging process. This process, developed with the third-party partner, involves complex metal surface finishing, performed on equipment developed by the third-party partner. An important, differentiating benefit of this proprietary process is that it does not generate problematic effluent, resulting in an environmentally safe approach to metal surface finishing, with minimal waste. We have entered into agreements with the third-party partner for production and transfer of technologies and process
know-how,
including the purchase of the enabling equipment developed by the third-party partner.
To date, we have successfully relied upon this third-party partner to perform these manufacturing steps, although we have experienced delivery delays associated with the third-party partner’s volume constraints. This experience caused us to accelerate our schedule for establishing our own high-volume capabilities
in-house,
modifying, in 2020, our construction plans to accommodate a dedicated,
on-premises
metal surface finishing facility. We expect to rely on our third-party partner for production requirements through the installation and qualification for production of the enabling equipment in the addition to our Andover manufacturing facility. We also expect to rely on our third-party partner in the future for surge capacity requirements.
If the third-party partner cannot deliver sufficient volumes to us, we are unable to complete our facility expansion in a timely manner, or if we are unable to effectively implement the new manufacturing processes, we may not be able to achieve the expected volumes or production capacity and, as a result, may experience reduced manufacturing yields, delays in product deliveries, and/or increased expenses, any of which could negatively influence our financial condition and results of operations.
Extended interruption of production at our manufacturing facility in Andover, Massachusetts, could materially reduce our revenue, increase our costs, and, potentially, negatively impact our customers.
The majority of our power components and power systems, whether for direct sale to customers or for sale to our subsidiaries for incorporation into their respective products, are manufactured in our Andover facility.
 
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Substantial damage to our existing manufacturing facility due to fire, natural disaster, power loss, or other events, including disruptive events associated with our ongoing expansion of the facility, could interrupt manufacturing, contributing to lengthy shipment delays that could have a negative impact on customers and, in turn, our customer relationships. While we have never experienced any meaningful interruption of manufacturing in our history, any prolonged inability to utilize all or a significant portion of our Andover facility could have a material adverse effect on our results of operations.
An extended delay in completing our capacity expansion could have a material adverse effect on our results of operations and negatively impact our ability to execute on our Advanced Products strategy.
We have been making and will continue to make capital investments for the expansion of manufacturing capacity for the production of Advanced Products at our Andover facility. Based on our extended long-term volume forecast, we anticipate additional capacity will be required to meet expected customer requirements. During the second quarter of 2020, we began construction of an approximately 90,000 square feet,
two-story
addition to our existing plant, and that construction continues on schedule.
The addition to our facility includes installation of certain equipment and implementation of certain manufacturing steps associated with Advanced Products manufacturing processes we currently outsource to a third-party partner, as described above. These manufacturing processes are associated with a proprietary packaging approach requiring complex metal surface finishing using environmentally safe technologies. Given our volume expectations and the proprietary elements of these processes, we have chosen to accelerate the development of a captive capacity that we expect will exceed the total capacity available from our third-party partner. Today, we own and operate, with our employees, certain equipment on premises at our third-party partner and, as such, have established a level of operational competence we believe will enable us to successfully install and implement these manufacturing processes internally. However, we may experience delays and incur additional costs during 2021 in implementing the manufacturing processes, given the complexity of the installation and qualification of the equipment.
Once the facility expansion has been completed and all manufacturing equipment installed and qualified for volume production, we may not achieve the anticipated production volumes and operating efficiencies. Any delay in achieving anticipated operating efficiencies associated with added capacity may cause manufacturing costs to be higher than expected for some period of time, thereby potentially negatively influencing our operating and financial results.
Disruption of our information technology infrastructure could adversely affect our business.
We depend heavily on our computing and communications infrastructure to achieve our business objectives, particularly for our financial and operational record keeping, our computer-integrated manufacturing processes controlling all aspects of our operations in our manufacturing facility in Andover, Massachusetts, our public website, and our email communications. We also rely on trusted third parties to provide certain infrastructure support services to us. If we or a third party service provider encounter a problem that impairs this infrastructure, the resulting disruption could impede the accuracy and timeliness of our financial reporting processes, and our ability to record or process customer orders, manufacture, and ship in a timely manner, or otherwise carry on business in the normal course. Our image and reputation also could be negatively affected by such circumstances. Additionally, we could incur material liabilities associated with the harm such impairment and disruption of our infrastructure may have on third parties including those associated with the unintentional release of confidential information and/or sensitive data. While we carry business interruption insurance to offset financial losses from such an interruption, and cyber-risk insurance to address potential liabilities from such circumstances, such insurance may be insufficient to compensate us for the potentially significant costs or liabilities incurred. Any such events, if prolonged, could have a material and adverse effect on our operating results and financial condition.
 
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On December 24, 2019, elements of our network were compromised by a form of malware referred to as “ransomware.” In close collaboration with our service provider, we had restored computing and network functions to full operational status by the afternoon of December 27, 2019. Subsequent analysis by management and the forensic specialists we retained allowed us to conclude the incident had no material impact on our operations, financial condition and performance, or the integrity of our financial reporting systems. In response to the vulnerabilities identified, we have substantially enhanced network and file security through expanded and improved system monitoring, network and file access procedures, user training, and emergency response protocols. However, even with our expanded commitment to continuous improvement of the security of our information technology infrastructure, we can offer no assurance that we will be successful in detecting or preventing network security incidents and associated disruptions in the future.
Our systems are designed to protect us from network security incidents and associated disruptions. However, as evidenced by the ransomware incident described above, we remain vulnerable to computer viruses and related software-based challenges to the integrity of our systems, unauthorized or illegal
break-ins,
or malicious network hacking, equipment or software sabotage, acts of vandalism to our systems by third parties, and, in the extreme, forms of cyber-terrorism. Our security measures or those of our third party service provider detected, but did not prevent, the network security incident and the associated disruptions described above and may not detect or prevent such incidents and disruptions in the future.
As of December 31, 2020, we were compliant with the comprehensive requirements for the protection of controlled unclassified information (“CUI”) as set forth in Special Publication
800-171
of the National Institute of Standards and Technology (“NIST”). The Company provides confidential information to third party business partners and/or receives confidential information from third party business partners in certain circumstances, when doing so is necessary to conduct business, particularly with departments of agencies of the U.S. Government. While we employ confidentiality agreements to protect other sensitive information (i.e., information not considered CUI), our own security measures or those of our third party service providers may not be sufficient to protect such information in the event the computing infrastructure of these third party business partners is compromised. Security incidents involving our computing and communications infrastructure or that of a third party business partner or service provider could result in the misappropriation or unauthorized release of confidential information belonging to us or to our employees, partners, customers or suppliers, which could result in an interruption to our operations, result in a violation of privacy or other laws, expose us to a risk of litigation, or damage our reputation, any of which could have a material and adverse effect on our operating results and financial condition. Our network segmented NIST
800-171
environment was not impacted by the December 2019 ransomware incident, but there can be no assurance that it will not be impacted by similar incidents in the future, which could have a material and adverse effect on our operating results and financial condition for the reasons described above.
We may face legal claims and litigation from product warranty or other claims that could be costly to resolve.
We have in the past and may in the future encounter legal action from customers, vendors, or others concerning product warranty or other claims. We generally offer a
two-year
warranty from the date title passes from us for all of our standard products. Effective January 1, 2017, we extended the warranty period to three years for a range of H Grade, M Grade and MI Family
DC-DC
legacy products sold after that date. In a limited number of circumstances, we have entered into supply contracts with certain high-volume customers calling for extended warranty terms. With our distribution partners, we also enter into contracts providing for our product warranties to transfer to the end customer upon final sale of our product(s) by the distributor.
We invest significant resources in the testing of our products; however, if any of our products contain defects, we may be required to incur additional development and remediation costs, pursuant to our warranty policies. These issues may divert our technical and other resources from other product development efforts and could result in claims against us by our customers or others, including liability for costs associated with product
 
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returns, which may adversely influence our operating results. If any of our products contain defects, or have reliability, quality, or compatibility problems, the Company’s reputation may be damaged, which could make it more difficult for us to sell our products to existing and prospective customers and could adversely affect our operating results. We are currently party to a limited number of supply agreements with certain customers contractually committing us to warranty and indemnification requirements exceeding those to which we have been exposed in the past. While we maintain insurance coverage for such exposure, we could incur significant financial cost beyond the limits of such coverage, as well as operational disruption and damage to our competitive position and image if faced with a significant product warranty or other claim.
Our ability to successfully implement our business strategy may be limited if we do not retain our key personnel and attract and retain skilled and experienced personnel.
Our success depends on our ability to retain the services of our executive officers. The loss of one or more members of senior management could materially adversely influence our business and financial results. In particular, we are dependent on the services of Dr. Vinciarelli, our founder, Chairman of the Board, Chief Executive Officer, and President. The loss of the services of Dr. Vinciarelli could have a material adverse effect on our development of new products and on our results of operations. On February 24, 2021, James A. Simms notified us of his decision to resign from his positions as our Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary effective June 30, 2021. We have initiated a search for a new Chief Financial Officer. Such leadership transitions can be inherently difficult to manage and may result in a loss of institutional knowledge and cause disruptions to our business. If we cannot effectively manage leadership transitions and management changes, it could make it more difficult to successfully operate our business and pursue our business goals. In addition, our research and development and marketing and sales activities depend on highly skilled engineers and other personnel with technical skills, who are in high demand and are difficult to replace. Our continued operations and growth depend on our ability to attract and retain skilled and experienced personnel in a very competitive employment market. If we are unable to attract and retain such employees, our ability to successfully implement our business strategy may be harmed.
Competitive Risks
We compete with many companies possessing far greater resources.
Some of our competitors have far greater financial, manufacturing, technical, and sales and marketing resources than we possess or have access to. Our Brick Products compete with those products offered by domestic and foreign manufacturers of integrated power supplies and related power conversion components. With our Advanced Product lines, we compete with global IDMs and fabless developers of semiconductor-based power management modules and power management ICs. These competitors have far larger organizations and broader semiconductor-based product lines. Competition is generally based on product performance, design flexibility (i.e., ease of use), product price, and product availability, but with the relative importance of these factors varying among products, markets, and customers.
Existing or new competitors may develop products or technologies that more effectively address the demands of our customers and markets with enhanced performance, features and functionality, or lower cost. Larger competitors frequently seek to maintain market share and protect customer relationships through heavily-discounted pricing, which we may not be able to match. If we fail to develop and commercialize leading-edge technologies and products that are cost effective and maintain high standards of quality, and introduce them to the market on a timely basis, our competitive position and results of operations could be materially adversely affected.
Our future success depends upon our ability to develop and market differentiated, leading-edge power conversion products for larger customers, potentially contributing to lengthy product development and sales cycles that may result in significant expenditures before revenues are generated. Our future operating results are dependent on the growth in such customers’ businesses and on our ability to profitably develop and deliver products meeting customer requirements.
The power system industry and the industries in which many of our customers operate are characterized by intense competition, rapid technological change, quickened product obsolescence, and price erosion for mature
 
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products, each of which could have an adverse effect on our results of operations. We are following a strategy based on the development of differentiated Advanced Products addressing what we believe to be the long-term limitations of traditional power architectures, while at the same time sustaining sales and profitability of our well-established Brick Products. The development of new, innovative products is often a complex, time-consuming, and costly process involving significant investment in research and development, with no assurance of return on investment. Although we have introduced many Advanced Products over recent years, there can be no assurance we will be able to continue to develop and introduce new and improved products and power system concepts in a timely or efficient manner. Similarly, there can be no assurance recently introduced or to be developed products will achieve customer acceptance.
Our future success depends substantially upon customer acceptance of our innovative Advanced Products, notably our
Power-on-Package
concept in AI and other high-performance applications. As we have been in the early stages of market penetration for these and other Advanced Products, we have experienced lengthy periods during which we have focused our product development efforts on the specific requirements of a limited number of large customers, followed by further periods of delay before meaningful purchase orders are received. These lengthy development and sales cycle times increase the possibility a customer may decide to cancel or change product plans, which could reduce or eliminate our sales to that customer. As a result, we may incur significant product development expenses, as well as significant sales and marketing expenses, before we generate the related revenues for these products. Furthermore, we may never generate the anticipated revenues from a product after incurring such expenses if our customer cancels or changes its product plans.
We continue to shift our
go-to-market
strategy to focus on larger opportunities with global OEMs, ODMs, and contract manufacturers. Our growth is therefore dependent on: the pace at which these OEMs and ODMs develop their own new products; the acceptance of our Advanced Products by these OEMs and ODMs; and the success of the customers’ products incorporating our Advanced Products. If we fail to anticipate changes in our customers’ businesses and their changing product needs or do not successfully identify and enter new markets, our results of operations and financial position could be negatively impacted.
In 2020, we further expanded our dedicated sales effort to penetrate the automotive market with our Advanced Products, notably in the rapidly expanding 48V opportunity within the electric vehicle and mild hybrid vehicle market segments. The automotive market is dominated by relatively few global OEMs and “tiers” of well-established suppliers. Penetrating this market will be challenging and we may not be successful in doing so. Additionally, our early success with vendors of AI computing solutions may not translate into long-term success with customers participating in the long-term development of autonomous driving solutions.    
We cannot offer any assurance the markets we currently serve will grow in the future, our Advanced Products or Brick Products will meet respective market requirements, or we can maintain adequate gross margins or operating profits in these markets.
Intellectual Property Risks
We may be unable to adequately protect our proprietary rights, which may limit our ability to compete effectively.
We operate in an industry in which the ability to compete depends on the development or acquisition of proprietary technologies that must be protected to preserve the exclusive use of such technologies. We devote substantial resources to establish and protect our patents and proprietary rights, and we rely on patent and intellectual property law to protect such rights. This protection, however, may not prevent competitors from independently developing products similar or superior to our products. We may be unable to protect or enforce current patents, may rely on unpatented technology that competitors could restrict or replicate, or may be unable to acquire patents in the future, all of which may have a material adverse effect on our competitive position. In addition, the intellectual property laws of foreign countries may not protect our rights to the same extent as those
 
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of the United States. We have been defending and may need to continue to defend or challenge patents. We have incurred and expect to incur significant financial costs in the defense of our patented technologies and have devoted and expect to devote significant resources to these efforts which, if unsuccessful, may have a material adverse effect on our operating results and financial position.
We face intellectual property infringement claims that could be disruptive to operations and costly to resolve and may encounter similar infringement claims in the future.
The power supply industry is characterized by vigorous protection and pursuit of intellectual property rights. We have in the past and may in the future receive communications from third parties asserting that our products or manufacturing processes infringe on a third party’s patent or other intellectual property rights. Such assertions, if publicly disclosed, have in the past and may in the future inhibit the willingness of potential customers to purchase certain of our products. In the event a third party makes a valid intellectual property claim against us and a license is not available to us on commercially reasonable terms, or at all, we could be forced to either redesign or stop production of products incorporating that technology, and our operating results could be materially and adversely affected. In addition, litigation may be necessary to defend us against claims of infringement, and this litigation could be costly, extend over a lengthy period of time, and divert the attention of key personnel. An adverse outcome in these types of matters could have a material adverse impact on our operating results and financial condition.
Please see Note 17 — Commitments and Contingencies, to the Consolidated Financial Statements for information regarding current litigation related to our intellectual property.
Any expenses or liability resulting from the outcome of litigation could adversely influence our operating results and financial condition.
From time to time, we may be subject to claims or litigation, including intellectual property litigation as described elsewhere in this Annual Report on Form
10-K.
Any such claims or litigation may be time-consuming and costly, divert management resources, require us to change our products, or have other adverse effects on our business. Any of the foregoing could have a material adverse effect on our operating results and could require us to pay significant monetary damages.
The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is considered probable an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. In determining whether a loss should be accrued, we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial statements. As of December 31, 2020, our evaluation led us to conclude no accrual of a loss contingency was warranted.
Regulatory Risks
If we fail to maintain an effective system of internal controls over financial reporting or discover material weaknesses in our internal controls over financial reporting, we may not be able to report our financial results accurately or timely or detect fraud, which could have a material adverse effect on our business.
An effective internal control environment is necessary for us to produce reliable financial reports and is an important part of our effort to prevent financial fraud. Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”) requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting.
 
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We have an ongoing program to perform the system and process evaluation and testing necessary to comply with the requirements of SOX and to continuously improve and, when necessary, remediate internal controls over financial reporting.
While management evaluates the effectiveness of our internal controls on a regular basis, these controls may not always be effective. There are inherent limitations on the effectiveness of internal controls, including collusion, management override, and failure in human judgment. In addition, control procedures are designed to reduce rather than eliminate business risks. In the event our Chief Executive Officer or Chief Financial Officer, our certifying officers under SOX, or our independent registered public accounting firm determines our internal controls over financial reporting are not effective as defined under Section 404, we may be unable to produce reliable financial reports or prevent fraud, which could materially harm our business. In addition, we may be subject to sanctions or investigation by government authorities or self-regulatory organizations, such as the SEC, the Financial Industry Regulatory Authority, or The NASDAQ Stock Market LLC. Any such actions could affect investor perceptions of the Company and result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our Common Stock to decline or limit our access to capital.
Regulations related to conflict minerals could adversely impact our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals (including gold, tantalum, tin, and tungsten, and their related ores), originating from the Democratic Republic of Congo (“DRC”) and adjoining countries. As a result, in August 2012 the SEC released final rules for annual disclosure and reporting for those companies who use conflict minerals mined from the DRC and adjoining countries in their products. We began to implement processes within our supply chain to comply with these rules beginning in 2012 filed our initial Form SD in May 2014, and have filed Form SD annually since then. There have been and will continue to be costs associated with complying with these disclosure requirements, including due diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes, or sources of supply as a consequence of such verification activities. The implementation of these rules could adversely affect the sourcing, supply, and pricing of materials used in our products. As there may be only a limited number of suppliers offering “conflict free” conflict minerals, we cannot be certain we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement.
Risks Related to Share Value
The price of our Common Stock has been volatile and may fluctuate in the future.
Because of the factors set forth above and below, among others, the trading price of our Common Stock has fluctuated and may continue to fluctuate significantly:
 
   
volatility of the financial markets, notably the equity markets in the U.S.;
 
   
uncertainty regarding the prospects of domestic and foreign economies, including the impact of volatile currency exchange rates;
 
   
uncertainty regarding domestic and international political conditions, including tax, trade, and tariff policies;
 
   
actual or anticipated fluctuations in our operating performance or that of our competitors;
 
   
the performance and prospects of our major customers, including their adoption of technologies or standards other than those in which we specialize;
 
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announcements by us or our competitors of significant new products, technical innovations, or litigation;
 
   
investor perception of the Company and the industry in which we operate;
 
   
the liquidity of the market for our Common Stock, reflecting a relatively low trading float and relatively low average trading volumes;
 
   
the uncertainty of the declaration and payment of future cash dividends on our Common Stock; and
 
   
the concentration of ownership of our Common Stock by Dr. Vinciarelli, our Chairman of the Board, Chief Executive Officer, and President.
In the past, we have declared and paid cash dividends on our Common Stock. The payment of dividends is based on the periodic determination by our Board of Directors that we have adequate capital to fund anticipated operating requirements and that excess cash is available for distribution to stockholders via a dividend. We have no formal policy regarding dividends and, as such, investors cannot make assumptions regarding the possibility of future dividend payments nor the amounts and timing thereof. As of December 31, 2020, we have no plans to declare or pay a cash dividend.
The ownership of our Common Stock is concentrated between Dr. Vinciarelli and a limited number of institutional investors. As of December 31, 2020, Dr. Vinciarelli was the beneficial owner of 10,014,454 shares of our Common Stock, plus 155,977 shares which Dr. Vinciarelli has the right to acquire upon exercise of options to purchase Common Stock within 60 days of December 31, 2020. He also holds 11,023,648 shares of our unregistered Class B Common Stock (which may only be sold or transferred after required conversion, on a
one-for-one
basis, into registered shares of Common Stock), which together with his ownership of Common Stock, represents 49.6% of our total issued and outstanding shares of capital stock. Accordingly, the market float for our Common Stock and average daily trading volumes are relatively small, which may negatively impact investors’ ability to buy or sell shares of our Common Stock in a timely manner.
Dr. Vinciarelli owns 93.8% of the issued and outstanding shares of our Class B Common Stock, which possess 10 votes per share. Dr. Estia J. Eichten, a member of our Board of Directors, owns the majority of the balance of the Class B Common Stock issued and outstanding. As such, Dr. Vinciarelli, controlling in aggregate 80.4% of our outstanding voting securities, has effective control of our governance.
 
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
 
ITEM 2.
PROPERTIES
Our corporate headquarters building in Andover, Massachusetts, which we own, provides approximately 90,000 square feet of office space for our sales, marketing, engineering, and administrative personnel. We also own a building of approximately 230,000 square feet in Andover, Massachusetts, which houses all Massachusetts manufacturing activities.
Current capital investments are focused on the expansion of manufacturing capacity for the production of Advanced Products at our Andover facility. Based on our long-term forecast of production levels, we anticipate substantial additional capacity will be required to meet expected requirements beyond 2023. During 2020, we began construction of a
two-story
addition to our Andover manufacturing facility that is intended to expand the Advanced Products production area by approximately 90,000 square feet. Construction is proceeding on schedule, and we expect to take occupancy later this year. We also are proceeding with the evaluation of alternative projects for the addition of another, larger manufacturing facility to be focused on Advanced Products for automotive applications, should we anticipate the need based on our forecasts for capacity beyond 2023.
 
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We own a single-story industrial building of approximately 31,000 square feet in Sunnyvale, California, which we lease on a long-term basis to a corporate tenant, which occupied the building beginning in June 2016.
All other domestic and foreign facilities are leased from third-party lessors on arms’ length terms. We believe our owned and leased facilities are adequate for our foreseeable needs.
 
ITEM 3.
LEGAL PROCEEDINGS
See Note 17 — Commitments and Contingencies, to the Consolidated Financial Statements for a complete description of the Company’s legal proceedings.
 
ITEM 4.
MINE SAFETY DISCLOSURES
Not Applicable.
 
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PART II
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is listed on The NASDAQ Stock Market LLC, under the trading symbol “VICR.” Shares of our Class B Common Stock are not registered with the Securities and Exchange Commission, are not listed on any exchange nor traded on any market, and are subject to transfer restrictions under our Restated Certificate of Incorporation, as amended.
As of February 16, 2021, there were 116 holders of record of our Common Stock and 13 holders of record of our Class B Common Stock. These numbers do not reflect persons or entities that hold their shares in nominee or “street name” through various brokerage firms.
Issuer Purchases of Equity Securities
In November 2000, our Board of Directors authorized the repurchase of up to $30,000,000 of our 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 and amounts of Common Stock repurchases are at the discretion of management based on its view of economic and financial market conditions.
 
Month of Fourth Quarter 2020
  
Total

Number
of Shares
Purchased
    
Average Price Paid
per Share
    
Total Number of
Shares

Purchased Pursuant to
November 2000 Plan
    
Remaining
Dollar Value of
Shares
Authorized
For Purchase
Pursuant to
November 2000
Plan
 
October 1 — 31, 2020
             —                    $ —                        —              $ 8,541,000
November 1 — 30, 2020
             —                    $ —                        —              $ 8,541,000
December 1 — 31, 2020
             —                    $ —                        —              $ 8,541,000
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
             —                    $ —                        —              $ 8,541,000
  
 
 
    
 
 
    
 
 
    
 
 
 
 
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Stockholder Return Performance Graph
The graph set forth below presents the cumulative, five-year stockholder return for each of the Company’s Common Stock, the Standard & Poor’s 500 Index (“S&P 500 Index”), a value-weighted index made up of 500 of the largest, by market capitalization, listed companies, and the Standard & Poor’s SmallCap 600 Index (“S&P SmallCap 600 Index”), a value-weighted index of 600 listed companies with market capitalizations between $200,000,000 and $1,000,000,000.
The graph assumes an investment of $100 on December 31, 2015, in each of our Common Stock, the S&P 500 Index, and the S&P SmallCap 600 Index, and assumes reinvestment of all dividends. The historical information set forth below is not necessarily indicative of future performance.
Comparison of Five Year Cumulative Return
Among Vicor Corporation, S&P 500 Index
and S&P SmallCap 600 Index
 

 
    
2015
 
2016
   
2017
   
2018
   
2019
   
2020
 
Vicor Corporation
  $100.00   $ 165.57     $ 229.17     $ 414.36     $ 512.28     $ 1,011.18  
S&P 500 Index
  $100.00   $ 111.96     $ 136.40     $ 130.42     $ 171.49     $ 203.04  
S&P SmallCap 600 Index
  $100.00   $ 126.56     $ 143.30     $ 131.15     $ 161.03     $ 179.20  
Our equity plan information required by this item is incorporated by reference to the information in Part III, Item 12 of this Annual Report on Form
10-K.
 
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ITEM 6.
SELECTED FINANCIAL DATA
The following selected consolidated financial data with respect to our statements of operations for the years ended December 31, 2020, 2019, and 2018, and with respect to our balance sheet as of December 31, 2020 and 2019, are derived from our audited Consolidated Financial Statements, which appear elsewhere in this Annual Report on Form
10-K.
The following selected consolidated financial data with respect to our statements of operations for the years ended December 31, 2017 and 2016, and with respect to our balance sheets as of December 31, 2018, 2017, and 2016, are derived from our Consolidated Financial Statements, which are not included herein. The data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.
 
    
Year Ended December 31,
 
Statement of Operations Data
  
2020
    
2019
    
2018
    
2017
   
2016
 
    
(In thousands, except per share data)
 
Net revenues
   $ 296,576    $ 262,977    $ 291,220    $ 227,830   $ 200,280
Income (loss) from operations
     17,368      13,821      32,059      (1,360     (6,314
Consolidated net income (loss)
     17,922      14,109      31,846      258     (6,261
Net income (loss) attributable to noncontrolling interest
     12      11      121      91     (14
Net income (loss) attributable to Vicor Corporation
     17,910      14,098      31,725      167     (6,247
Net income (loss) per share — basic attributable to Vicor Corporation
     0.42      0.35      0.80      0.00       (0.16
Net income (loss) per share — diluted attributable to Vicor Corporation
     0.41      0.34      0.78      0.00       (0.16
Weighted average shares — basic
     42,186      40,330      39,872      39,228     38,842
Weighted average shares — diluted
     43,869      41,677      40,729      39,933     38,842
 
    
As of December 31,
 
Balance Sheet Data
  
2020
    
2019
    
2018
    
2017
    
2016
 
    
(In thousands)
 
Working capital
   $ 276,419    $ 149,136    $ 129,062    $ 90,796    $ 89,545
Total assets
     396,239      240,727      221,068      165,724      154,067
Total liabilities
     45,084      34,857      36,978      29,305      23,050
Total equity
     351,155      205,870      184,090      136,419      131,017
 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
A discussion regarding our results of operations for the year ended December 31, 2019, compared to the year ended December 31, 2018, was included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, on pages
36-38
under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which was filed with the SEC on February 28, 2020.
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
 
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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.
In June 2020, we completed an underwritten public offering of 1,769,231 shares of our Common Stock, at a price to the public of $65.00 per share. We received net proceeds of approximately $109.7 million, after deduction of underwriting discounts and offering expenses. We intend to use the net proceeds from the offering for the expansion of our manufacturing facilities and other general corporate purposes.
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
 
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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.
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. As described further below, 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 past four quarters. 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.
Rates of absenteeism associated with employee self-quarantine due to exposure to
COVID-19
were steady at a satisfactory level through the third quarter of 2020, but rose in December. 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. As of the date of this report, absenteeism rates have improved, 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.
 
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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.
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.
Recent Developments
On February 24, 2021, James A. Simms notified us of his decision to resign from his positions as our Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary effective June 30, 2021. Mr. Simms’ resignation is not related to our operations, policies, or practices, including our internal controls or other matters related to financial reporting. We have initiated a search for a new Chief Financial Officer, a process with which Mr. Simms will be assisting.
2020 Financial Highlights
 
   
Net revenues increased 12.8% to $296,576,000 for 2020, from $262,977,000 for 2019, primarily due to an overall 28.6% increase in bookings for the year ended December 31, 2020, compared to the year ended December 31, 2019, principally due to an increase of 80.9% in new orders for Advanced Products.
 
   
Export sales, as a percentage of total revenues, represented approximately 64.4% in 2020 and 53.7% in 2019, principally reflecting the locations of OEMs, ODMs, and contract manufacturers utilizing higher volumes of Advanced Products.
 
   
Gross margin increased to $131,447,000 for 2020, from $122,966,000 for 2019. Gross margin, as a percentage of net revenues decreased to 44.3% for 2020 from 46.8% for 2019. Despite higher net revenues and gross margin dollars for the year ended December 31, 2020, gross margin as a percentage of net revenues decreased as compared to the year ended December 31, 2019, primarily due to an unfavorable change in product mix (i.e., a higher percentage of lower margin products were produced and shipped during the year ended December 31, 2020), a negative influence from production inefficiencies and cost variances associated with initial production volumes of new products, certain supply chain constraints associated with the
COVID-19
pandemic, and higher tariff charges.
 
   
Backlog, representing the total of orders for products received for which shipment is scheduled within the next 12 months, was approximately $147,550,000 at the end of 2020, as compared to $104,164,000 at the end of 2019.
 
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Operating expenses for 2020 increased $4,934,000, or 4.5%, to $114,079,000 from $109,145,000 for 2019, due to increases in research and development expenses of $4,328,000 and selling, general, and administrative expenses of $606,000. Compensation and related personnel costs closely track headcount and annual merit-based increases in salary and wages. However, certain other expenses, such as prototyping costs in research and development, or advertising and promotion costs associated with sales initiatives, can vary meaningfully period to period.
 
   
We reported net income for 2020 of $17,910,000, or $0.41 per diluted share, compared to net income of $14,098,000, or $0.34 per diluted share, for 2019. Diluted shares outstanding at
year-end
2020 increased approximately 2.2 million over the prior
year-end,
as a result of the June 2020 underwritten offering of Common Stock and employee exercise of stock options during the year.
 
   
In 2020, as a result of activities associated with our construction and capacity expansion, depreciation and amortization totaled $11,056,000, and capital expenditures were $28,653,000, compared to $10,334,000 and $12,485,000, respectively, for 2019.
 
   
Inventories increased by approximately $8,082,000, or 16.4%, to $57,269,000 at the end of 2020, as compared to $49,187,000 at the end of 2019, primarily due to an increase in raw materials of $9,972,000 to meet increasing demand, partially offset by an increase in reserves of $3,442,000.
The following table sets forth certain items of selected consolidated financial information as a percentage of net revenues for the years shown, ended December 31. This table and the subsequent discussion should be read in conjunction with the selected financial data and the Consolidated Financial Statements and related footnotes contained elsewhere in this report.
 
    
Year Ended December 31,
 
    
2020
   
2019
   
2018
 
Net revenues
     100.0     100.0     100.0
Gross margin
     44.3     46.8     47.7
Selling, general and administrative expenses
     21.3     23.8     21.4
Research and development expenses
     17.2     17.7     15.2
Income before income taxes
     6.2     5.7     11.3
Critical Accounting Policies and Estimates
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 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 — Recently Adopted 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
 
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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. While recent positive operating results, as a result of increases in bookings, caused the Company to be in a cumulative income position as of December 31, 2020, the Company faces uncertainties in forecasting its operating results due to the continued impact of the
COVID-19
pandemic on the Company’s supply chain, certain process issues with the production of Advanced Products and the unpredictability in certain markets. 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, at this time, 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, 2020. 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 quarterly earnings and increases in bookings continue, and the Company’s concerns about industry uncertainty and world events, including the impact of the
COVID-19
pandemic on the Company’s supply chain, 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.
Other new pronouncements issued but not effective until after December 31, 2020 are not expected to have a material impact on our consolidated financial statements.
 
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Year ended December 31, 2020 compared to Year ended December 31, 2019
See Note 19,
Segment Information,
to the Consolidated Financial Statements for a discussion of our change to segment reporting in the second quarter of 2019.
Consolidated net revenues for 2020 were $296,576,000, an increase of $33,599,000, or 12.8%, as compared to $262,977,000 for 2019.
Net revenues, by product line, for the years ended December 31 were as follows (dollars in thousands):
 
                  
Increase
 
    
2020
    
2019
    
    $    
    
    %    
 
Brick Products
   $ 190,256    $ 187,896    $ 2,360      1.3
Advanced Products
     106,320      75,081      31,239      41.6
  
 
 
    
 
 
    
 
 
    
Total
   $ 296,576    $ 262,977    $ 33,599      12.8
  
 
 
    
 
 
    
 
 
    
The increase in net revenues was primarily due to an overall 28.6% increase in bookings for the year ended December 31, 2020, compared to the year ended December 31, 2019, principally due to an increase of 80.9% in new orders for Advanced Products.
Gross margin for 2020 increased $8,481,000, or 6.9%, to $131,447,000 from $122,966,000 in 2019. Gross margin as a percentage of net revenues decreased to 44.3% in 2020 from 46.8% in 2019. Despite higher net revenues and gross margin dollars for the year ended December 31, 2020, gross margin as a percentage of net revenues decreased as compared to the year ended December 31, 2019, primarily due to an unfavorable change in product mix (i.e., a higher percentage of lower margin products were produced and shipped during the year ended December 31, 2020), a negative influence from production inefficiencies and cost variances associated with initial production volumes of new products, certain supply chain constraints associated with the
COVID-19
pandemic, and higher tariff charges.
Selling, general, and administrative expenses were $63,163,000 for 2020, an increase of $606,000, or 1.0%, as compared to $62,557,000 for 2019. As a percentage of net revenues, selling, general, and administrative expenses decreased to 21.3% in 2020 from 23.8% in 2019, primarily due to the increase in net revenues.
The components of the $606,000 increase in selling, general, and administrative expenses were as follows (dollars in thousands):
 
    
Increase (decrease)
 
Compensation
   $ 3,153      8.2 %(1) 
Depreciation and amortization
     318      11.3 %(2) 
Legal fees
     231      14.5 %(3) 
Facilities allocations
     (137      (8.3 )% 
Outside services
     (191      (8.7 )%(4) 
Advertising expenses
     (281      (8.5 )%(5) 
Commissions
     (326      (9.1 )%(6) 
Travel expense
     (1,973      (63.3 )%(7) 
Other, net
     (188      (3.2 )% 
  
 
 
    
   $ 606      1.0
  
 
 
    
 
(1)
Increase primarily attributable to merit-based compensation increases for
non-exempt
hourly employees in May 2020, increases in headcount and higher stock-based compensation expense associated with stock options awarded in June 2020.
 
(2)
Increase attributable to net additions of furniture and fixtures and capitalization of building improvements.
 
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(3)
Increase primarily attributable to higher use of outside legal services associated with the December 2019 ransomware incident, which carried into the first quarter of 2020, and other corporate legal matters.
 
(4)
Decrease primarily attributable to a decrease in the use of outside service providers at our Andover, MA facility.
 
(5)
Decrease primarily attributed to decreases in sales support expenses, direct mailings, and advertising in trade publications.
 
(6)
Decrease primarily attributable to the decline in net revenues subject to commissions.
 
(7)
Decrease primarily attributable to reduced travel by our sales and marketing personnel, due to travel restrictions caused by the
COVID-19
pandemic.
Research and development expenses increased $4,328,000, or 9.3%, to $50,916,000 in 2020 from $46,588,000 in 2019. As a percentage of net revenues, research and development expenses decreased to 17.2% in 2020 from 17.7% in 2019, primarily due to the increase in net revenues.
The components of the $4,328,000 increase in research and development expenses were as follows (dollars in thousands):
 
    
Increase (decrease)
 
Compensation
   $ 2,613      7.9 %(1) 
Deferred costs
     1,004      57.6 %(2) 
Project and
pre-production
materials
     789      11.3 %(3) 
Computer expense
     170      33.3
Depreciation and amortization
     164      9.1
Overhead absorption
     (296      (33.1 )%(4) 
Other, net
     (116      (1.7 )% 
  
 
 
    
     $4,328      9.3%  
  
 
 
    
 
(1)
Increase primarily attributable to merit-based compensation increases for
non-exempt
hourly employees in May 2020, increases in headcount, and higher stock-based compensation expense associated with stock options awarded in June 2020.
 
(2)
Increase primarily attributable to a decrease in the capitalization of costs for certain
non-recurring
engineering projects for which the related revenues have been deferred.
 
(3)
Increase primarily attributable to higher spending for new product development of Advanced Products.
 
(4)
Decrease primarily attributable to a decrease in research and development (“R&D”) personnel incurring time on production activities, compared to R&D activities.
The significant changes in the components of “Other income (expense), net” for the years ended December 31 were as follows (in thousands):
 
    
2020
    
2019
    
Increase

(decrease)
 
Rental income
   $ 792    $ 792    $  
Foreign currency gains (losses), net
     181      (108      289
Interest income
     95      300      (205
Gain on disposal of equipment
     13      38      (25
Credit gains on
available-for-sale
securities
     4      4     
Other
     8      40      (32
  
 
 
    
 
 
    
 
 
 
   $ 1,093    $ 1,066    $ 27
  
 
 
    
 
 
    
 
 
 
 
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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 Europe and Asia, for which the functional currency is the U.S. Dollar. These other subsidiaries in Europe and Asia experienced more favorable foreign currency exchange rate fluctuations in 2020 compared to 2019. Interest income decreased due to a decrease in interest rates.
Income before income taxes was $18,461,000 in 2020, as compared to $14,887,000 in 2019.
The provision for income taxes and the effective income tax rate for the years ended December 31 were as follows (dollars in thousands):
 
    
2020
   
2019
 
Provision for income taxes
   $ 539   $ 778
Effective income tax rate
     2.9     5.2
The effective tax rates were lower than the statutory tax rates for the year ended December 31, 2020 and 2019 primarily due to the Company’s full valuation allowance position against domestic deferred tax assets. The provision for income taxes for the years ended December 31, 2020 and 2019 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 16 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, 2020 of $17,910,000, or $0.41 per diluted share, as compared to $14,098,000, or $0.34 per diluted share, for the year ended December 31, 2019.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2020, we had $161,742,000 in cash and cash equivalents and $50,166,000 of highly liquid short-term investments. The ratio of current assets to current liabilities was 7.8:1 at December 31, 2020, as compared to 6.0:1 at December 31, 2019. Net working capital increased $127,283,000 to $276,419,000 at December 31, 2020 from $149,136,000 at December 31, 2019.
The primary working capital changes were due to the following (in thousands):
 
    
Increase (decrease)
 
Cash and cash equivalents
   $ 77,074
Short-term investments
     50,166
Accounts receivable
     2,884
Inventories
     8,082
Other current assets
     (340
Accounts payable
     (5,116
Accrued compensation and benefits
     (3,684
Accrued expenses
     66
Sales allowances
     144
Short-term lease liabilities
     (109
Income taxes payable
     (82
Short-term deferred revenue and customer prepayments
     (1,802
  
 
 
 
   $ 127,283
  
 
 
 
 
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The primary sources of cash for the year ended December 31, 2020 were: (i) approximately $109,681,000 of cash received in the form of net proceeds from the completion of the public offering of our Common Stock in June 2020, (ii) $34,547,000 of cash generated through operating activities, and (iii) $11,585,000 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 uses of cash during the year ended December 31, 2020 were $50,166,000 for the purchase of short-term investments and $28,653,000 for the purchase of property and equipment.
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, 2020. As of December 31, 2020, we had approximately $8,541,000 remaining for share purchases under the November 2000 Plan.
As of December 31, 2020, we had no
off-balance
sheet arrangements.
The table below summarizes our contractual obligations for operating leases as of December 31, 2020 (in thousands):
 
    
Payments Due by Period
 
Contractual Obligations
  
Total
    
Less than
1 Year
    
Years 2 & 3
    
Years 4 & 5
    
More Than
5 Years
 
Operating lease obligations (1)
   $ 4,919    $ 1,740    $ 2,199    $ 980    $  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
(1)
For further information, refer to Note 13 to the Consolidated Financial Statements,
Leases
, included in Part II, Item 8 of this Annual Report on Form
10-K.
As of December 31. 2020, we had approximately $13,141,000 of capital expenditure commitments, principally for manufacturing equipment, which we intend to fund with existing cash. In addition to these commitments, as of December 31, 2020 we had approximately $63,800,000, in aggregate, of budgeted capital expenditures associated with the construction of an addition to the Company’s existing manufacturing facility and the purchase and installation of new production equipment, which represent our primary liquidity needs for the foreseeable future. We believe 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 the construction activities 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.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of market risks, including changes in interest rates affecting the return on our cash and cash equivalents, short-term investments and fluctuations in foreign currency exchange rates. As our cash and cash equivalents and short-term investments consist principally of cash accounts, money market securities and U.S. Treasury securities, which are short-term in nature, we believe our exposure to market risk on interest rate fluctuations for these investments is not significant. As of December 31, 2020, our long-term investment portfolio, recorded on our Consolidated Balance Sheet as “Long-term investment, net”, consisted of a single auction rate security with a par value of $3,000,000, purchased through and held in custody by a broker-dealer affiliate of Bank of America, N.A., that has experienced failed auctions (the “Failed Auction Security”) since February 2008. While the Failed Auction Security is Aaa/AA+ rated by major credit rating agencies,
 
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collateralized by student loans and guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program, continued failure to sell at its periodic auction dates (i.e., reset dates) could negatively impact the carrying value of the investment, in turn leading to impairment charges in future periods. Periodic changes in the fair value of the Failed Auction Security attributable to credit loss (i.e., risk of the issuer’s default) are recorded through earnings as a component of “Other income (expense), net”, with the remainder of any periodic change in fair value not related to credit loss (i.e., temporary
“mark-to-market”
carrying value adjustments) recorded in “Accumulated other comprehensive loss”, a component of Vicor Corporation Stockholders’ Equity. Should we conclude a decline in the fair value of the Failed Auction Security is other than temporary, such losses would be recorded through earnings as a component of “Other income (expense), net”. We do not believe there was an “other-than-temporary” decline in value in this security as of December 31, 2020.
We estimate our annual interest income would change by approximately $30,000 in 2020 for each 100 basis point increase or decrease in interest rates.
Our exposure to market risk for fluctuations in foreign currency exchange rates relates primarily to the operations of VJCL, for which the functional currency is the Japanese Yen, and changes in the relative value of the Yen to the U.S. Dollar. Relative to our Yen exposure as of December 31, 2020, we estimate a 10% unfavorable movement in the value of the Yen relative to the U.S. Dollar would increase our foreign currency loss by approximately $96,000. The functional currency of all other subsidiaries in Europe and other subsidiaries in Asia is the U.S. Dollar. While we believe risk to fluctuations in foreign currency rates for these subsidiaries is generally not significant, they can be subject to substantial currency changes, and therefore foreign exchange exposures.
 
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
 
    
Page
 
FINANCIAL STATEMENTS
  
     41  
     43  
     44  
     45  
     46  
     47  
     48  
     80  
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
To the Stockholders and Board of Directors
Vicor Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Vicor Corporation and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, cash flows, and equity for each of the years in the three-year period ended December 31, 2020, and the related notes and financial statement schedule listed in Item 15(a)(2) (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in
Internal Control – Integrated Framework (2013)
 issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Realizability of raw materials inventory
As discussed in Note 2 to the consolidated financial statements, the Company values inventories at the lower of cost, determined using
the first-in,
first-out method,
or net realizable value. The Company’s estimation process for assessing net realizable value is based upon forecasted future usage, which was derived based on
 
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backlog, historical consumption and expected market conditions. As disclosed in Note 3 to the consolidated financial statements, approximately 74%, or $42.6 million, of the Company’s total inventory balance is comprised of raw materials.
We identified the evaluation of the realizability of raw materials inventory to be a critical audit matter. Subjective auditor judgment was required as a result of uncertainty in market conditions used to estimate forecasted future usage and the long lead times to acquire raw materials within the global electronics supply chain. Changes in forecasted future usage could have a significant impact on the realizability of raw materials inventory.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter. This included controls related to the Company’s process to develop its forecast of usage, including estimates of the projected demand based on historical usage and the potential impact of market conditions. We evaluated the Company’s estimate of the realizability of raw materials by:
 
   
assessing historical consumption as a predictor of future product demand by comparing it to trends in industry publications
 
   
examining the historical accuracy of the Company’s prior estimates by considering subsequent sales and write off activity
 
   
evaluating the adjustments made to forecast future demand based on historical usage data
 
   
interviewing operational personnel of the Company involved in purchasing and manufacturing to evaluate product innovations, changes in customer mix, and other factors that may impact expected future sales and usage of raw material inventory.
Realizability of domestic deferred tax assets
As discussed in Note 16 to the consolidated financial statements, the Company had a valuation allowance of $37.9 million against all domestic deferred tax assets, for which realization cannot be considered more likely than not. In assessing the need for a valuation allowance, the Company considers all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and past financial performance.
We identified the evaluation of the realizability of the domestic deferred tax assets as a critical audit matter due to the subjectivity involved in assessing the recoverability of those deferred tax assets. Subjective auditor judgment was required to evaluate the uncertainty inherent in estimating the Company’s ability to generate sufficient domestic taxable income exclusive of reversing temporary differences of the appropriate character in the future.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s income tax process, including a control related to the assessment of the realizability of deferred tax assets and the application of relevant tax regulations. To assess the Company’s ability to forecast its financial performance used to determine future domestic taxable income, we compared the Company’s previous forecasts to actual results, and evaluated the Company’s consideration of the impact of industry and global economic conditions through inquiry with operational personnel and inspection of third-party publications. We involved federal and state income tax professionals with specialized skills and knowledge, who assisted in assessing the Company’s application of the relevant tax regulations and evaluating the realizability of deferred tax assets
/s/ KPMG LLP
We have served as the Company’s auditor since 2013.
Boston, Massachusetts
March 1, 2021
 
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VICOR CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2020 and 2019
(In thousands, except per share data)
 
    
2020
   
2019
 
ASSETS
 
Current assets:
                
Cash and cash equivalents
   $ 161,742     $ 84,668  
Short-term investments
     50,166        
Accounts receivable, less allowance of $82 in 2020 and $59 in 2019
     40,999       38,115  
Inventories, net
     57,269       49,187  
Other current assets
     6,756       7,096  
    
 
 
   
 
 
 
Total current assets
     316,932       179,066  
Long-term deferred tax assets
     226       205  
Long-term investment, net
     2,517       2,510  
Property, plant and equipment, net
     74,843       56,952  
Other assets
     1,721       1,994  
    
 
 
   
 
 
 
Total assets
   $ 396,239     $ 240,727  
    
 
 
   
 
 
 
LIABILITIES AND EQUITY
 
Current liabilities:
                
Accounts payable
   $ 14,121     $ 9,005  
Accrued compensation and benefits
     14,094       10,410  
Accrued expenses
     2,624       2,690  
Sales allowances
     597       741  
Short-term lease liabilities
     1,629       1,520  
Income taxes payable
     139       57  
Short-term deferred revenue and customer prepayments
     7,309       5,507  
    
 
 
   
 
 
 
Total current liabilities
     40,513       29,930  
Long-term deferred revenue
     733       1,054  
Contingent consideration obligations
     227       451  
Long-term income taxes payable
     643       567  
Long-term lease liabilities
     2,968       2,855  
    
 
 
   
 
 
 
Total liabilities
     45,084       34,857  
Commitments and contingencies (Note 17)
           
Equity:
                
Vicor Corporation stockholders’ equity:
                
Class B Common Stock: 10 votes per share, $.01 par value, 14,000,000 shares authorized, 11,758,218 shares issued and outstanding in 2020 and 2019
     118       118  
Common Stock: 1vote per share, $.01 par value, 62,000,000 shares authorized 43,204,671 shares issued and 31,569,865 shares outstanding in 2020; 40,403,058 shares issued and 28,768,252 shares outstanding in 2019
     433       405  
Additional
paid-in
capital
     328,392       201,251  
Retained earnings
     161,008       143,098  
Accumulated other comprehensive loss
     (204     (383
Treasury stock at cost: 11,634,806 shares in 2020 and 2019
     (138,927     (138,927
    
 
 
   
 
 
 
Total Vicor Corporation stockholders’ equity
     350,820       205,562  
Noncontrolling interest
     335       308  
    
 
 
   
 
 
 
Total equity
     351,155       205,870  
    
 
 
   
 
 
 
Total liabilities and equity
   $ 396,239     $ 240,727  
    
 
 
   
 
 
 
See accompanying notes.
 
43

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VICOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2020, 2019 and 2018
(In thousands, except per share amounts)
 
    
2020
   
2019
   
2018
 
Net revenues
   $ 296,576     $ 262,977     $ 291,220  
Cost of revenues
     165,129       140,011       152,249  
    
 
 
   
 
 
   
 
 
 
Gross margin
     131,447       122,966       138,971  
Operating expenses:
                        
Selling, general and administrative
     63,163       62,557       62,224  
Research and development
     50,916       46,588       44,286  
Severance and other charges
                 402  
    
 
 
   
 
 
   
 
 
 
Total operating expenses
     114,079       109,145       106,912  
    
 
 
   
 
 
   
 
 
 
Income from operations
     17,368       13,821       32,059  
Other income (expense), net:
                        
Total unrealized gains (losses) on
available-for-sale
securities, net
     7       (16     1  
Portion of losses (gains) recognized in other comprehensive income (loss)
     (3     20       6  
    
 
 
   
 
 
   
 
 
 
Net credit gains recognized in earnings
     4       4       7  
Other income (expense), net
     1,089       1,062       867  
    
 
 
   
 
 
   
 
 
 
Total other income (expense), net
     1,093       1,066       874  
    
 
 
   
 
 
   
 
 
 
Income before income taxes
     18,461       14,887       32,933  
Less: Provision for income taxes
     539       778       1,087  
    
 
 
   
 
 
   
 
 
 
Consolidated net income
     17,922       14,109       31,846  
Less: Net income attributable to noncontrolling interest
     12       11       121  
    
 
 
   
 
 
   
 
 
 
Net income attributable to Vicor Corporation
   $ 17,910     $ 14,098     $ 31,725  
    
 
 
   
 
 
   
 
 
 
Net income per common share attributable to Vicor Corporation:
                        
Basic
   $ 0.42     $ 0.35     $ 0.80  
Diluted
   $ 0.41     $ 0.34     $ 0.78  
Shares used to compute net income per common share attributable to Vicor Corporation:
                        
Basic
     42,186       40,330       39,872  
Diluted
     43,869       41,677       40,729  
See accompanying notes.
 
44

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VICOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2020, 2019 and 2018
(In thousands)
 
    
2020
   
2019
   
2018
 
Consolidated net income
   $ 17,922     $ 14,109     $ 31,846  
Foreign currency translation gains, net of tax benefit (1)
     200       33       98  
Unrealized losses on
available-for-sale
securities, net of tax (1)
     (6     (20     (6
    
 
 
   
 
 
   
 
 
 
Other comprehensive income
     194       13       92  
    
 
 
   
 
 
   
 
 
 
Consolidated comprehensive income
     18,116       14,122       31,938  
Less: Comprehensive income attributable to noncontrolling interest
     27       13       129  
    
 
 
   
 
 
   
 
 
 
Comprehensive income attributable to Vicor Corporation
   $ 18,089     $ 14,109     $ 31,809  
    
 
 
   
 
 
   
 
 
 
 
(1)
The deferred tax assets associated with cumulative foreign currency translation gains and cumulative unrealized losses on available for sale securities are completely offset by a tax valuation allowance as of December 31, 2020, 2019, and 2018. Therefore, there is no income tax benefit (provision) recognized in any of the three years ended December 31, 2020.
See accompanying notes.
 
45

Table of Contents
VICOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2020, 2019 and 2018
(In thousands)
 
    
2020
   
2019
   
2018
 
Operating activities:
                        
Consolidated net income
   $ 17,922     $ 14,109     $ 31,846  
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
                        
Depreciation and amortization
     11,056       10,334       9,254  
Stock-based compensation expense
     5,883       3,036       3,396  
(Decrease) increase in long-term deferred revenue
     (321     822       (71
Increase in long-term income taxes payable
     76       329       43  
Deferred income taxes
     (21     60       (55
Increase in other long-term liabilities
                 9  
Gain on disposal of equipment
     (13     (38     (57
Provision
(recovery)
for doubtful accounts
     23       (144     65  
Credit gain on
available-for-sale
securities
     (4     (4     (7
Increase in contingent consideration obligations
           280        
Change in current assets and liabilities, net
     (54     (6,576     (8,252
    
 
 
   
 
 
   
 
 
 
Net cash provided by operating activities
     34,547       22,208       36,171  
Investing activities:
                        
Purchases of short-term investments
     (50,166            
Additions to property, plant and equipment
     (28,653     (12,485     (18,211
Proceeds from sale of equipment
     13       38       57  
Decrease (increase) in other assets
     182       (35     (85
    
 
 
   
 
 
   
 
 
 
Net cash used for investing activities
     (78,624     (12,482     (18,239
Financing activities:
                        
Proceeds from public offering of Common Stock
     109,681              
Proceeds from employee stock plans
     11,585       4,742       8,656  
Payment of contingent consideration obligations
     (224     (237     (270
Noncontrolling interest dividend paid
           (139      
    
 
 
   
 
 
   
 
 
 
Net cash provided by financing activities
     121,042       4,366       8,386  
Effect of foreign exchange rates on cash
     109       19       9  
    
 
 
   
 
 
   
 
 
 
Net increase in cash and cash equivalents
     77,074       14,111       26,327  
Cash and cash equivalents at beginning of year
     84,668       70,557       44,230  
    
 
 
   
 
 
   
 
 
 
Cash and cash equivalents at end of year
   $ 161,742     $ 84,668     $ 70,557  
    
 
 
   
 
 
   
 
 
 
Change in current assets and liabilities:
                        
Accounts receivable
   $ (2,816   $ 5,714     $ (8,834
Inventories, net
     (8,049     (1,812     (10,827
Other current assets
     369       (2,895     176  
Accounts payable and accrued liabilities
     8,668       (7,339     7,450  
Accrued severance and other charges
           (234     234  
Short-term lease payable
     34       12        
Income taxes payable
     82       (653     410  
Deferred revenue
     1,658       631       3,139  
    
 
 
   
 
 
   
 
 
 
Change in current assets and liabilities, net
   $ (54   $ (6,576   $ (8,252
    
 
 
   
 
 
   
 
 
 
Supplemental disclosures:
                        
Cash paid during the year for income taxes, net of refunds
   $ 79     $ 2,194     $ 743  
See accompanying notes.
 
46

Table of Contents
VICOR CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
Years Ended December 31, 2020, 2019 and 2018
(In thousands)
 
    
Class B

Common

Stock
    
Common

Stock
   
Additional

Paid-In

Capital
    
Retained

Earnings
    
Accumulated

Other

Comprehensive

Income (Loss)
   
Treasury

Stock
   
Total Vicor

Corporation

Stockholders’

Equity
    
Noncontrolling

Interest
   
Total

Equity
 
Balance on December 31, 2017
   $ 118      $ 401     $ 181,395      $ 93,605      $ (478   $ (138,927   $ 136,114      $ 305     $ 136,419  
Issuance of Common Stock under employee stock plans
              7       8,649                                 8,656                8,656  
Stock-based compensation expense
                      3,396                                 3,396                3,396  
Cumulative effect of adoption of new accounting principle (Topic 606)
                               3,670                        3,670                3,670  
Other
              (6     17                                 11                11  
Components of comprehensive income, net of ta
x
                                                                            
Net income
                               31,725                        31,725        121       31,846  
Other comprehensive income
                                        84               84        8       92  
                                                       
 
 
    
 
 
   
 
 
 
Total comprehensive income
                                                        31,809        129       31,938  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
   
 
 
 
Balance on December 31, 2018
     118       402       193,457        129,000        (394     (138,927     183,656        434       184,090  
Issuance of Common Stock under employee stock plans
              3       4,739                                 4,742                4,742  
Stock-based compensation expense
                      3,036                                 3,036                3,036  
Noncontrolling interest dividend paid
                                                               (139     (139
Other