| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 04-2742817 | |
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25 Frontage Road, Andover, Massachusetts | 01810 | |
(Address of principal executive offices) | (Zip code) |
| Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.01 per share | VICR | The NASDAQ Stock Market LLC | ||
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. ☑
Large Accelerated Filer | Accelerated Filer | Non-accelerated Filer ☐ | Smaller Reporting Company ☐ | |||
Emerging growth company ☐ | ||||||
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| Class B Common Stock | 11,758,218 |
Thissubsidiaries, unless otherwise specified.
ITEM 1. | BUSINESS |
Vicor Corporation designs, develops, manufactures,
combined to enable a complete power system. We serve customers with applications for which the high conversion efficiency (i.e., the ratio of output power in watts to the power consumedrepresented by the component)symbol “W”, with wattage being the product of voltage, expressed as “volts,” and high power density (i.e., the amount of output power in watts dividedrepresented by the volume ofsymbol “V,” and current, expressed as “amperes,” and represented by the component) of our products are well suited. We also offer a range of higher value-added standard products (our “Configurable” product line) and custom system design and manufacturing capabilities. Both our Configurable products and custom systems leverage the superior performance of our modular power components.
In the market segments we serve, we position the Company as a vendor of power components that can be utilized individually, given their market-leading performance, or combined, given their level of integration, to create highly-differentiated power management solutions. We articulate this positioning through our “Power Component Design Methodology,” which is our approach to providing our customers the modular products, design tools, and engineering support to enable the rapid design of comprehensive power conversion and management systems.
Our website, www.vicorpower.com, sets forth detailed information describing our Power Component Design Methodology, all of 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 onForm 10-K and shall not be deemed “filed” under the Exchange Act.
We are headquartered in Andover, Massachusetts, where our manufacturing facility is located. We conduct business primarily through the activities of our three reporting segments, the Brick Business Unit (“BBU”), established in 2005, and our two operating subsidiaries, Picor Corporation, established in 2001, and VI Chip Corporation, established in 2007. Picor Corporation relocated its headquarters from North Smithfield, Rhode Island, to Lincoln, Rhode Island in January 2017. Picor Corporation also has personnel based in Andover, Massachusetts. VI Chip Corporation is headquartered in Andover, Massachusetts, where its manufacturing facilities areco-located with those of the BBU.
Our Vicor Custom PowerTMlocations are geographically distributed across the United States, and all are incorporated in Delaware. In March 2016, we acquired 100% ownership of certain operating assets and cash of our consolidated subsidiary, Converpower Corporation, in which we held a 49% ownership interest. In December 2015, we completed the statutory merger of one Vicor Custom Power subsidiary, Mission Power Solutions, Inc., with and into another subsidiary, Northwest Power, Inc., after which we closed the Mission Power Solutions location. Also in December 2015, we sold our 49% ownership interest in Aegis Power Systems, Inc. to Aegis Power Systems, thereby ending our formal relationship with thisnow-former subsidiary. The consolidated financial statements presented herein reflect these transactions.
Internationally, we conduct business through subsidiaries incorporated in or branch offices established in individual countries. 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. Vicor B.V., a wholly-owned subsidiary incorporated in the Netherlands, provides logistical and administrative support for a limited volume of orders placed directly with the Company by customers in the European Union. We have established individual subsidiaries or branch offices outside of the United States, Technical Support Centers (“TSCs”), to conduct preparatory and auxiliary services in support of the Company.
VLT, Inc., incorporated in California, is our wholly-owned licensing subsidiary. VICR Securities Corporation, incorporated in Massachusetts, is a subsidiary established to hold certain investment securities.
Our subsidiaries and their legal domicile are set forth in Exhibit 21.1 to this Annual Report on Form10-K. The activities of all of the above named entities are consolidated in the financial statements presented herein.
We were incorporated in Delaware in 1981. Shares of our Common Stock were listed on the NASDAQ National Market System in April 1990 under the ticker symbol VICR, and we completed an initial public offering of our shares in May 1991.
Market Background and Our Strategy
“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 higher or lower 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
Our strategy, competitive positioning, and product offerings, all based on highly differentiated product performance, have anticipateddivided by the evolution of system power architectures. As system designs advanced, along with the demandsvolume of the loads powered, the inherent limitations of historically accepted system power architectures have caused designerssystem). Higher efficiency and density contribute to seek out improved solutions.
In 1984, we introduced a significant enhancement of the standardizedDC-DC converter: the fully-encapsulated “brick” module. Our innovative, patented technology utilized our implementation of zero current soft switching topology to deliver unprecedentedly high switching frequencies and, in turn, unprecedented power density. Superior conversion efficiency, overall performance improvements, and full encapsulation (which provided shielding from environmental influences) contributed to significant enhancement ofsuperior thermal performance, characteristics, an important competitive advantage. Such thermal performance enhancement has been critical to the differentiation of our power converters, as thevoltagepower conversion and distribution is heat, which must be dissipated in order to assure the performance of the converterpower system solution itself and the overall system to which it is delivering power.
The brick module integrated transformation, regulation, isolation, filtering, and/or input protection into a single device, thereby driving the adoption of the Distributed Power Architecture (“DPA”). The dominant system power architecture up until that time, the Centralized Power Architecture (“CPA”), generates all system voltages centrally and distributes these voltages to loads using individual distribution buses (i.e., a conductive circuit, generally made of copper). CPA became expensive and impractical for electronic systems increasingly characterized by widely distributed and diverse loads requiring lower voltages, higher currents, and faster responsiveness to rapidly changing power demands of varied loads. DPA, enabled by the brick concept, allows the distribution of one DC voltage system-wide and downstream conversion of that voltage, with a brick, at a specific load. This approach allows electricity to be distributed through a complex system in the most efficient manner, at a uniform higher voltage (typically 48 volts), thereby dramatically reducing distribution and conversion losses, lowering copper consumption, and significantly increasing design flexibility. With patented
advances in switching topology and converter design, Vicor became a leading vendor of brickDC-DC converters in the 1980s and 1990s, particularly within the telecommunications infrastructure segment of the market.
With the advent of enterprise computing in the 1990s, the limitations of DPA became apparent, as the number of different loads on a system board increased beyond the level for which DPA and bricks were well-suited. The Intermediate Bus Architecture (“IBA”), a multi-stage extension of DPA, addressed the space constraints, performance requirements, and cost challenges of highly complex system boards by further separating the functions of DC conversion carried out by the brick, which in IBA is replaced by an isolated bus converter delivering a stepped-down (i.e., reduced), unregulated voltage to anon-isolatedpoint-of-load regulator. For computing and, later, networking applications, IBA was more scalable and cost-efficient, as numerous brickDC-DC converters on a system board were replaced by one brickDC-DC converter, providing one system-wide distributed voltage, accompanied by numerous, lower-cost bus converters providing an intermediate bus voltage, typically from 5 to 14 volts, topoint-of-load regulators.
Two significant industry changes coincided with the broad adoption of IBA in the late 1990s and the early 2000s. The first change was the significant decline of the telecommunications infrastructure segment that represented our primary focus, while the second change was a pronounced shift toward product commoditization, primarily driven by globalization. These two changes had an interrelated impact on our strategy, as the primary driver of IBA adoption was initial cost reduction, not system conversion efficiency. As such, IBA was broadly implemented using 12 volt distribution, not the more efficient 48 volt distribution, our core competency.
Unwilling to pursue rapidly commoditized market opportunities, notably in IBA, and unwilling to relocate our manufacturing to lower-cost countries, we shifted our strategy and operations in the 2000s to emphasize “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, that could not be met by high-volume oriented competitors. We focused on applications, largely implementations of DPA, for which our brickDC-DC legacy products were well-suited, in market segments such as aerospace and defense electronics, industrial automation, industrial equipment, instrumentation and test equipment, and transportation (e.g., rail). This strategy has been the basis upon which the BBU has competed since this strategic and operational shift. The customers served range from independent manufacturers of highly specialized electronic devices to larger original equipment manufacturers (“OEMs”) and their contract manufacturers.
During the 2000s, we embarked on a long-term strategy based on our belief that our competitors’ products and existing system power architectures, notably IBA, would not meet evolving market requirements, notably system conversion efficiency. Over the last decade, we have invested significantly in the development of new power component technologies and product concepts addressing two meaningful market trends, the first toward higher required conversion efficiencies, and the second toward more and diverseon-board voltages, higher current requirements, and the higher performance demands of numerous complex loads. Reflecting the versatile, building block approach of our Power Component Design Methodology, in 2003 we introduced our Factorized Power ArchitectureTM (“FPA”), an innovative, component-based approach to flexible, rapid system design, based on separate components optimized to perform a specific function. FPA increases system conversion efficiency, density, and power delivery by dedicating regulation and transformation functions into separate power modules. Thisre-partitioning of power conversion enables higher input voltages, 48V as an example, to be converted directly to the point of load reducing the number of conversion stages required (i.e., duplicated functions requiring separate components), reducing system distribution losses, and reducing power dissipation at thepoint-of-load. We continue to believe FPA represents a compelling architectural alternative to other architectural implementations, as it offers superior conversion efficiency, higher power density, improved system responsiveness, and an attractive total cost of ownership, while offering advantageous system design and board layout flexibility.
To support implementation of FPA, we introduced our initial range of advanced products, our VI Chip modules exploiting our proprietary expertise in soft switching topologies and control, power semiconductors,
materials, and packaging: the PRM®(Pre-Regulator Module), anon-isolated buck-boost regulator; the BCM® (Bus Converter Module), an isolated, fixed ratio intermediate bus voltage converter; and the VTM® (Voltage Transformation Module), an isolated current multiplier (i.e., voltage converter). The VTM and BCM utilize on our Sine Amplitude ConverterTMswitching topology, a patented fixed-frequency implementation of zero current / zero voltage soft switching, while the PRMalso is based on our proprietary implementationthe electrical characteristics of zero voltage soft switching (“ZVS”)the power system (and their effect on and compatibility with the customer’s application). Important electrical characteristics include transient responsiveness (i.e., which is optimized for buck-boost voltage regulation. All three products incorporate technologies for which we have been issued patents or have patent applications pending.
Beginning in 2011, with an expanded portfoliothe reaction of advanced products from our VI Chip and Picor subsidiaries, we began to focus our strategic efforts toward higher-volume opportunities with global OEMs and the Original Design Manufacturers (“ODMs”) and contract manufacturers serving these OEMs, as FPA and our advanced products offered superiora power density, conversion efficiency, and thermal management characteristics for board-based, rack-mountedpoint-of-load applications, notably for microprocessors requiring tightly regulated, high currents. FPA and our first-generation VI Chip modules were adopted by customers for use in demanding applications, most notably supercomputing, sophisticated test instrumentation, and defense electronics. However, broader adoption was inhibited by cost considerations and,system to a lesser extent, our initially limited product range.
In response, we undertook development of a substantially improved product platform, which we introducedsudden change in 2013. Our “ChiP” platform (ChiP is an acronym for “Converter housed in PackageTM”) specifically was designed to be a scalable product format, with lower manufacturing costs, which could be leveraged to efficientlyvoltage or current levels) and quickly broaden product offerings. ChiPs are offered in the same functional families as the earlier VI Chip modules, using the same advanced switching topologies, but, because of the format’s improved manufacturability and design leveragability, we are able to offer much broader ranges of performance specifications within existing and new functional families. Because ChiPs were designed to be manufactured in volume with lower costs, we are able to profitably sell ChiPs and ChiP-based solutions at competitive prices, on acents-per-watt basis, comparable to prices of alternative commodity products. While our first-generation VI Chip modules were designed to facilitate FPA implementations, ChiP modules support all known power distribution architectures, including FPA, thereby expanding our addressable market opportunitynoise profile (i.e., the rangelevel of customer applications across whichelectromagnetic interference created by power conversion). We believe the superior performance of our advanced products can be used).
Atpower systems is the same time, we developed a high-performance family ofpoint-of-load regulators, in System in Package (“SiP”) format, to be integrated into our expanding product portfolio, truly enabling comprehensive power management solutions topoint(s)-of-load. These ZVSpoint-of-load regulators have been designed to meet the requirements of high-volume customers for differentiated performance and cost effectiveness.
In 2014, we introduced the “VIA” packaging concept (VIA is an acronym for “Vicor Integrated AdaptorTM”), a rugged, double-sided package for ChiP modules integrating complementary components and circuitry, offering superior thermal management characteristics. The VIA package provides customers an advanced,turn-key solution for their demanding power needs, cost-effectively accelerating design cycles andtime-to-market, while providing superior power density. The VIA package is particularly differentiated for certain applications with challenging form factor and thermal management requirements, such as those often associated with defense electronics. We consider the VIA package to be strategically important, as it has been designed to be used in the widest range of power system architectures and applications, allowing us to target applications ranging from those addressed by our legacy brick products to the most challenging emerging applications.
In 2015, we introduced a family ofnon-isolated, fixed conversion ratio,bi-directional, bus converter modules (the “NBM™” family). Highly differentiated NBMs exploit our latest innovations in magnetics and semiconductors, enabling improved efficiency and power density, and represent, we believe, a competitively important element of our Power Component Design Methodology, complementing other advanced products to expand the range of board-level applications served by our integrated solutions.
In 2017, we introduced a surface mount variant of the ChiP platform, theSM-ChiP, which provides added thermal management and design flexibility in addition to the same
Since the introduction of our advanced products, we have been executing a transitionalgo-to-market strategy based on our Power Component Design Methodology, exploiting our historical strengths, while addressing both the realities of today’s power conversion marketplace and our vision of its long-term direction. This strategy involves maintaining a profitable legacy business in bricks and brick-based system solutions, while investing in and transitioning our focus to an advanced product portfolio based largely on the ChiP platform, targeting higher growth opportunities.
Today, we target customer applications for which the high conversion efficiency and high power density of our products are well suited within the following commercial and military market segments: aerospace and aviation; defense electronics; enterprise and high performance computing (including large scale datacenters and supercomputers); industrial automation; industrial equipment; instrumentation and test equipment; medical diagnostics; telecommunications and network equipment and infrastructure; transportation infrastructure, and vehicles (including autonomous driving and electric and hybrid electric vehicles). With our advanced products, we also are pursuing opportunities in emerging market segments, including commercial solid state lighting and 380 voltDC-based facility infrastructure (also referred to as “micro-grids”).
Our competitive positioning has been, and will continue to be, supported by our long-standing commitment to research and development of power conversion technologies, advanced packaging and manufacturing, and innovative approaches to solving customer problems. We incurred approximately $44,924,000, $41,848,000, and $41,472,000 in research and development expenses in 2017, 2016, and 2015, respectively, representing approximately 19.7%, 20.9%, and 18.8% of revenues in 2017, 2016, and 2015, respectively.
As stated, our strategy involves maintaining high levels of customer engagement and design and engineering support, which has resulted in significant expansion of our sales and application engineering infrastructure over historical levels, notably in high growth regions of the world such as China, Korea, and India. We incurred approximately $40,438,000, $37,967,000, and $37,336,000 in marketing and sales expenses in 2017, 2016, and 2015, respectively, representing approximately 17.7%, 19.0%, and 17.0% of revenues in 2017, 2016, and 2015, respectively.
We intend to maintain spending in support of research and development and marketing and sales at levels, on an absolute basis, consistentsuperiority with prior periods. If we successfully execute our strategy, we believe our revenue should increase and, if so, the percentages of revenue represented by spending on research and development and marketing and sales should decline in comparison to historical percentage levels.
Competition
Despite significant consolidation of our competitors in the markets we serve with legacy products, the growth of large-scale,low-cost foreign competitors in the commoditized segments of those markets, and increased application overlap with vendors of solutions based on semiconductors and discrete components in the markets we serve with advanced products, the total global merchant market forAC-DC andDC-DC power conversion solutions remains fragmented, with over 1,000 merchant (i.e.,non-captive) vendors. The markets we
serve, among which some overlap exists for our legacy and advanced products, are made up of many large, diversified manufacturers, as well as many smaller manufacturers focused on specialized products or narrowly defined market segments or geographies. The markets we serve with legacy products, typically through sales representatives and distribution partners, are generally characterized by relatively long (i.e., greater than three years) product life cycles, offset by increasing commoditization and price competition. The markets we serve with advanced products, typically on a direct basis, are generally characterized by relatively short (i.e., less than three years) product life cycles, and competitors that are primarily far larger vendors of integrated circuits and discrete components competing on price.
Although numerous third party industry studies estimate the total global merchant market forAC-DC andDC-DC switching power supplies to exceed $20 billion of annual revenue, representing approximatelytwo-thirds of the total annual consumption of switching power supplies (i.e., the sum of merchant and captive volumes consumed), the Company competes in smaller, well-defined commercial and military market segments and niches within those segments. We believe, based on these third party estimates,AC-DC power supplies represent more than 85% of the total merchant market, reflecting a wide range of battery charging applications, primarily in the consumer, mobile device, and office computing segments (commodity segments in which we currently do not compete, together representing more than 50% of the total merchant market). Based on our own assessment of the segments in which we do compete, we estimate our aggregate addressable market opportunity within theAC-DC portion of the merchant market approaches $1 billion annually, while we estimate our aggregate addressable market opportunity within theDC-DC portion of the merchant market exceeds $3 billion annually. These third party industry studies set forth estimates of varying levels of annual, dollar-based, nominal revenue growth across the merchant market segments in which we compete. These studies indicate most of the market segments we serve with legacy products have experienced low single-digit growth over the past three years. These studies further indicate most of the market segments we serve with advanced products have experienced high single-digit and low double-digit growth over the past three years.
Despite our minor share in the overall merchant market and the competitive presence of numerous, far larger vendors in the market segments and niches we serve with both legacy and advanced products, we believe we maintain an advantageous competitive position in those market segments and niches. Notably, we believe we have the largest share of the 48 Volt topoint-of-load niches within the served segments of the enterprise and high performance computing market. However, numerous competitors across these market segments and niches have significantly greater engineering, financial, manufacturing, and marketing and sales resources, as well as longer operating histories and longer customer relationships, than we do.
The competitive characteristics of market segments we serve with our transitionalgo-to-market strategy may vary. Generally, competition is based on product price, product performance, design flexibility (i.e., ease of use), and product availability. We seek to position ourselves with customers across all market segments served in a manner that reducesas our vulnerability to commoditization. With our legacy products we emphasize our highly differentiated responsiveness to individual customer requirements, enabled by our mass customization capabilities, broad range of solution offerings, and relatively highcan be utilized individually or combined, given their level of customer engagement. As we shift our strategy, increasing our focus on higher volume, OEM and ODM opportunities, we are emphasizing what we believe are our sustainable competitive advantages going forward: the differentiation of our advanced products’ superior performance andintegration, to create power densities, enabled by our patented and proprietary technologies; a compelling value proposition based on lower total cost of ownership enabled by superior power conversion efficiencies; and the advantageous design flexibility enabled by our advanced products and our Power Component Design Methodology.
Our Products
Reflecting our Power Component Design Methodology, we offer a comprehensive range of individual, highly-integrated, building blocks enabling design of a power system solutions specific to a customer’s precise needs. Since introducingWe articulate this positioning through our “Power Component Design Methodology,” an element of our differentiation strategy, which is our approach to providing our customers the modular products, design tools, and popularizingengineering support to enable the encapsulated brick package format duringrapid 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 1980s,cost of acquiring and operating a power system over its useful life, driven by competitive product pricing, high reliability, and demonstrably lower electricity costs.
has been on high performanceDC-DC switching converters providingdevices, which address applications requiring the transformation regulation, isolation, filtering, and/or input protection necessaryof 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 protect sophisticated electronic loads. With our development of FPA, significant enhancement of our manufacturing capabilities, and the introduction of an expanding range of advanced products, we believe we offer the most advanced range of high-performance power components in the industry. A secondary and highly complementary product strategy has been to vertically integrate our component-level building blocks into complete power systems representing turnkeyAC-DC andDC-DC solutions for our customers’ power needs.
industrial use.
Legacyappropriate, 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.
protect loads, across a range of conventional power architectures. We offer brick modules asa wide range of brick-format These products are well-established as important, reliable elements of conventional power systems architectures.
We currently offer seven families of high power density,component-level DC-DC converters, representing what we believe to be the broadest selection of encapsulatedDC-DC converter modules in the industry: theVI-200TM,VI-J00TM,MI-200TM,MI-J00TM, and the FasTrakTM module line, our highest volume products, made up of the Maxi, Mini, and Micro product families. All of ourDC-DC converters are based on our proprietary approach to resonant soft switching, enabling high efficiencies and power densities. 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.
Products from our broad line of complementary components are used to condition and/or filter the input and output voltages of the brickDC-DC converter. Generally, these components address customer requirements at the AC current source, upstream from ourDC-DC converters, providing rectification of the AC current, input filtering, inrush limiting, and transient protection. We also offer numerous accessories to meet customer requirements.
These legacy products generally are targeted at applications requiring high performance and reliability in the following market segments:segments such as aerospace and aviation; defense electronics;electronics, industrial automation;automation, industrial equipment;equipment, instrumentation and test equipment; medical diagnostics; telecommunications infrastructure;equipment, and transportation infrastructure,(e.g., rail). Our customers range from independent manufacturers of highly specialized electronic devices to larger original equipment manufacturers (“OEMs”) and vehicles.
We offer a family of isolatedDC-DC converters delivering up to 60 watts in a small (22 x 16.5 x 6.7 mm) surface-mount package. These converters utilize our proprietary ZVS topology to achievehigh-switching
frequencies enablingbest-in-class power density, while reducing input and output filtering requirements. Because these small devices are packaged in an over-molded package, they are able to withstand harsh environments in applications for which space is limited and light weight is advantageous (e.g., aerospace, aviation, and defense electronics). These high density converter modules are offered in three input voltages: 48 volt nominal for communication applications; 28 volt nominal for rugged high temperature or military applications; and 24 volt nominal for industrial applications.
Utilizing our modular brick components to provide system function, we offer numerous higher valued-added standardAC-DC andDC-DC products we configure to a customer’s specific needs, often with multiple voltage outputs. These near-custom products exploit the benefits and flexibilitytheir contract manufacturers. Some of our modular approach to offer higher performance, higher power densities, lower costs, and faster delivery than many competitive offerings. Our configurable products typically are usedBrick Product lines have been in production for over a rangedecade, reflecting the maturity of CPA and distributed power architecture implementations in defense electronics, industrial and transportation applications, as well as medical instrumentation.
Certain customers rely on us to design, develop, and manufacture custom power systems to meet performance and/or form factor requirements that cannot be met with standard products. Theselow-volume, highvalue-add system solutions frequently are designed to function reliably in the harsh environments associated with aerospace, aviation, and defense applications, but also are used in applications ranging from industrial equipment to medical instrumentation. Historically,markets we serve, the long-established relationships we have utilized products from our legacy product portfolio in our custom power systems. However, during 2017, all new custom designs utilized products from our advanced product portfolio, thereby extendingwith many customers, and the advantageslong-standing suitability of our advanced products to the turnkey solutions offered by the Vicor Custom Power organization.
demanding applications.
Advanced Products
The following advanced product groups reflect our vision of the direction of the market segments we serve with our Power Component Design Methodology. These products have been designed by our VI Chip and Picor reporting segments, with VI Chip modules manufactured by the BBU, and Picor modules manufactured by third parties. Many of these products are targeted toward FPA implementations, but our more recently introduced advanced products are suitable for other distributed architectures.
Introduced in 2013, the ChiP platform has been designed to be a scalable product format, with lower manufacturing costs, which could be leveraged to efficiently and quickly broaden product offerings. We believe the ChiP platform establishesbest-in-class standards for a new generation of scalable power modules, while expanding our capability range and, in turn, our addressable market opportunity. Combining advanced, proprietary magnetic structures, power semiconductors, and microcontrollers in a high density interconnect substrate, the ChiP platform delivers superior thermal management characteristics, allowing customers to achieve low cost power system solutions with previously unattainable system efficiency, size, and weight. ChiP modules also have lower manufacturing costs than our original VI Chips, thereby allowing us to offer highly differentiated products, not only with superior total cost of ownership over time, but at attractive initial price points. Our goal is to offer ChiP modules and solutions on a cents per watt basis near or equivalent to the prices of competitive product offerings, thereby presenting customers with a compelling value proposition.
ChiPs are produced in the same functional families as our earlier VI Chip FPA modules (i.e., PRM, BCM, and VTM), but today we offer over 100 specific ChiP module variants, reflecting a broad range of configurations based on dimensions, lead formats, and performance specifications, enabled by the flexible module format. As highlighted above, we have introduced, beginning in 2015, products in the NBM family ofnon-isolated, fixed conversion ratio,bi-directional, bus converter modules. Highly differentiated NBMs exploit our latest innovations in magnetics and semiconductors. Based on our current design and development activities, we anticipate further expansion of the range of package sizes, board or chassis mounting alternatives, lead formats, and performance characteristics of our ChiP product offerings, notably within theSM-ChiP line of surface mount modules. We plan to target a number of these new product families and variants at segments and applications that, if successfully penetrated, should expand the size and range of our addressable markets.
ChiP modules are targeted at applications, regardless of the power distribution architecture, for which their high level of performance and form factor differentiation is appropriate. Across distributed power system architectures, at the sophisticated applications for which ChiPs are appropriate include: aerospace and aviation (e.g., for use in unmanned aerial vehicles, due to their conversion efficiency, reliability, small form factor, and light weight); computing (e.g., for source topoint-of-load solutions in servers deployed in datacenters, due to their conversion efficiency and flexibility of use, which contribute to lower total cost of ownership); defense electronics (e.g., for use in airborne, seaborne, or field radar, due to their high power capabilities, conversion efficiency, ruggedness, and reliability); industrial automation, instrumentation, and test equipment (e.g., for use in semiconductor testing, due to their power density and tight current regulation); telecommunications and networking infrastructure (e.g., for use in pole-mounted small-cell base stations in urban environments, due to their form factor, reliability, and cost/performance profile); and vehicles (e.g., in autonomous driving applications, electric vehicles, and hybrid electric vehicles, due to their form factor, light weight, differentiated performance, and cost/performance profile). As stated, we also are pursuing applications in market segments and niches for which the advantages of ChiPs are most compelling (e.g., solid state signage, for which high performance, small form factor and design flexibility are required).
The VIA platform is a rugged, double-sided, copper-alloy package for ChiP modules, integrating complementary components, circuitry, and superior thermal management through conductive cooling. In 2016, we completed installation of our first dedicated manufacturing line exclusively for the VIA packaging concept. We consider the VIA platform to be important to our transitionalgo-to-market strategy, as it has been designed to enable the use of ChiP modules across the widest range of power system architectures, power levels, and applications. It is aneasy-to-use power management solution, providing customers an advanced,turn-key solution for their demanding power needs, cost-effectively accelerating design cycles andtime-to-market, while providing superior power density. The VIA platform is particularly differentiated by the flexibility it provides designers, as it offers substantial thermal advantages and its form factor allows a broad range of installation options. In numerous applications, the package simplifies thermal design considerations and, in some instances, eliminates the need for a fan for convection cooling, improving overall system reliability and further minimizing the power system footprint.
The VIA platform also facilitates the VIA DCM, which is an important product for executing our strategic transition. We currently offer seven variants of the VIA DCM. The product family integrates filtering, output voltage regulation, circuitry protection, and a control interface, giving the VIA DCM the function of a conventional brickDC-DC converter, while offering higher conversion efficiency, superior power density, and the design flexibility described above. As such, we are positioning the VIA DCM as a successor to our legacy brickDC-DC converters, notably in advanced, challenging applications, such as those associated with defense electronics.
Our Cool-Power brand ofnon-isolated,point-of-load regulators consists of an expanding portfolio of buck (i.e., the device steps down voltage) and buck-boost (i.e., the device lowers or increases voltage) regulators, all in surface mount packaging.
We believe Cool-Power buck regulators provide best in class conversion efficiency (up to 98%), allowing customers to deploy more efficient designs, regardless of power system architecture, based on the compatibility of thesepoint-of-load regulators with voltages of 12, 24, or 48 volts. These regulators, based on our patented and proprietary technologies, have been optimized for loads requiring high conversion efficiency, power density, and precise regulation, such as computer and graphic processors and specialized ASICs.
Our success to date with these products has frequently been when they have been part of an integrated FPA solution, delivering a tightly regulated voltage to an upstream VTM serving as a current multiplier, delivering low voltage, high, precisely regulated current to thepoint-of-load. Our 48 volt topoint-of-load solutions for datacenter servers is representative of such an integrated FPA solution.
During 2017, we expanded the range and capabilities of our solutions for the conversion of alternating currents to direct currents, enhancing our positioning as a supplier of highly-differentiated power management solutions from the AC source to the point(s) of load. Such solutions include our ChiP PFM® (Power Factor Module) and the VIA PFM. Representing a significant improvement over our legacyfront-end solutions, the VIA PFM achieves a market-leading power density, supplying from a universal AC input an isolated DC output , with active power factor correction at 93% peak conversion efficiency, which is an unmatched level for anAC-DC converter of this size and power density. We pair the VIA PFM with our VIA AIMTM (“AC Input Module”), which provides AC rectification, filtering, transient protection, and inrush limiting capabilities, thereby creating a high-performanceAC-DCfront-end solution of differentiated small size. This solution has been well-received in market segments for which it is especially well-suited, including small-cell base stations and commercial solid state lighting and signage.
During the second half of 2017, we recognized revenue associated with the shipment of significant prototype volumes of our latestfront-end innovation, a three-phasefront-end module (the RFM TM), which provides superior conversion efficiency and unmatched power density. We anticipate formally introducing the new RFM product line during the first quarter of 2018, with specific RFM products to be announced throughout 2018. We expect the RFM will become a meaningful element of our Power Component Design Methodology, as it represents a highly differentiated solution for enabling fully integrated power conversion and management in the most demanding applications, such as high performance computing and supercomputing.
We continue to offer the first generation of VI Chip PRM, BCM, and VTM modules, in full (32.5 by 22.0 by 6.73 mm) and half (22.0 by 16.5 by 6.73 mm) sizes, targeting FPA implementations. These products remain compelling solutions for certain applications, notably in defense electronics, medical instrumentation, and test and measurement applications.
With the expansion of ChiP product families, we anticipate our sales of the first generation of VI Chips may be limited primarily to shipments to existing customers during the life cycles of the applications into which these products have been designed. However, we expect the life cycles of many of these applications may continue for several years.
During 2017, the Company discontinued the production and sale of many power path management components, originally developed by our Picor subsidiary, having determined the volumes sold of these
circuit protection products no longer represented a compelling complement to the adoption and sale of our other advanced products. The revenues and profits associated with the sale of such components were not material to the Company’s consolidated results for the years ended December 31, 2017, 2016 and 2015.
Annual revenue associated with the sale of advanced products, including the power path components referenced immediately above, represented approximately 33.1%, 24.2%, and 21.1% of the Company’s consolidated revenue for the years ended December 31, 2017, 2016, and 2015, respectively.
Patents and Intellectual Property
An important element of our strategy is to protect our competitive leadership with domestic and foreign patents and patent applications that cover our products and much of their enabling technologies. We believe our competitive leadership is further protected by proprietary trade secrets associated with our use of certain components and materials of our own design, as well as our significant experience with manufacturing, packaging, and testing these complex devices.
We believe our patents afford 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, 2017, in the United States, we have been issued 98 total patents. These patents have expirations scheduled between 2018 and 2035. 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.
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. Licenses are granted and administered through our wholly-owned subsidiary, VLT, Inc., which is the assignee for our patents that may be subject to licensing. Revenues from licensing arrangements have not exceeded 10% of our consolidated revenues in any of the last three fiscal years.
Customers and Backlog
For the years ended December 31, 2017, 2016 and 2015, NuPower Electronic, Ltd., our authorized distributor for China, accounted for approximately 13.0%, 16.4%, and 16.2% of net revenues, respectively, and our five largest customers represented approximately 35.2%, 26.5%, and 33.4% of net revenues, respectively.
International revenues, as a percentage of total revenues, were approximately 63.2%, 59.8%, and 60.0% in 2017, 2016, and 2015, respectively. Net revenues from customers in China, our largest international market, accounted for approximately 35.8% of total net revenues in 2017, approximately 32.1% in 2016, and approximately 34.2% in 2015, respectively. International sales have increased from historical levels primarily due to higher volumes of shipments to foreign ODMs and contract manufacturers, many of which are located in China, utilized by domestic and international OEMs. As we have substantially expanded our sales and customer support activities and resources internationally, particularly in Asia, we expect international sales to continue to increase as a percentage of total revenue. (See Note 16 to the Consolidated Financial Statements for additional information on our reporting segments).
available from catalog-oriented competitors.
Salesrelationships than we do.
Sales
for certain custom products, VJCL.
Vicor
select, architect, and implement power systems using Vicor’sour products. During 2017, we continued to enhance ourOur highly differentiated which 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 and the full power system. We are aggressively expandingcontinue to enhance and expand the range and capabilities of engineering tools we make available online to customers and prospective customers.
We generally sell
2019, respectively.
factors including the effect of the global pandemic.
As stated above, we introduced theSM-ChiP in 2017. This surface mount varianttaken occupancy of the ChiP platform requires a number of process steps not included in the manufacture of a through-hole ChiP module. To date, we have relied on several third party contractors to perform such steps in relatively low volumes, thereby limiting our ability to scale productionexpansion and appropriately control quality and costs. In December 2017, we entered into a production agreement with a highly sophisticated contractor capable of delivering the short term volumes expected, while meeting our quality and cost requirements. We anticipate the agreement will enable us to meet our forecast needs forSM-ChiP production until our planned manufacturing facilityequipment installation is fully functional.
We pursue a manufacturing strategy based upon production flexibility and the continuous improvement of product quality, volume throughput, and reduced manufacturing costs. underway.
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.
Our Picor subsidiary, given its fabless model, relies on
See Note 16 — Segment Information to the Consolidated Financial Statements for certain financial informationtrade secrets associated with the operationsour use of certain components and manufacturing activitiesmaterials of our business segments.
Employees
own design and proprietary manufacturing, packaging, and testing processes. We incurred approximately $53,114,000, $50,916,000, and $46,588,000 in research and development expenses in 2021, 2020, and 2019, respectively, representing approximately 14.8%, 17.2%, and 17.7% of revenues in 2021, 2020, and 2019, respectively.
ITEM 1A. | RISK FACTORS |
Our stock price has been volatile and may fluctuate in the future.
Because of the factors set forth below, among others, the trading price of our Common Stock has fluctuated and may continue to fluctuate significantly:
We do not actively communicate with investment analysts and, as a consequence, we are not aware of earnings estimates or supporting investment research coverage of Vicor and our Common Stock. While we seek to be transparent in our financial reporting, public statements, and related disclosures, the absence of research coverage may limit investor interest in our Common Stock. Because our operating results have fluctuated on a quarterly and annual basis, investors may have difficulty in assessing our current and future performance, particularly in light of our strategic transition, as discussed above.
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, 2017, 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, 2017, Dr. Vinciarelli owned 9,861,605 shares of our Common Stock, as well as 11,023,648 shares of our unregistered Class B Common Stock (which may only be sold or transferred after required conversion, on aone-for-one basis, into registered shares of Common Stock), together representing 54.0% of our total issued and outstanding shares on a fully converted basis. 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 82.5% of our outstanding voting securities, has effective control of our governance.
Global economic uncertainty associated with the
Despite the breadth of
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. We compete with domestic and foreign manufacturers of integrated power supplies and power conversion components. With the growth of our advanced product lines, we increasingly are competing with global manufacturers of power management products with far larger organizations and broader semiconductor-based product lines. Competition is generally based on product pricing, availability and capacity, the design and quality of products, and product performance, features and functionality, 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. 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 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 legacy
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 products over the past three years, there can be no assurance we will be able to continue to develop and introduce new and improved products 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 products. As we have been in the early stages of market penetration for these 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 ourgo-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 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. We cannot offer any assurance the markets we serve will grow in the future, our legacy and advanced products will meet the respective market requirements, or we can maintain adequate gross margins or operating profits in these markets.
inventory or determine certain inventory is obsolete (i.e., unusable), we likely will record additional inventory reserves (i.e., expenses representing the
For the years ended December 31, 2017, 2016,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 2015, revenues from sales outside the United States were 63.2%, 59.8%,results of operations.
While our currency risks are limited, as our sales are denominated in U.S. Dollars worldwide, with the exception of sales by VJCL (and a residual volume of sales of Vicor B.V.), our international activities expose us to special risks including, but not limited to, regulatory requirements, economic and political instability, transportation delays, foreign currency controls, trade barriers and tariffs, and unfavorable shifts in foreign exchange rates. In addition, our international customers’ business may be negatively affected by economic sanctions, as were imposed in 2014 by the U.S. Department of the Treasury against certain Russian entities to which we had sold products in the past. Sudden or unexpected changes in the foregoingAndover facility could have a material adverse effect on our results of operations.
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.
We
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.
We invest significant resources in the testing ofindependent registered public accounting firm determines our products; however, if any of our products contain defects,internal controls over financial reporting are not effective as defined under Section 404, we may be requiredunable to incur additional developmentproduce 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 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 returns, which may adversely influence our operating results. If anyan adverse reaction in the financial markets due to a loss of confidence in the reliability of our products contain defects, or have
reliability, quality, or compatibility problems, the Company’s reputation may be damaged,financial statements, which could make it more difficult for uscause the market price of our Common Stock to selldecline or limit our productsaccess 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.
capital.
Extended interruption of production at our manufacturing facility in Andover, Massachusetts, could materially reduce our revenue and increase costs.
All modular power components, whether for direct sale
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 email communications, financial and operational record keeping, and our computer-integrated manufacturing processes controlling all aspects of our operations in our manufacturing facility in Andover, Massachusetts. If a problem occurs impairing this infrastructure, the resulting disruption could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Since 2012, we have experienced no interruption of our computing and communications capabilities. While we carry business interruption insurance to offset financial losses from such an interruption, 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.
Our systems are designed to protect us from network security breaches and associated disruptions. However, we remain vulnerable to computer viruses and related software-based challenges to the integrity of our systems, unauthorized or illegalbreak-ins or malicious network hacking, equipment or software sabotage, acts of vandalism to our systems by third parties, and, in the extreme, forms of cyberterrorism. Our security measures or those of our third-party service providers may not detect or prevent such network security breaches or associated disruptions.
Also, we provide confidential information to third-party business partners and/or receive confidential information from third-party business partners in certain circumstances when doing so is necessary to conduct business. As of December 31, 2017, we were compliant with the comprehensive requirements for the protection of controlled unclassified information (“CUI”) as set forth in Special Publication800-171 of the National Institute of Standards and Technology. 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 breaches of our computing and communications infrastructure or that of a third-party business partner 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.
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 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.
We have an ongoing program to perform the system and process evaluation and testing necessary to comply with the requirements of the Sarbanes-Oxley Act 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 the Sarbanes-Oxley Act, 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
Our ability to successfully implementoperating performance or that of our business strategy may be limited ifcompetitors;
Our success dependspayment of future cash dividends on our ability to retain Common Stock; and
particular, we are dependent on the services ofCommon Stock by Dr. Vinciarelli, our founder, Chairman of the Board, Chief Executive Officer, and President.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 2. | PROPERTIES |
ITEM 3. | LEGAL PROCEEDINGS |
On January 28, 2011, SynQor, Inc. (“SynQor”) filed a complaint for patent infringement against Ericsson, Inc. (“Ericsson”), Cisco Systems, Inc. (“Cisco”) and Vicor in the U.S. District Court for the Eastern District of Texas (the “Texas Action”). Ericsson and Cisco subsequently settled with SynQor and are no longer partiesContingencies, to the Texas Action. With respect to Vicor, SynQor’s complaint in the Texas Action alleged that our products, including but not limited to unregulated bus converters used in intermediate bus architecture power supply systems, infringe SynQor’s U.S. patent numbers 7,072,190, 7,272,021, and 7,564,702 (“the ‘190 patent”, “the ‘021 patent” and “the ‘702 patent”, respectively). SynQor’s complaint sought an injunction against further infringement and an award of unspecified compensatory and enhanced damages, interest, costs and attorney fees. On September 20, 2011, SynQor filed an amended complaint in the Texas Action that further alleged that our products, including, but not limited to, unregulated bus converters used in intermediate bus architecture power supply systems, infringe SynQor’s U.S. patent number 8,023,290 (“the ‘290 patent”). We responded to SynQor’s amended complaint in the Texas Action by denying our products infringe anyConsolidated Financial Statements for a complete description of the SynQor patents, and asserting that the SynQor patents are invalid. We further alleged that the SynQor ‘290 patent is unenforceable due to inequitable conduct by SynQor or its agents during the examination of the ‘290 patent at the United States Patent and Trademark Office (“USPTO”). We have also asserted counterclaims seeking damages against SynQor for deceptive trade practices and tortious interference with prospective economic advantage arising from SynQor’s attempted enforcement of its patents against us.
We have initiated administrative review proceedings at the USPTO challenging the validity of certain claims of the SynQor patents asserted in the Texas Action, including all claims that were asserted against us by SynQor. Regarding the ‘190 patent, the Patent Trial and Appeal Board (“PTAB”) of the USPTO issued a decision upholding the validity of the ‘190 patent claims. That decision was appealed by us to the United States Court of Appeals for the Federal Circuit (“the Federal Circuit”), which issued a decision on March 13, 2015
reversing the PTAB, determining that certain claims were invalid, and remanding the matter to the PTAB for further proceedings. On May 2, 2016, the PTAB issued a decision determining that all but one of the remaining claims of the ‘190 patent were invalid and remanding the remaining claim to a patent examiner for further examination. On June 22, 2017, the examiner issued a determination under 37 C.F.R. § 41.77(d), finding that the remaining claim of the ‘190 patent was unpatentable. That decision is expected to be further reviewed by the PTAB pursuant to 37 C.F.R. § 41.77(f).
On May 2, 2016, the PTAB also issued decisions finding all challenged claims of SynQor’s ‘021 patent invalid and upholding the validity of all challenged claims of SynQor’s ‘702 and ‘290 patents. On May 23, 2016, the Texas Court issued an order staying the Texas Action until the completion of all of the administrative review proceedings concerning the asserted SynQor patents, including any appeals from such proceedings to the Federal Circuit.
On August 30, 2017, the Federal Circuit issued rulings with regard to PTAB’s reexamination decisions for the ‘021, ‘702 and ‘290 patents. With respect to the ‘021 patent, the Federal Circuit affirmed the PTAB’s determination that all of the challenged claims of the ‘021 patent were invalid. The Federal Circuit remanded the case to the PTAB for further consideration of the patentability of certain claims that had been added by amendment during the reexamination. With respect to the ‘702 patent, the Federal Circuit affirmed the PTAB’s determination that all of the challenged claims of the ‘702 patent were patentable. With respect to the ‘290 patent, the Federal Circuit vacated the PTAB’s decision upholding the patentability of the ‘290 patent claims, and remanded the case to the PTAB for further consideration.
On October 31, 2017, we filed a request with the USPTO for ex parte reexamination of the ‘702 patent, based on different prior art references than had been at issue in the previous inter parte reexamination of the ‘702 patent. On December 6, 2017, the USPTO issued a decision granting our request for ex parte reexamination of the ‘702 patent, finding that the Company’s request was warranted because it raised substantial new questions of patentability of the ‘702 patent.
We continue to believe none of our products, including our unregulated bus converters, infringe any valid claim of the asserted SynQor patents, either alone or when used in an intermediate bus architecture implementation. We believe SynQor’s claims lack merit and, therefore, continue to vigorously defend ourselves against SynQor’s patent infringement allegations. We do not believe a loss is probable for this matter. If a loss were to be incurred, however, we cannot estimate the amount of possible loss or range of possible loss at this time.
In addition to the SynQor matter, we are involved in certain other litigation and claims incidental to the conduct of our business. While the outcome of lawsuits and claims against us cannot be predicted with certainty, we do not expect any current litigation or claims will have a material adverse impact on our financial position or results of operations.
ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The following table sets forth the quarterly high and low sales prices for the Common Stock as reported by The NASDAQ Stock Market for the periods indicated:
2017 | High | Low | ||||||
First Quarter | $ | 16.60 | $ | 14.15 | ||||
Second Quarter | 20.30 | 15.60 | ||||||
Third Quarter | 23.60 | 17.05 | ||||||
Fourth Quarter | 24.95 | 20.60 | ||||||
2016 | High | Low | ||||||
First Quarter | $ | 10.60 | $ | 7.19 | ||||
Second Quarter | 11.06 | 8.94 | ||||||
Third Quarter | 12.16 | 9.74 | ||||||
Fourth Quarter | 16.05 | 11.50 | ||||||
Dividend Policy
We do not have a policy mandating the declaration of cash dividends at any particular time or on a regular basis. We did not pay cash dividends on our Common Stock for the years ended December 31, 2017 or 2016.
Dividends are declared periodically, only at the discretion of our Board of Directors, and any such declaration depends on actual cash from operations, our financial condition and capital requirements, the recommendation of our management, and any other factors the Board of Directors may consider relevant at the time.
From time to time, excess cash held at the subsidiary level is transferred to the Company via cash dividends declared by the subsidiary. During the year ended December 31, 2016, one of our subsidiaries paid a total of $750,000 in cash dividends, all of which was paid to us.
PeriodTotalNumberof SharesPurchasedAverage Price Paidper ShareTotal Number ofSharesPurchased as Partof PubliclyAnnounced Plansor ProgramsMaximumNumber (orApproximateDollar Value) ofSharesthat May Yet BePurchased Underthe Plans orProgramsOctober 1 — 31, 2017 — $— — $8,541,000November 1 — 30, 2017 — $— — $8,541,000December 1 — 31, 2017 — $— — $8,541,000Total — $— — $8,541,000
Month of Fourth Quarter 2021 | 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, 2021 | — | $ | — | — | $ | 8,541,000 | ||||||||||
November 1 — 30, 2021 | — | $ | — | — | $ | 8,541,000 | ||||||||||
December 1 —31, 2021 | — | $ | — | — | $ | 8,541,000 | ||||||||||
Total | — | $ | — | — | $ | 8,541,000 | ||||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |||||||||||||||||
Vicor Corporation | $100.00 | $ | 247.60 | $ | 223.25 | $ | 168.27 | $ | 278.60 | $ | 385.61 | |||||||||||
S&P 500 Index | $100.00 | $ | 132.39 | $ | 150.51 | $ | 152.59 | $ | 170.84 | $ | 208.14 | |||||||||||
S&P SmallCap 600 Index | $100.00 | $ | 141.31 | $ | 149.45 | $ | 146.50 | $ | 185.40 | $ | 209.94 | |||||||||||
2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||||
Vicor Corporation | $100.00 | $ | 138.41 | $ | 250.26 | $ | 309.40 | $ | 610.73 | $ | 840.93 | |||||||||||
S&P 500 Index | $100.00 | $ | 121.83 | $ | 116.49 | $ | 153.17 | $ | 181.35 | $ | 233.41 | |||||||||||
S&P SmallCap 600 Index | $100.00 | $ | 113.23 | $ | 103.63 | $ | 127.24 | $ | 141.60 | $ | 179.58 | |||||||||||
ITEM 6. | [RESERVED] |
The following selected consolidated financial data with respect to our statements of operations for the years ended December 31, 2017, 2016, and 2015, and with respect to our balance sheet as of December 31, 2017 and 2016, are derived from our audited Consolidated Financial Statements, which appear elsewhere in this Annual Report on Form10-K. The following selected consolidated financial data with respect to our statements of operations for the years ended December 31, 2014 and 2013, and with respect to our balance sheets as of December 31, 2015, 2014, and 2013, 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 | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
Net revenues | $ | 227,830 | $ | 200,280 | $ | 220,194 | $ | 225,731 | $ | 199,160 | ||||||||||
Loss from operations | (1,360 | ) | (6,314 | ) | (267 | ) | (14,763 | ) | (20,467 | ) | ||||||||||
Consolidated net income (loss) | 258 | (6,261 | ) | 5,159 | (14,070 | ) | (23,504 | ) | ||||||||||||
Net income (loss) attributable to noncontrolling interest | 91 | (14 | ) | 232 | (183 | ) | 136 | |||||||||||||
Net income (loss) attributable to Vicor Corporation | 167 | (6,247 | ) | 4,927 | (13,887 | ) | (23,640 | ) | ||||||||||||
Net income (loss) per share — basic and diluted attributable to Vicor Corporation | 0.00 | (0.16 | ) | 0.13 | (0.36 | ) | (0.60 | ) | ||||||||||||
Weighted average shares — basic | 39,228 | 38,842 | 38,754 | 38,569 | 39,195 | |||||||||||||||
Weighted average shares — diluted | 39,933 | 38,842 | 39,146 | 38,569 | 39,195 | |||||||||||||||
| As of December 31, | ||||||||||||||||||||
Balance Sheet Data | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
Working capital | $ | 90,796 | $ | 89,545 | $ | 94,905 | $ | 90,321 | $ | 97,869 | ||||||||||
Total assets | 165,724 | 154,067 | 157,545 | 155,542 | 165,640 | |||||||||||||||
Total liabilities | 29,305 | 23,050 | 21,460 | 24,990 | 23,303 | |||||||||||||||
Total equity | 136,419 | 131,017 | 136,085 | 130,552 | 142,337 | |||||||||||||||
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
We have organized our business segments according to our key product lines. Reflecting our history and direction, we broadly categorize our products as either “legacy” or “advanced,” generally based24V for industrial automation).
appropriate, we categorize our product portfolios as either “Advanced Products” or “Brick Products.” The BBUAdvanced Products category consists of our more recently introduced products, which are largely used to implement our proprietary Factorized Power Architecture
through VJCL and our Vicor Custom Power subsidiaries. The BBU has customers concentratedtarget applications in aerospace and aviation, defense electronics, industrial automation, industrialinstrumentation, test equipment, medical diagnostics, rail transportation,solid state lighting, telecommunications and testnetworking infrastructure, and measurement instrumentation.
The VI Chip segment consistsvehicles (notably in the autonomous driving, electric vehicle, and hybrid vehicle niches of the vehicle segment). With our subsidiary, VI Chip Corporation, which designs, develops, manufactures,Brick Products, we generally serve a fragmented base of large and markets many of our advanced power component products. The VI Chip segment also includes the VI Chip business conducted in Japan through VJCL. VI Chip generally targets large, high volumesmall customers, concentrated in the datacenter and supercomputer segments of the computing market, although we also target applications in aerospace and aviation, autonomous driving,
The Picor segment consiststransportation (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 our subsidiary, Picor Corporation, which designs, develops,sales among relatively fewer customers.
Our consolidated results for 2017 showed a small profit, driven by an increase in net revenues and improved gross margins, notably in the second halfdate of the year, for VI Chip. Our operating performance, though, continues to reflect the general weakness of demand for our legacy products, as well as increased customer price sensitivity for these products. Customer interest in our expanding portfolio of recently-introduced advanced products continues to increase, as evidenced by the year’s higher bookings and higheryear-end backlog, both reflecting accelerated market uptake of our advanced products, notably our 48 volt topoint-of-load solutions for datacenters and supercomputers.
While improved bookings reflected increasing demand for our advanced products, with shipments scheduled well into 2018, global demand for our legacy brick converters, configurable products, and associated components remains at volumes lower than historical trend, which we attribute to the ongoing macroeconomic conditions specific to the industries and geographies we serve, as well as increased customer price sensitivity in certain industries and geographies in which commoditized products have established a strong competitive position. Our legacy products commonly are used in defense electronics, high-value capital goods, and sizeable infrastructure projects, the end demand for which has been unpredictable, reflecting budgetary uncertainty andlow-growth economies.
Althoughthis report, the number of identified opportunities for our new products continues to expand, as evidenced by booking patterns,Company employees diagnosed with
In more robust markets, such as those we are targeting with our advanced products, existing and potential customers are actively pursuing their own growth strategies, developing products with higher performance enabled by our new products and the modular component approach of our Factorized Power Architecture. As such, we increasingly are asked by existing and potential customers to collaborate on the development of new or highly modified implementations of our new products. While such collaborations are attractive opportunities to enhance customer relationships and gain competitive advantage, they also are resource and time intensive.
Additionally, when we have successfullydesigned-in our advanced product solutions, we may encounter delays and uncertainty associated with scheduling production of such solutions. For example, we are collaborating with several large-scale OEMs in the hyperscale datacenter segment of the computing market and have been engaged with these potential customers on development and design work for multiple quarters. However, only during the second half of 2017 did we begin to receivepre-production prototype orders or early production orders associated with certain engagements. Further, several additional datacenter OEMs raised their level of engagement with us, placing prototype orders and/ornon-recurring engineering orders. Givenif the number of such opportunitiesemployees diagnosed with
We believe the following considerations may influence our performance in 2018:
Operational Considerations
Market and Macroeconomic Considerations