Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

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, 2024, compared to the year ended December 31, 2023, was included in the Company's Annual Report on Form 10-K for the year ended December 31, 2024, on pages 24 and 26-28 under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", which was filed with the SEC on March 3, 2025.

We design, develop, manufacture, and market modular power components and power systems for converting electrical power for use in electrically-powered devices. Our competitive position is supported by innovations in product design and achievements in product performance, largely enabled by our focus on the research and development of advanced technologies and processes, often implemented in proprietary semiconductor circuitry, materials, and packaging. Many of our products incorporate patented or proprietary implementations of high-frequency switching topologies enabling power system solutions that are more efficient and much smaller than conventional alternatives. Our strategy emphasizes demonstrable product differentiation and a value proposition based on competitively superior solution performance, advantageous design flexibility, and a compelling total cost of ownership. While we offer a wide range of alternating current ("AC") and direct current ("DC") power conversion products, we consider our core competencies to be associated with 48V DC distribution, which offers numerous inherent cost and performance advantages over lower distribution voltages. However, we also offer products addressing other DC voltage standards (e.g., 380V for power distribution in data centers, 110V for rail applications, 28V for military and avionics applications, and 24V for industrial automation).

Based on design, performance, and form factor considerations, as well as the range of evolving applications for which our products are appropriate, we categorize our product portfolios as either "Advanced Products" or "Brick Products." The Advanced Products category consists of our more recently introduced products, which are largely used to implement our proprietary Factorized Power Architecture™ ("FPA"), an innovative power distribution architecture enabling flexible, rapid power system design using individual components optimized to perform a specific conversion function.

The Brick Products category largely consists of our broad and well-established families of integrated power converters, incorporating multiple conversion stages, used in conventional power systems architectures. Given the growth profiles of the markets we serve with our Advanced Products line and our Brick Products line, our strategy involves a continuing 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 power delivery 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 serve applications in aerospace and aviation, defense electronics, satellites, factory automation, instrumentation, test equipment, transportation, 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 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, including from intellectual property licensing among relatively fewer customers.

Our quarterly consolidated operating results can be difficult to forecast and have been subject to significant fluctuations. We plan our production and inventory levels based on management's estimates of customer demand, customer forecasts, and other information sources. Customer forecasts, particularly those of OEM, ODM, and contract manufacturing customers to which we supply Advanced Products in high volumes, are subject to scheduling changes on short notice, contributing to operating inefficiencies and excess costs. In addition, external factors such as supply chain uncertainties, which are often associated with the cyclicality of the electronics industry, regional macroeconomic and trade-related circumstances, and force majeure events, have caused our operating results to vary meaningfully. Supply chain disruptions, including those associated with our reliance on outsourced package process steps that are essential in the production of some

of our Advanced Products, and those relating, for example, to the procurement of raw material, have in the past negatively impacted and may in the future negatively impact our operating results. We have taken steps to mitigate the impact of supply chain disruptions by, among other things and in varying degrees, moving outsourced manufacturing steps in-house to the Company, ordering supplies with extended lead times, paying higher prices for certain supplies or outsourced production, and expediting deliveries at a cost premium. The resulting impact of the steps taken to mitigate supply chain disruptions have, to varying degrees and at different times, reduced our revenue, gross margin, operating profit and cash flow and may continue to do so in the future. Our quarterly gross margin as a percentage of total net revenues may vary, depending on production volumes, licensing income, 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 total 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.

2025 Financial Highlights

The following table sets forth certain items of selected consolidated financial information as a percentage of total net revenues and patent litigation settlement for the years ended December 31, 2025, 2024, and 2023. This table and the subsequent discussion should be read in conjunction with the Consolidated Financial Statements and related notes contained elsewhere in this report.

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 - Impact of newly adopted and recently issued but not 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 net realizable value is based upon forecasted future usage which we derive based on backlog, historical consumption, and expected market conditions. For both our Brick and Advanced Product lines, the methodology used compares on-hand quantities to forecasted usage and historical consumption, such that amounts of inventory on hand in excess of management's estimate of expected future utility, are fully reserved. While we have used our best efforts and believe we have used the best available information to estimate future demand, due to uncertainty in the economy and our business and the inherent difficulty in forecasting future usage, it is possible actual demand for our products will differ from our estimates. If actual future demand or market conditions are less favorable than those projected by management, additional inventory reserves for existing inventories may need to be recorded in future periods.

Evaluation of the Realizability of Deferred Tax Assets

Significant management judgment is required in determining whether deferred tax assets will be realized in full or in part. We assess the need for a valuation allowance on a quarterly basis. We record a valuation allowance to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and past financial performance. Despite recent positive operating results, we face uncertainties in forecasting our operating results due to the unpredictability of customer orders in certain markets, product transitions, new program introductions and adoption times of new technology offerings. This operating uncertainty also makes it difficult to predict the availability and utilization of tax benefits over the next several years. Prior to December 31, 2025, the Company maintained a valuation allowance against a significant portion of its deferred tax assets, consisting of net operating loss carryforwards, tax credit carryforwards, and deductible temporary differences. Based on the Company's history of cumulative earnings before taxes for financial reporting purposes over a 12-quarter period and expected future taxable income, management determined it was more likely than not a significant portion of the deferred tax assets would be realized. As a result, at December 31, 2025, the Company reversed $43,648,000 of its valuation allowance related to certain deductible temporary differences expected to be realized in future periods. This tax benefit was partially offset by estimated federal, state, and foreign income taxes. As of December 31, 2025, the Company has a remaining valuation allowance of approximately $17,931,000 against certain deferred tax assets, for which realization cannot be considered more likely than not at this time. Such deferred tax assets principally relate to tax credit carryforwards in certain state jurisdictions for which sufficient taxable income for utilization cannot be projected at this time, or the credits may expire without being utilized. If and when management determines the remaining valuation allowance should be released, the adjustment would result in a tax benefit in the Consolidated Statements of Operations and 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 newly adopted and recently issued but not adopted accounting standards, to the Consolidated Financial Statements for a description of newly adopted and recently issued but not 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, 2025 are not expected to have a material impact on our consolidated financial statements.

Year ended December 31, 2025 compared to Year ended December 31, 2024

Consolidated total net revenues for 2025 were $407,701,000, an increase of $48,643,000, or 13.5%, as compared to $359,058,000 for 2024.

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

The increase in net revenues for Advanced Products was primarily due to improved market demand and higher royalty revenue. The decrease in net revenues for Brick Products was primarily due to reduced market demand.

During the year ended December 31, 2025, the Company received a patent litigation settlement payment of $45,000,000 (as described in more detail in Note 16 to the Consolidated Financial Statements).

Gross margin for the year ended December 31, 2025 increased $75,431,000, or 41.0%, to $259,429,000 from $183,998,000 for the year ended December 31, 2024. Gross margin, as a percentage of total net revenues and patent litigation settlement, increased to 57.3% for the year ended December 31, 2025, as compared to 51.2% for the year ended December 31, 2024. The increase in gross margin dollars and gross margin percentage was primarily attributable to the $45,000,000 patent litigation settlement payment received by the Company in the second quarter of 2025 and the favorable impact from higher sales volume and improved sales mix on that revenue, including royalty revenue, when compared to 2024, offset by the unfavorable impact of production inefficiencies including an increase in freight-in and tariff spending of $3,949,000 (net of approximately $907,000 in duty drawback recovery in 2025 and $1,669,000 in duty drawback recovery in 2024 of previously paid tariffs).

Selling, general, and administrative expenses were $99,031,000 for 2025, an increase of $2,145,000, or 2.2%, as compared to $96,886,000 for 2024. As a percentage of total net revenues, selling, general, and administrative expenses decreased to 24.3% in 2025 from 27.0% in 2024.

The components of the $2,145,000 increase in selling, general, and administrative expenses were as follows (dollars in thousands):

Research and development expenses increased $9,648,000, or 14.0%, to $78,570,000 in 2025 from $68,922,000 in 2024. As a percentage of total net revenues, research and development expenses increased to 19.3% in 2025 from 19.2% in 2024.

The components of the $9,648,000 increase in research and development expenses were as follows (dollars in thousands):

Litigation-contingency expense was $0 for 2025, as compared to $19,500,000 for 2024, which related to the SynQor litigation. See Note 16 to the Consolidated Financial Statements for additional information regarding the SynQor litigation-contingency expense.

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

Our exposure to market risk fluctuations in foreign currency exchange rates relates to the operations of Vicor Japan Company, Ltd. ("VJCL"), for which the functional currency is the Japanese Yen, and all other subsidiaries in Europe and Asia, for which the functional currency is the U.S. Dollar. These subsidiaries in Europe and Asia experienced favorable foreign currency exchange rate fluctuations in 2025 compared to 2024. In 2025, interest income increased due to higher balances of cash and cash equivalents held by the Company.

Income before income taxes was $94,571,000 in 2025, as compared to $10,487,000 in 2024.

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

The effective tax rates differ from the statutory tax rates for the years ended December 31, 2025 and 2024 primarily due to the release of a portion of the valuation allowance and the Company's full valuation allowance position against certain domestic deferred tax assets.

See Note 15 to the Consolidated Financial Statements for disclosure regarding our current assessment of the release of a significant portion of the valuation allowance against net domestic deferred tax assets.

We reported net income for the year ended December 31, 2025 of $118,556,000, or $2.61 per diluted share, as compared to $6,129,000, or $0.14 per diluted share, for the year ended December 31, 2024.

Liquidity and Capital Resources

At December 31, 2025, we had $402,805,000 in cash and cash equivalents. The ratio of current assets to current liabilities was 9.0:1 at December 31, 2025, as compared to 7.5:1 at December 31, 2024. Net working capital increased $120,828,000 to $522,042,000 at December 31, 2025 from $401,214,000 at December 31, 2024.

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

The primary sources of cash for the year ended December 31, 2025 were $139,548,000 generated from operations and $41,495,000 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, 2025 were $35,175,000 used for repurchases of Common Stock and $20,318,000 used for purchases of property and equipment.

In November 2000, our Board of Directors authorized the repurchase of up to $30,000,000 of our Common Stock (the "November 2000 Plan"). In July 2024, our Board of Directors authorized the repurchase of up to $100,000,000 of our Common Stock (the "New Repurchase Authorization"). The New Repurchase Authorization replaces the November 2000 Plan in its entirety and no further repurchases will be made pursuant to the November 2000 Plan. As of December 31, 2025, we had approximately $64,327,000 remaining available for repurchases of our Common Stock under the New Repurchase Authorization.

The timing and amounts of Common Stock repurchases under the New Repurchase Authorization are at the discretion of the Company's President and Chief Executive Officer based upon economic and financial market conditions.

As of December 31, 2025, we had a total of approximately $3,877,000 of cancelable and non-cancelable capital expenditure commitments, principally for manufacturing and production equipment, which we intend to fund with existing cash, and approximately $1,144,000 of capital expenditure items which had been received and included in Property, plant and equipment, net in the accompanying Consolidated Balance Sheets, but not yet paid for. Our primary needs for liquidity are for making continuing investments in manufacturing and production equipment. We believe cash generated from operations together with our available cash and cash equivalents will be sufficient to fund planned operational needs and capital equipment purchases, for both the short and long term.

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.