POWER INTEGRATIONS INC

Previous wording

Our business and financial performance depends significantly on worldwide economic conditions. We face global macroeconomic challenges and risks including the effects of the conflicts in Ukraine and the Middle East, potential risks stemming from tensions between China and Taiwan and between China and Western countries, health crises such as the COVID-19 pandemic, volatility in exchange rates, cyclical demand patterns common for our industry, inflation, tariffs and other risks associated with the global trade environment.

Current wording

Our business and financial performance depends significantly on worldwide economic conditions. We face global macroeconomic challenges and risks including the effects of the conflicts in Ukraine and the Middle East, potential risks stemming from tensions between China and Taiwan and between China and Western countries, volatility in exchange rates, cyclical demand patterns common for our industry, inflation, tariffs and other risks associated with the global trade environment.

Previous wording

Our net revenues were $444.5 million and $651.1 million in 2023 and 2022, respectively. Revenues from all four end-market categories decreased in 2023 compared to the prior year. We believe that demand for our products has been negatively affected by an array of macroeconomic and geopolitical factors including reduced consumer spending in response to inflation and higher interest rates, softer housing markets, weaker demand for mobile phones, general economic weakness in China, the conflicts in Ukraine and the Middle East, and a shift in consumer spending toward travel and services following a period of elevated spending on goods during the COVID-19 pandemic. We believe these factors have exacerbated the effects of a cyclical downturn in the semiconductor industry; such downturns are commonly experienced in our industry following periods of strong growth during which supply chain participants tend to accumulate excess inventories.

Current wording

We believe that demand for our products has been negatively affected in recent years by an array of macroeconomic and geopolitical factors including reduced consumer spending and a reduction in home sales in response to inflation and higher interest rates, general economic weakness in China, particularly in the residential real estate market, weaker industrial activity and the conflicts in Ukraine and the Middle East. We believe these factors have exacerbated the effects of a cyclical downturn in the semiconductor industry; such downturns are commonly experienced following periods of strong growth­‒such as that observed during the COVID-19 pandemic‒during which supply-chain participants tend to accumulate excess inventories. Inventories at distributors of our products have decreased significantly in recent periods, enabling our sales to align more closely with end-market demand; this contributed to an increase in net revenues in the fourth quarter of 2024 compared to the fourth quarter of 2023.

Previous wording

Our top ten customers, including distributors that resell to OEMs and merchant power supply manufacturers, accounted for approximately 80% and 76% of net revenues in 2023 and 2022, respectively. International sales represented approximately 98% and 96% of net revenues in 2023 and 2022, respectively.

Current wording

Our top ten customers, including distributors that resell to OEMs and merchant power supply manufacturers, accounted for approximately 79% and 80% of net revenues in 2024 and 2023, respectively. International sales represented approximately 98% of net revenues for both 2024 and 2023.

Previous wording

and customer mix can also cause our gross margin to fluctuate. Also, because we purchase a large percentage of our silicon wafers from foundries located in Japan, our gross margin is influenced by fluctuations in the exchange rate between the U.S. dollar and the Japanese yen. All else being equal, a 10% change in the value of the U.S. dollar compared to the Japanese yen would eventually result in a corresponding change in our gross margin of approximately 1.5%; this sensitivity may increase or decrease depending on the percentage of our wafer supply that we purchase from Japanese suppliers. Also, although our wafer fabrication and assembly operations are outsourced, as are most of our test operations, a portion of our production costs are fixed in nature. As a result, our unit costs and gross profit margin are impacted by the volume of units we produce.

Current wording

Because our industry is intensely price-sensitive, our gross margin (gross profit divided by net revenues) is subject to change based on the relative pricing of solutions that compete with ours. Variations in product mix, end-market mix and customer mix can also cause our gross margin to fluctuate. Also, because we purchase a large percentage of our silicon wafers from foundries located in Japan, our gross margin is influenced by fluctuations in the exchange rate between the U.S. dollar and the Japanese yen. All else being equal, a 10% change in the value of the U.S. dollar compared to the Japanese yen would eventually result in a corresponding change in our gross margin of approximately 1.4%; this sensitivity may increase or decrease depending on the percentage of our wafer supply that we purchase from Japanese suppliers. Also, although our wafer fabrication and assembly operations are outsourced, as are most of our test operations, a portion of our production costs are fixed in nature. As a result, our unit costs and gross profit margin are impacted by the volume of units we produce.

Previous wording

Our gross profit, defined as net revenues less cost of revenues, was $229.0 million or 52% of net revenues in 2023, compared to $366.9 million or 56% of net revenues in 2022. Our gross margin decreased in 2023 due to a combination of factors, including reduced production volumes, which impacted our manufacturing costs per unit, as well as a less favorable end-market mix, with a greater percentage of revenues coming from lower-margin end markets and applications.

Current wording

Our gross profit, defined as net revenues less cost of revenues, was $224.8 million or 54% of net revenues in 2024, compared to $229.0 million or 52% of net revenues in 2023. Our gross margin increased in 2024 due tothe favorable impact of the dollar/yen exchange rate on our wafer costs, manufacturing efficiencies including the benefit of higher unit volumes on our manufacturing costs per unit, and favorable end-market mix with a greater percentage of sales coming from higher-margin market categories.

Previous wording

Total operating expenses in 2023 were $193.9 million, an increase of $7.4 million as compared to 2022 dueto: higher stock-based compensation expenses reflecting a lower-than-usual level of such expenses in the prior year; higher salary- and benefit-related expenses reflecting annual salary increases and higher costs associated with employee health insurance and other benefits.

Current wording

Total operating expenses in 2024 were $206.8 million, an increase of $12.9 million as compared to 2023, primarily dueto increased stock-based compensation expense and higher salary- and benefit-related expenses driven by increased headcount, annual salary increases and higher costs associated with employee health insurance and other benefits.

Previous wording

Our critical accounting policies are as follows:

Current wording

Our critical accounting policies which reflect our more significant estimates are as follows:

Previous wording

Sales to most distributors are made under terms allowing certain price adjustments and limited rights of return (known as “stock rotation”) of our products held in their inventory or upon sale to their end customers. We recognize revenue from sales to distributors upon the transfer of control to the distributor. Frequently, distributors need to sell at a price lower than the standard distribution price in order to win business. At the time the distributor invoices its customer or soon thereafter, the distributor submits a “ship-and-debit” price adjustment claim to us to adjust the distributor’s cost from the standard price to the pre-approved lower price. After we verify that the claim was pre-approved, we issue a credit memo to the distributor for the ship-and-debit claim. In determining the transaction price, we consider ship-and-debit price adjustments to be variable consideration. At the time revenue is recognized on sales to distributors, future ship-and-debit price adjustments are unknown and therefore subject to uncertainty. Such price adjustments are estimated using the expected-value method based on an analysis of actual ship-and-debit claims, at the distributor and product level, over a period of time considered adequate to account for current pricing and business trends. The reserve for ship-and-debit

Current wording

or soon thereafter, the distributor submits a “ship-and-debit” price adjustment claim to us to adjust the distributor’s cost from the standard price to the pre-approved lower price. After we verify that the claim was pre-approved, we issue a credit memo to the distributor for the ship-and-debit claim. In determining the transaction price, we consider ship-and-debit price adjustments to be variable consideration. At the time revenue is recognized on sales to distributors, future ship-and-debit price adjustments are unknown and therefore subject to uncertainty. Such price adjustments are estimated using the expected-value method based on an analysis of actual ship-and-debit claims, at the distributor and product level, over a period of time considered adequate to account for current pricing and business trends. The reserve for ship-and-debit claims decreased by $9.6 million between December 31, 2024 and December 31, 2023, primarily due to lower inventory levels held by distributors. Historically, actual price adjustments for ship-and-debit claims have not materially differed from those estimated when determining the transaction price. To the extent future ship-and-debit claims significantly exceed amounts estimated, there could be a material impact on our revenues and results of operations.

Previous wording

Sales to customers outside of the United States were $435.9 million and $625.6 million in 2023 and 2022, respectively, representing 98% and 96% of net revenues in 2023 and 2022, respectively. Although power supplies using our products are designed and distributed worldwide, most of these power supplies are manufactured by our customers in Asia. As a result, sales to this region accounted for approximately 84% and 75% of our net revenues in 2023 and 2022, respectively. We expect international sales to continue to account for a large portion of our net revenues for the foreseeable future.

Current wording

Sales to customers outside of the United States were $412.5 million and $435.9 million in 2024 and 2023, respectively, representing 98% of net revenues in both 2024 and 2023. Although power supplies using our products are designed and distributed worldwide, most of these power supplies are manufactured by our customers in Asia. As a result, sales to this region accounted for 84% of our net revenues in both 2024 and 2023. We expect international sales to continue to account for a large portion of our net revenues for the foreseeable future.

Previous wording

Sales to distributors accounted for 69% and 70% of our net revenues in 2023 and 2022, respectively, with direct sales to OEMs and merchant power supply manufacturers accounting for the remainder in each of the corresponding years.

Current wording

Sales to distributors accounted for 70% and 69% of our net revenues in 2024 and 2023, respectively, with direct sales to OEMs and merchant power supply manufacturers accounting for the remainder in each of the corresponding years.

Previous wording

*Sales and marketing expenses.*Sales and marketing (“S&M”) expenses consist primarily of employee-related expenses, including salaries and stock-based compensation, and commissions to sales representatives, as well as amortization of acquired intangible assets and facilities expenses, including expenses associated with our regional sales and support offices. The following table compares sales and marketing expenses for the years ended December 31, 2023, 2022 and 2021:

Current wording

*Sales and marketing expenses.*Sales and marketing (“S&M”) expenses consist primarily of employee-related expenses, including salaries and stock-based compensation, and commissions to sales representatives, as well as facilities expenses, including expenses associated with our regional sales and support offices. The following table compares sales and marketing expenses for the years ended December 31, 2024, 2023 and 2022:

Previous wording

S&M expenses increased in 2023 compared to 2022 primarily due to higher salaries and related expenses, increased travel and trade show expenses, and increased stock-based compensation expense. These increases were partially offset by decreased commissions expense.

Current wording

S&M expenses increased in 2024 compared to 2023 primarily due to increased stock-based compensation expense related to performance-based awardsand higher salaries- and benefit-related expenses due to increased headcount and annual salary increases.

Previous wording

G&A expenses increased in 2023 primarily due to higher salaries and related expenses driven by increased headcount and increased stock-based compensation expense related to performance-based awards. These increases were partially offset by recovery of bad debt and lower professional services expenses.

Current wording

G&A expenses increased in 2024 primarily due to increased stock-based compensation expense related to performance-based awards, higher salaries- and benefit-related expenses due to increased headcount and annual salary increases as well as increased professional services.

Previous wording

In 2023 and 2022, the effective tax rate was lower than the statutory U.S. federal income-tax rates of 21% due to the geographic distribution of our world-wide earnings in lower tax jurisdictions, the impact of federal research tax credits and the recognition of excess tax benefits related to share-based compensation. Additionally, in 2023 and 2022, our effective tax rate was favorably impacted by the geographic distribution of our world-wide earnings in lower-tax jurisdictions and federal research tax credits. In 2023, the rate was further favorably impacted by the release of $7.6 million of reserves related to federal uncertain tax positions as the statute of limitations for review of these positions expired. These benefits were partially offset by U.S. tax on foreign income, known as global intangible low-taxed income. The primary jurisdiction from which our foreign earnings are derived is the Cayman Islands, which is a non-taxing jurisdiction. Income earned in other foreign jurisdictions was not material. We have not been granted any incentivized tax rates and do not operate under tax holidays in any jurisdiction. For additional details, refer to Note 11,Provision for Income Taxes, in our Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Current wording

In 2024 and 2023, the effective tax rate was lower than the statutory U.S. federal income-tax rates of 21% due to the geographic distribution of our world-wide earnings in lower tax jurisdictions, the impact of federal research tax credits and the recognition of excess tax benefits related to share-based compensation. Additionally, in 2024 and 2023, our effective tax rate was favorably impacted by a discrete item associated with the release of unrecognized tax benefits. These benefits were offset by U.S. tax on foreign income, known as global intangible low-taxed income. The primary jurisdiction from which our foreign earnings are derived is the Cayman Islands, which is a non-taxing jurisdiction. Income earned in other foreign jurisdictions was not material. We have not been granted any incentivized tax rates and do not operate under tax holidays in any jurisdiction. For additional details, refer to Note 11,Provision (Benefit) for Income Taxes, in our Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Previous wording

We had $311.6 million in cash, cash equivalents and short-term marketable securities at December 31, 2023 compared to $353.8 million at December 31, 2022. As of December 31, 2023 and 2022, we had working capital, defined as current assets less current liabilities, of approximately $462.7 million and $466.7 million, respectively.

Current wording

We had $300.0 million in cash, cash equivalents and short-term marketable securities at December 31, 2024 compared to $311.6 million at December 31, 2023. As of December 31, 2024 and 2023, we had working capital, defined as current assets less current liabilities, of approximately $458.7 million and $462.7 million, respectively.

Previous wording

June 7, 2026, with all other terms remaining the same. The Credit Agreement was amended with an effective date of June 28, 2023 to include the Secured Overnight Financing Rates (“SOFR”) as interest rate benchmark rates, with all other terms remaining the same. Our ability to borrow under the revolving line of credit is conditioned upon our compliance with specified covenants, including reporting and financial covenants, primarily a minimum liquidity measure and a debt to earnings ratio, with which we are currently in compliance. The Credit Agreement terminates on June 7, 2026; all advances under the revolving line of credit will become due on such date, or earlier in the event of a default. As of December 31, 2023 and 2022, we had no advances outstanding under the Credit Agreement.

Current wording

We have a Credit Agreement with Wells Fargo Bank, National Association (the "Credit Agreement") that provides us with a $75.0 million revolving line of credit to use for general corporate purposes with a $20.0 million sub-limit for the issuance of standby and trade letters of credit. The Credit Agreement was amended on June 7, 2021, to provide an alternate borrowing rate as a replacement for LIBOR and extend the termination date from April 30, 2022 to June 7, 2026, with all other terms remaining the same. The Credit Agreement was amended with an effective date of June 28, 2023 to include the Secured Overnight Financing Rates (“SOFR”) as interest rate benchmark rates, with all other terms remaining the same. Our ability to borrow under the revolving line of credit is conditioned upon our compliance with specified covenants, including reporting and financial covenants, primarily a minimum liquidity measure and a debt to earnings ratio, with which we are currently in compliance. The Credit Agreement terminates on June 7, 2026; all advances under the revolving line of credit will become due on such date, or earlier in the event of a default. As of December 31, 2024 and 2023, we had no advances outstanding under the Credit Agreement.

Previous wording

Our operating activities generated cash of $65.8 million and $215.3 million in the years ended December 31, 2023 and 2022, respectively. We generate cash primarily from operating activities in the ordinary course of business.

Current wording

Our operating activities generated cash of $81.2 million and $65.8 million in the years ended December 31, 2024 and 2023, respectively. We generate cash primarily from operating activities in the ordinary course of business.

Previous wording

In 2022, our net income was $170.9 million, which included non-cash expenses of $34.9 million of depreciation, $22.4 million of stock-based compensation, $3.3 million for amortization of premium on marketable securities, $2.4 million of intangibles amortization and a $2.6 million decrease in deferred income taxes. Sources of cash also included a $19.9 million decrease in accounts receivable and a $7.3 million decrease in prepaid expenses and other assets. These sources of cash were partially offset by a $36.2 million increase in inventories due to softening demand during the year and a $3.8 million decrease in accounts payable (excluding payables related to property and equipment) due to timing of payments and a $5.2 million decrease in taxes payable and accrued liabilities.

Current wording

In 2024, our net income was $32.2 million, which included non-cash expenses of $33.3 million of depreciation, $35.1 million of stock-based compensation and $1.3 million of intangibles amortization partially offset by a $8.4 million increase in deferred income taxes. Sources of cash included a $3.5 million increase in accounts payable (excluding payables related to property and equipment) due to timing of payments and a $4.0 million decrease in prepaid expenses and other assets. These sources of cash were partially offset by a $12.3 million increase in accounts receivable, a $2.4 million increase in inventories, and a $3.5 million decrease in taxes payable and accrued liabilities.

Previous wording

In 2023, our net income was $55.7 million, we also incurred $35.2 million of depreciation, $28.5 million of stock-based compensation and $2.2 million of intangibles amortization partially offset by a $9.2 million increase in deferred income taxes. Sources of cash also included a $6.6 million decrease in accounts receivable. These sources of cash were partially offset by a $27.7 million increase in inventories due to softening demand during the year, a $18.2 million decrease in taxes payable and accrued liabilities, a $5.4 million decrease in accounts payable (excluding payables related to property and equipment) due to timing of payments and a $1.2 million increase in prepaid expenses and other assets.

Current wording

In 2023, our net income was $55.7 million, which included non-cash expenses of$35.2 million of depreciation, $28.5 million of stock-based compensation and $2.2 million of intangibles amortization partially offset by a $9.2 million increase in deferred income taxes. Sources of cash included a $6.6 million decrease in accounts receivable. These sources of cash were partially offset by a $27.7 million increase in inventories due to softening demand during the year, a $18.2 million decrease in taxes payable and accrued liabilities, a $5.4 million decrease in accounts payable (excluding payables related to property and equipment) due to timing of payments and a $1.2 million increase in prepaid expenses and other assets.

Previous wording

Our investing activities in the year ended December 31, 2022 generated $78.3 million of cash, consisting primarily of $116.3 million from sales and maturities of marketable securities, net of purchases, and proceeds of $1.2 million from the sale of an office building, partially offset by $39.2 million for purchases of property and equipment, primarily production-related machinery and equipment.

Current wording

Our investing activities in the year ended December 31, 2024 resulted in a $25.9 million net use of cash, consisting primarily of $17.3 million for purchases of property and equipment and $9.5 million for the Odyssey acquisition, partially offset by $0.9 million of proceeds from sales and maturities of marketable securities, net of purchases.

Previous wording

Our investing activities in the year ended December 31, 2023 resulted in a $14.2 million net use of cash, consisting primarily of $20.9 million for purchases of property and equipment, primarily production-related machinery and equipment, partially offset by $6.7 million from sales and maturities of marketable securities, net of purchases.

Current wording

Our investing activities in the year ended December 31, 2023 resulted in a $14.2 million net use of cash, consisting primarily of $20.9 million for purchases of property and equipment, primarily production-related machinery and equipment, partially offset by $6.7 million of proceeds from sales and maturities of marketable securities, net of purchases.

Previous wording

Our financing activities in the year ended December 31, 2022, resulted in a $346.4 million net use of cash. Financing activities consisted primarily of $311.1 million for the repurchase of our common stock and $41.5 million for the payment of dividends to stockholders, partially offset by proceeds of $6.2 million from the issuance of common stock, including the exercise of employee stock options and issuance of shares through our employee stock purchase plan.

Current wording

Our financing activities in the year ended December 31, 2024, resulted in a $68.2 million net use of cash. Financing activities consisted primarily of $46.0 million for the payment of dividends to stockholders and $27.9 million for the repurchase of our common stock, partially offset by proceeds of $5.7 million from the issuance of common stock through our employee stock purchase plan.

Previous wording

In February 2023, our board of directors raised the cash dividend with the declaration of four cash dividends of $0.19 per share to be paid to stockholders of record at the end of each quarter in 2023. In October 2023, our board of directors raised the cash dividend with the declaration of five cash dividends of $0.20 per share to be paid to stockholders of record at the end of the fourth quarter in 2023 (in lieu of the $0.19 per share announced in February 2023) and at the end of each quarter in 2024.

Current wording

In February 2023, our board of directors declared dividends of $0.19 per share to be paid to stockholders of record at the end of each quarter in 2023. In October 2023, our board of directors raised the cash dividend with the declaration of five cash dividends of $0.20 per share to be paid to stockholders of record at the end of the fourth quarter in 2023 (in lieu of the $0.19 per share announced in February 2023) and at the end of each quarter in 2024.

Previous wording

Over the years our board of directors has authorized the use of funds to repurchase shares of our common stock, including $100.0 million in January 2022, $50.0 million in February 2022, $75.0 million in April 2022 and $100.0 million in October 2022 with repurchases to be executed according to pre-defined price/volume guidelines. In 2022, we repurchased 3.8 million shares for $311.1 million, leaving $81.3 million in funds authorized as of December 31, 2022. In 2023, we repurchased 0.8 million shares for $55.3 million, leaving $26.0 million in funds authorized as of December 31, 2023.

Current wording

Over the years our board of directors has authorized the use of funds to repurchase shares of our common stock, including $100.0 million in October 2022 with repurchases to be executed according to pre-defined price/volume guidelines. As of December 31, 2022, we had $81.3 million remaining under our stock-repurchase program.

Previous wording

Authorization of future stock repurchase programs is at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and business conditions as well as other factors.

Current wording

In 2023, we repurchased 0.8 million shares for $55.3 million, leaving $26.0 million in funds authorized as of December 31, 2023. We exhausted this authorization in April 2024. In October 2024, our board of directors authorized the use of an additional $50.0 million for the repurchase of our common stock, with repurchases to be executed according to pre-defined price/volume guidelines. As of December 31, 2024, $48.1 million remained under this repurchase authorization; the program has no expiration date. In 2024, we repurchased a total of 0.4 million shares of the Company’s common stock for $27.9 million. Authorization of future repurchase programs is at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, business conditions and other factors.

Previous wording

Cash paid for property and equipment in the year ended December 31, 2023 was $20.9 million. We expect capital expenditures in fiscal 2024 to be primarily for machinery and equipment for use in the manufacture of our products to support future growth. We expect to fund these capital expenditures with cash on hand as well as cash provided by future operations.

Current wording

Cash paid for property and equipment in the year ended December 31, 2024 was $17.3 million. We expect capital expenditures in fiscal 2025 to be primarily for machinery and equipment for use in the manufacture of our products to support future growth. We expect to fund these capital expenditures with cash on hand as well as cash provided by future operations.

Previous wording

Our cash, cash equivalents and investment balances may change in future periods due to changes in our planned cash outlays, including changes in incremental costs such as direct and integration costs related to future acquisitions. The Tax Act signed into law on December 22, 2017 generally allows companies to repatriate accumulated foreign earnings without incurring additional U.S. federal taxes beginning after December 31, 2017. Accordingly, as of December 31, 2023, our worldwide cash and marketable securities are available to fund capital allocation needs, including capital and internal investments, acquisitions, stock repurchases and/or dividends without incurring significant U.S. federal income taxes.

Current wording

Our cash, cash equivalents and investment balances may change in future periods due to changes in our planned cash outlays, including changes in incremental costs such as direct and integration costs related to future acquisitions. Current U.S. tax laws generally allow companies to repatriate accumulated foreign earnings without incurring additional U.S. federal taxes. Accordingly, as of December 31, 2024, our worldwide cash and marketable securities are available to fund capital allocation needs, including capital and internal investments, acquisitions, stock repurchases and/or dividends without incurring significant U.S. federal income taxes.

Previous wording

In addition to operating lease and purchase obligations, we have a contractual obligation related to income tax as of December 31, 2023, which primarily comprises unrecognized tax benefits of approximately $16.4 million, and was classified as contra deferred tax assets or long-term income taxes payable in our consolidated balance sheet. As of December 31, 2023 we also had approximately $1.7 million classified as long-term income taxes payable related to the estimated one-time transition tax from the enactment of the Tax Act which will be payable in three remaining annual installments. We believe that cash generated from operations, together with existing sources of liquidity, will satisfy the cash requirements for these contractual obligations.

Current wording

In addition to operating lease and purchase obligations, we have a contractual obligation related to income tax as of December 31, 2024, which primarily comprises unrecognized tax benefits of approximately $15.2 million, and was classified as contra deferred tax assets or long-term income taxes payable in our consolidated balance sheet. We believe that cash generated from operations, together with existing sources of liquidity, will satisfy the cash requirements for these contractual obligations.