What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-07 compared with 2024-02-12 · 55 added, 59 removed, 174 unchanged (40% of the section changed)

17 unchanged sentences

These combinations of switches and drivers are used for power conversion in high-power applications (i.e., power levels ranging from approximately 100 kilowatts up to gigawatts) such as industrial motors, solar- and wind-power systems, EVs and high-voltage DC transmission systems.

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.

Our net revenues were $419.0 million and $444.5 million in 2024 and 2023, 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.

The decline in revenues in 2024 was driven by lower sales into the communications end-market, primarily reflecting greater use of Chinese-made components in chargers manufactured for Chinese smartphone vendors, as well as increased decoupling of smartphone handsets and chargers.

Revenues from the consumer, industrial and computer categories increased compared to the prior year.

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 in our industry following periods of strong growth during which supply chain participants tend to accumulate excess inventories.

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.

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% and 96% of net revenues in 2023 and 2022, respectively.

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.

International sales represented approximately 98% of net revenues for both 2024 and 2023.

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.

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.

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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 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 .

Total operating expenses in 2023 were $193.9 million, an increase of $7.4 million as compared to 2022 due to:

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.

Our gross margin increased in 2024 due to the 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.

Total operating expenses in 2024 were $206.8 million, an increase of $12.9 million as compared to 2023, primarily due to 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.

Critical Accounting Policies and Estimates

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Actual results could differ from those estimates.

Our critical accounting policies are as follows:

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

* revenue recognition;

● estimating write-downs for excess and obsolete inventory.

* inventory valuation.

Our critical accounting policies are important to the portrayal of our financial condition and results of operations, and require us to make judgments and estimates about matters that are inherently uncertain.

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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.

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.

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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 $17.2 million between December 31, 2023 and December 31, 2022, primarily due to lower inventory levels held by distributors.

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.

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Historically, these distributor stock rotation returns have not been material.

Estimating write-downs for excess and obsolete inventory

Inventory valuation

The bulk of our inventory is held in wafers, which combined with the fungibility of our products across customers and applications results in a lower risk of obsolescence.

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Net revenues consist of revenues from product sales, which are calculated net of returns and allowances.

Revenues from all four end-market categories decreased in 2023 compared to the prior year.

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.

Revenues declined in 2024 compared to the prior year driven by lower sales into the communications end-market, primarily reflecting greater use of Chinese-made components in chargers manufactured for Chinese smartphone vendors, as well as increased decoupling of smartphone handsets and chargers.

Revenues from the consumer, industrial and computer end-market categories increased compared to the prior year.

Our approximate net revenue mix by end-markets served in 2024, 2023 and 2022 is as follows:

Communications

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.

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 approximately 84% and 75% of our net revenues in 2023 and 2022, respectively.

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.

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(dollars in millions)

Our gross margin decreased in 2023 as compared to 2022 due to a combination of factors, including a less favorable end-market mix, with a greater percentage of revenues coming from lower-margin end markets and applications and reduced production volumes, which impacted our manufacturing costs per unit.

Our gross margin increased in 2024 as compared to 2023 due to the 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 end-market categories.

Research and development expenses.

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Headcount (at period end)

R&D expenses increased in 2023 compared to 2022 primarily due to increased stock-based compensation expense, higher salaries and related expenses due to annual salary increases and increased equipment-related expenses, partially offset by lower product development costs.

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

The addition of the employees of Odyssey Semiconductor in July 2024 contributed to the increase.

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.

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:

2 unchanged sentences

Headcount (at period end)

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.

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

General and administrative expenses.

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Headcount (at period end)

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.

Other operating expenses, net.

Other operating expenses, net was $1.1 million in fiscal 2022.

This amount consisted of a $2.9 million expense resulting from the settlement of our litigation with Opticurrent LLC on May 16, 2022, in which we agreed to pay Opticurrent $2.9 million to end all outstanding legal disputes, partially offset by receipt of a $1.7 million distribution related to the bankruptcy liquidation of SemiSouth Laboratories, Inc., of which we were a creditor as a result of investments made in SemiSouth in 2011.

G&A expenses increased i n 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.

Other income .

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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.

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.

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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.

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.

Liquidity and Capital Resources

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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 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.

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We generate cash primarily from operating activities in the ordinary course of business.

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.

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.

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 .

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.

Cash from Investing Activities

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.

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.

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.

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.

Cash from Financing Activities

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 $55.3 million for the repurchase of our common stock and $44.0 million for the payment of dividends to stockholders, partially offset by proceeds of $6.2 million from the issuance of common stock through our employee stock purchase plan.

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.

Our financing activities in the year ended December 31, 2023, resulted in a $93.0 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.

In January 2022, our board of directors declared dividends of $0.18 per share to be paid to stockholders of record at the end of each quarter in 2022.

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 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.

In October 2024, our board of directors raised the cash dividend again with the declaration of five cash dividends of $0.21 per share to be paid to stockholders of record at the end of the fourth quarter in 2024 (in lieu of the $0.20 per share announced in October 2023) and at the end of each quarter in 2025.

The declaration of any future cash dividend 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, as well as a determination that cash dividends are in the best interest of our stockholders.

Stock Repurchases

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.

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.

In 2023, we repurchased 0.8 million shares for $55.3 million, leaving $26.0 million in funds authorized as of December 31, 2023.

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.

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.

Capital Expenditures

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We expect to fund these capital expenditures with cash on hand as well as cash provided by future operations.

Off-Balance-Sheet Arrangements

As of December 31, 2024 and 2023, we did not have any off-balance-sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes.

Other Information

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.

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.

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Our uses of cash beyond the next 12 months will depend on many factors, including the general economic environment in which we operate and our ability to generate cash flow from operations, which are uncertain but include funding our operations and additional capital expenditures.

Off-Balance-Sheet Arrangements

As of December 31, 2023 and 2022, we did not have any off-balance-sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes.

Contractual Obligations

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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.

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.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis