What changed in this filing

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Item 7. Management’s Discussion and Analysis

2026-02-06 compared with 2025-02-07 · 78 added, 74 removed, 155 unchanged (50% of the section changed)

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A large percentage of our products are ICs used in AC-DC power supplies, which convert the high-voltage AC from a wall outlet to the low-voltage DC required by most electronic devices.

Power supplies incorporating our products are used with all manner of electronic products including mobile phones, computing and networking equipment, appliances, electronic utility meters, battery-powered tools, industrial controls, and “home-automation,” or “internet of things” applications such as networked thermostats, power strips and security devices.

Power supplies incorporating our products are used with all manner of electronic products including industrial controls, “smart” utility meters, appliances, air conditioners, battery-powered tools, building-automation, or “internet-of-things” applications such as networked thermostats and security devices, and mobile devices such as smartphones, tablets and notebook computers.

Variations of our power-supply ICs are used for high-voltage power conversion in electric vehicles (“EVs”).

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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.

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 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% 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.

Our net revenue was $443.5 million and $419.0 million in 2025 and 2024, respectively.

The increase in revenue in 2025 was primarily driven by higher sales in the industrial end-market, including growth in sales of our gate-driver products, as well as increased sales of our ICs for a broad range of applications including electronic utility meters, electric vehicles and battery-powered tools.

Our top ten customers, including distributors that resell to OEMs and merchant power supply manufacturers, accounted for approximately 81% and 79% of net revenue in 2025 and 2024, respectively.

International sales represented approximately 98% of net revenue in each of 2025 and 2024.

Because our industry is intensely price-sensitive, our gross margin (gross profit divided by net revenue) 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.

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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.

this sensitivity may increase 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.

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 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.

Our gross profit, defined as net revenue less cost of revenue, was $241.6 million or 55% of net revenue in 2025, compared to $224.8 million or 54% of net revenue in 2024.

Our gross margin increased in 2025 due to 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 2025 were $231.5 million, an increase of $24.6 million as compared to 2024, primarily due to higher stock-based compensation expense as a result of an award modification associated with the retirement of our former chief executive officer (refer to Note 7, Stock-Based Compensation , in our Notes to Consolidated Financial Statements for details) and expenses incurred related to an employee litigation matter (refer to Note 14, Legal Proceedings and Contingencies , in our Notes to Consolidated Financial Statements for details) as well as higher expenses for outside engineering services and legal services.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America, or U.S.

GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On an ongoing basis, we evaluate our estimates, including those listed below.

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Revenue recognition

Product revenues consist of sales to original equipment manufacturers, or OEMs, merchant power supply manufacturers and distributors.

Product revenue consists of sales to original equipment manufacturers, or OEMs, merchant power supply manufacturers and distributors.

We apply the provisions of Accounting Standards Codification (“ASC”) 606-10, Revenue from Contracts with Customers , and all related appropriate guidance.

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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.

After we verify that the claim was pre-approved, we issue a credit memo to the distributor for the ship-and-debit claim.

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 is 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.

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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 $9.6 million between December 31, 2024 and December 31, 2023, primarily due to lower inventory levels held by distributors.

The reserve for ship-and-debit claims increased by $7.2 million between December 31, 2025 and December 31, 2024, primarily due to higher inventory levels held by distributors in our industrial end-market.

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.

To the extent future ship-and-

debit claims significantly exceed amounts estimated, there could be a material impact on our revenue and results of operations.

Stock rotation rights grant the distributor the ability to return certain specified amounts of inventory.

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When evaluating the adequacy of our provision for excess and obsolete inventory, we identify excess and obsolete products and also analyze historical usage, forecasted demand, current economic trends and historical write-offs .

This write-down is reflected as a reduction to inventory in the consolidated balance sheets and an increase in cost of revenues in our consolidated statements of income.

If actual market conditions are less favorable than our assumptions, we may be required to take additional write-downs, which could adversely impact our cost of revenues and operating results.

This write-down is reflected as a reduction to inventory in the consolidated balance sheets and an increase in cost of revenue in our consolidated statements of income.

If actual market conditions are less favorable than our assumptions, we may be required to take additional write-downs, which could adversely impact our cost of revenue and operating results.

Historically these write-downs have not been material.

Results of Operations

The following table sets forth statement of income data as a percentage of net revenues for the periods indicated:

The following table sets forth statement of income data as a percentage of net revenue for the periods indicated:

Year Ended December 31,

Cost of revenues

Cost of revenue

Operating expenses:

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General and administrative

Other operating expenses, net

Other operating expenses

Total operating expenses

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Comparison of Years Ended December 31, 2025 and 2024

Net revenues.

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

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.

Net revenue consists of revenue from product sales, which are calculated net of returns and allowances.

Revenue increased in 2025 compared to the prior year due primarily to higher sales in the industrial end-market .

Our approximate net revenue mix by end-markets served in 2025, 2024 and 2023 is as follows:

Communications

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.

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.

The following customers represented 10% or more of our net revenues for the respective years:

Honestar Technologies Co., Ltd.

International sales, consisting of sales to customers outside of the United States of America based on “bill to” customer locations, were $436.6 million and $412.5 million in 2025 and 2024, respectively, representing 98% of net revenue in both 2025 and 2024.

Although power converters using our products are distributed to end markets worldwide, most are manufactured in Asia.

As a result, sales to this region represented approximately 84% of our net revenue in both 2025 and 2024.

We expect international sales, and sales to the Asia region in particular, to continue to account for a large portion of our net revenue in the future.

Sales to distributors accounted for 69% and 70% of our net revenue in 2025 and 2024, respectively.

Direct sales to OEMs and merchant power supply manufacturers accounted for the remainder in each of the corresponding years.

The following customers represented 10% or more of our net revenue for the respective years:

Salcomp Group

* Total customer revenue was less than 10% of net revenues.

No other customers accounted for 10% or more of net revenues during these years.

Honestar Technologies Co., Ltd.

* Total customer revenue was less than 10% of net revenue.

No other customers accounted for 10% or more of our net revenue in these years.

Gross profit.

Gross profit is net revenues less cost of revenues.

Our cost of revenues consists primarily of the purchase of wafers from our contracted foundries, the assembly, packaging and testing of our products by sub-contractors, product testing performed in our own facility, overhead associated with the management of our supply chain and the amortization of acquired intangible assets.

Gross margin is gross profit divided by net revenues.

Gross profit is net revenue less cost of revenue.

Our cost of revenue consists primarily of the purchase of wafers from our contracted foundries, the assembly, packaging and testing of our products by sub-contractors, product testing performed in our own facility, overhead associated with the management of our supply chain and the amortization of acquired intangible assets.

Gross margin is gross profit divided by net revenue.

The following table compares gross profit and gross margin for the years ended December 31, 2025, 2024 and 2023:

(dollars in millions)

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.

Our gross margin increased in 2025 as compared to 2024 due to 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.

Research and development expenses.

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We also record R&D expenses for prototype wafers related to new products until the products are released to production.

The following table compares R&D expenses for the years ended years ended December 31, 2024, 2023 and 2022:

The following table compares R&D expenses for the years ended December 31, 2025, 2024 and 2023:

(dollars in millions)

Headcount (at period end)

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.

R&D expenses increased in 2025 compared to 2024 primarily due to higher salaries and expenses for outside engineering services, partially offset by decreased stock-based compensation expense.

Sales and marketing expenses.

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Headcount (at period end)

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.

S&M expenses in 2025 were flat compared to 2024.

General and administrative expenses.

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Headcount (at period end)

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.

G&A expenses increased i n 2025 compared to 2024 primarily due to increased professional and legal services and higher salary- and benefit-related expenses.

Other operating expenses.

Other operating expenses were $19.7 million in 2025.

We recognized expenses of $11.3 million stemming from an employee litigation matter (refer to Note 14, Legal Proceedings and Contingencies , in our Notes to Consolidated Financial Statements for details).

In addition, we recognized stock-based compensation expense of $8.4 million as a result of an award modification associated with the retirement of our former chief executive officer (refer to Note 7, Stock-Based Compensation , in our Notes to Consolidated Financial Statements for details).

Other income .

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(dollars in millions)

Other income increased in 2024 due primarily to an increase in interest income resu lting from higher yields earned on our investments .

Other income decreased in 2025 primarily due to lower interest income.

Provision (Benefit) for income taxes.

Provision for income taxes represents federal, state and foreign taxes.

The following table compares the provision for income taxes for the years ended December 31, 2024, 2023 and 2022:

Benefit for income taxes represents federal, state and foreign taxes.

The following table compares the provision (benefit) for income taxes for the years ended December 31, 2025, 2024 and 2023:

(dollars in millions)

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Effective tax rate

In 2024 and 2023, the effective tax rate was lower than the statutory U.S.

In 2025 and 2024, our 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.

Additionally, in 2025 and 2024, our effective tax rate was favorably impacted by discrete items associated with the release of unrecognized tax benefits caused by an expiration in the statute of limitations on these positions.

These benefits were offset by U.S.

tax on foreign income, known as global intangible low-taxed income.

tax on foreign income, known as Net Controlled Foreign Corporation Tested Income (“NCTI”).

The primary jurisdiction from which our foreign earnings are derived is the Cayman Islands, which is a non-taxing jurisdiction.

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We have not been granted any incentivized tax rates and do not operate under tax holidays in any jurisdiction.

The rate was further reduced by the release of federal uncertain tax position caused by a expiration in the statute of limitations on these positions.

These benefits were partially offset by foreign income subject to U.S.

tax, known as Net Controlled Foreign Corporation Tested Income ("NCTI").

The Company’s primary jurisdiction where foreign earnings are derived is the Cayman Islands, which is a non-taxing jurisdiction.

Income earned in other foreign jurisdictions was not material.

The Company has not been granted any incentivized tax rates and does not operate under any tax holidays in any jurisdiction.

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted in the U.S.

The OBBBA includes provisions modifying the corporate income tax code, including the immediate expensing of domestic research and development expenditures for tax purposes, 100% bonus depreciation for qualified assets, and an increase in the statutory tax rate on certain foreign earnings from 10.5% to 12.6% (effective in the fiscal year 2026).

We have elected to account for NCTI, under the deferred method.

The deferred tax amounts recorded are based on the evaluation of temporary differences that are expected to reverse as NCTI is incurred in future periods.

As a result, we remeasured our estimated deferred tax balances related to NCTI for the changes in the tax rate and recorded an expense of $0.5 million during the third quarter of 2025.

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.

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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.

The Credit Agreement was amended with an effective date of

June 28, 2023 to include the Secured Overnight Financing Rates 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.

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

In 2025, our net income was $22.1 million, which included non-cash expenses of $27.2 million of depreciation, $39.7 million of stock-based compensation, $0.9 million decrease in deferred income taxes and $0.8 million of intangibles amortization partially offset by a $1.1 million of accretion of discount on marketable securities .

Sources of cash included a $9.3 million decrease in accounts receivable, a $10.5 million increase in taxes payable and accrued liabilities, a $3.3 million increase in accounts payable (excluding payables related to property and equipment) due to timing of payments.

These sources of cash were partially offset by a $1.3 million increase in inventories.

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.

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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 .

Cash from Investing Activities

Our investing activities in the year ended December 31, 2025, generated $36.2 million of cash, consisting primarily of $60.5 million of proceeds from sales and maturities of marketable securities, net of purchases.

This amount was partially offset by the use of $24.4 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, 2025, resulted in a $139.9 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.

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 $98.1 million for the repurchase of our common stock and $47.2 million for the payment of dividends to stockholders, partially offset by proceeds of $5.3 million from the issuance of common stock through our employee stock purchase plan.

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.

Our financing activities in the year ended December 31, 2024, resulted in a $68.2 million net use of cash.

In October 2023, our board of directors declared dividends of $0.20 per share to be paid to stockholders of record 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.

In October 2025, our board of directors raised the quarterly cash dividend with the declaration of four cash dividends of $0.215 per share to be paid to stockholders of record at the end of each quarter in 2026.

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 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.

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.

Over the years our board of directors has authorized the use of funds to repurchase shares of our common stock, including $50.0 million in each of October 2024 and April 2025, with repurchases to be executed according to pre-defined price/volume guidelines.

In 2025, we repurchased a total of 2.0 million shares of the Company’s common stock for $98.1 million, exhausting our repurchase authorization.

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.

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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