POWER INTEGRATIONS INC (POWI)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis has been prepared as an aid to understanding our financial condition and results of operations. It should be read in conjunction with the condensed consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, and with the consolidated financial statements and management’s discussion and analysis of our financial condition and results of operations in our Annual Report on Form 10-K for the year ended December 31, 2025, filed with the SEC on February 6, 2026. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed under the caption “Risk Factors” included in this report. See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause actual results to differ materially from those predicted include, but are not limited to:

•The demand for our products declining in the major end markets we serve, which may occur due to competitive factors, supply chain fluctuations, rising inflation, or other changes in macroeconomic or geopolitical conditions;

•our inability to penetrate new markets for our products;

•the volume and timing of orders received from customers;

•our ability to develop and bring new products and technologies to market, including on a timely basis;

•reliance on international sales activities for a substantial portion of our revenue;

•the length of our sales cycle;

•the significant sales of our products through distributors, which limits our direct interaction with our end customers, reducing our ability to forecast sales, and increasing the complexity of our business;

•the cyclical nature of the power supply industry and cyclical market patterns across different end markets for which our products are used;

•competitive pressures on selling prices;

•risks associated with our supply chain including, the volume, cost, and timing of delivery of orders placed by us with our wafer foundries and assembly subcontractors, and their ability to procure materials;

•undetected defects, quality issues, warranty claims, or product recalls related to our products;

•our ability to attract and retain qualified personnel;

•changes in global trade policy, including tariffs, could reduce demand for end products that incorporate our products, which could have a material adverse effect on our revenue and operating results;

•our ability to realize the expected benefits of restructuring initiatives designed to reduce costs and create a more efficient organization;

•debt obligations we incur in the future could adversely affect our financial condition;

•the inability to adequately protect or enforce our intellectual property rights;

•we have been and may be subject to or involved in litigation, threatened litigation, or other disputes, the outcome of which may be difficult to predict, and which may be costly to defend, divert management attention, require us to pay damages, or restrict the operation of our business;

•changes in tax rules and regulations, changes in interpretation of tax rules and regulations, or unfavorable assessments from tax audits may increase the amount of taxes we are required to pay and require management time and attention;

•continued impact of changes in securities laws and regulations, including potential risks resulting from our evaluation of our internal controls over financial reporting;

•current or potential war, domestic or international conflict, political or social instability, or military actions, including the conflicts in Ukraine and the Middle East;

•failure, disruption, security breaches, or other incidents impacting our information technology infrastructure or information management systems;

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•interruptions in our information technology systems;

•unfavorable or uncertain market conditions and risks relating to the adoption, use, or application of emerging technologies, including AI, by our customers and in our business;

•fluctuations in exchange rates, particularly the exchange rate between the U.S. dollar and the Japanese yen, the euro and the Swiss franc;

•earthquakes, fire, global health crises, or other disasters;

•risks associated with acquisitions and strategic investments; and

•our ability to successfully integrate, or realize the expected benefits from, our acquisitions.

Overview

We are a leading innovator in semiconductor technologies for high-voltage power conversion. Our products are key building blocks in the clean-power ecosystem, enabling the generation of renewable energy as well as the efficient transmission and consumption of power in applications ranging from milliwatts to megawatts.

Our revenue was $118.9 million and $115.9 million in the three months ended June 30, 2026 and 2025, respectively, and $227.2 million and $221.4 million in the six months ended June 30, 2026 and 2025, respectively. The increase in revenue for the three- and six-month periods reflected higher sales in the industrial end market.

Our top ten customers, including distributors that resell to OEMs and merchant power supply manufacturers, accounted for approximately 82% and 81% of our revenue for the three and six months ended June 30, 2026 and approximately 81% in each of the corresponding periods of 2025. International sales accounted for approximately 98% of our revenue for each of the three and six months ended June 30, 2026, respectively, and 98% and 99%, respectively, in the corresponding periods of 2025.

Our gross margin was 54% and 55% for the three months ended June 30, 2026 and 2025, respectively, and 53% and 55% for the six months ended June 30, 2026 and 2025, respectively. The decrease in gross margin was primarily due to less favorable customer and product mix related to increased sales of lower margin products and decreased sales of higher margin products as well as less favorable impact of the dollar/yen exchange rate on our wafer costs and, for the six-month period, restructuring costs recorded in cost of sales.

Total operating expenses were $55.7 million and $65.3 million for the three months ended June 30, 2026 and 2025, respectively, and $111.2 million and $116.8 million for the six months ended June 30, 2026 and 2025, respectively. The decrease in operating expenses for the three- and six-month periods was primarily due to a non-recurring expense related to an employee litigation matter that occurred in the prior-year period as described in Note 11 Commitments and Contingencies of this report. These decreases were partially offset by restructuring and related charges for severance and benefit costs associated with the workforce reduction described in Note 13 Restructuring of this report.

Our management team continuously evaluates operations to better align our organization with market opportunities, increase operational efficiency, decrease costs and increase profitability. In connection with this, a restructuring plan was undertaken in the first quarter of 2026, reducing the Company’s workforce by approximately 7% to better align our expenses with revenue and create flexibility to invest in the products, people, and markets that are expected to drive long-term growth and profitability. As a result, we recognized restructuring charges of $6.6 million during the first quarter of 2026, primarily composed of severance costs. The restructuring plan was substantially completed in the first quarter of 2026.

Capital Return Program. We remain committed to delivering stockholder value through our stock repurchase and dividend programs. Under future programs authorized by our Board of Directors, we may repurchase shares of our common stock in the open-market or through privately negotiated transactions. The extent to which we repurchase our stock and the timing of such repurchases will depend upon market conditions, the rules and regulations governing repurchases and other corporate considerations, as determined by our management team.

During the three and six months ended June 30, 2026, we returned $11.9 million and $23.8 million, respectively, of capital to stockholders through the payment of cash dividends.

We continue to monitor the environment for potential long-term impact on supply and demand from tariffs.

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 (“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

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financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those listed below. We base our estimates on historical facts and various other assumptions that we believe to be reasonable at the time the estimates are made. Actual results could differ from those estimates.

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. There have been no material changes to our critical accounting policies and estimates disclosed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, in each case in our Annual Report on Form 10-K for the year ended December 31, 2025, filed with the SEC on February 6, 2026. Currently, our only critical accounting policies relate to revenue recognition and estimating write-downs for excess and obsolete inventory.

Results of Operations

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

Comparison of the three and six months ended June 30, 2026 and 2025

Net revenue. Net revenue consists of revenue from product sales, net of returns and allowances. Net revenue for the three and six months ended June 30, 2026 was $118.9 million and $227.2 million, respectively, and $115.9 million and $221.4 million, respectively, in the corresponding periods o

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This section of this Form 10-K generally discusses 2025 and 2024 items and year-to-year comparisons between 2025 and 2024. Discussions of 2023 items and year-to-year comparisons between 2024 and 2023 are not included in this Form 10-K, and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024. The following discussion and analysis has been prepared as an aid to understanding our financial condition and results of our operations. It should be read in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this Form 10-K. Our actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in Part I, Item 1A “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Business Overview

We design, develop and market analog and mixed-signal integrated circuits (“ICs”) and other electronic components and circuitry used in high-voltage power conversion. Our products are used in power converters that convert electricity from a high-voltage source to the type of power required for a specified downstream use. In most cases, this conversion entails, among other functions, converting alternating current (“AC”) to direct current (“DC”) or vice versa, reducing or increasing the voltage, and regulating the output voltage and/or current according to the customer’s specifications.

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 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”). We also supply high-voltage LED drivers, which are AC-DC ICs specifically designed for lighting applications that utilize light-emitting diodes, and motor-driver ICs for brushless DC (“BLDC”) motors used in consumer appliances, HVAC systems, ceiling fans and a variety of industrial applications.

We also offer high-voltage gate drivers—either standalone ICs or circuit boards containing ICs, electrical isolation components and other circuitry—used to operate high-voltage switches such as insulated-gate bipolar transistors (“IGBTs”) and silicon-carbide (“SiC”) MOSFETs. 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 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. 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 depending on the percentage of our wafer supply that we purchase from Japanese suppliers. Also, although

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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 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 revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those listed below. We base our estimates on historical facts and various other assumptions that we believe to be reasonable at the time the estimates are made. Actual results could differ from those estimates.

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

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. A brief description of our critical accounting policies and material estimates is set forth below. For more information regarding our accounting policies, see Note 2, Summary of Significant Accounting Policies and Recent Accounting Pronouncements, in our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

Revenue recognition

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. We recognize revenue under the core principle to depict the transfer of control to our customers in an amount reflecting the consideration we expect to be entitled. In order to achieve that core principle, we apply the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

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 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. 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 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-

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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. Stock rotation returns are an additional form of variable consideration and are also estimated using the expected value method based on historical return rates. Historically, these distributor stock rotation returns have not been material.

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. We routinely monitor the quality of our on-hand wafers to ensure that performance remains unchanged over time. 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 in

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