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ALPHA & OMEGA SEMICONDUCTOR LTD - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
Except for the historical information contained herein, the matters addressed in
this Item 2 constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements are subject to a variety of risks and
uncertainties, including those discussed below under the heading "Risk Factors"
and elsewhere in this Quarterly Report on Form 10-Q, that could cause actual
results to differ materially from those anticipated by the Company's management.
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
certain "safe harbor" provisions for forward-looking statements. All
forward-looking statements made in this Quarterly Report on Form 10-Q are made
pursuant to the Act. The Company undertakes no obligation to publicly release
the results of any revisions to its forward-looking statements that may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unexpected events. Unless the context otherwise requires, the
words "AOS," the "Company," "we," "us" and "our" refer to Alpha and Omega
Semiconductor Limited and its subsidiaries.
This management's discussion should be read in conjunction with the management's
discussion included in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2012, filed with the Securities and Exchange
Commission on August 31, 2012.
Overview
We are a designer, developer and global supplier of a broad portfolio of power
semiconductors. Our portfolio of power semiconductors is extensive, with over
1,000 products, and has grown rapidly with the introduction of over 240 new
products during the fiscal year ended June 30, 2012, and over 190 and 140 new
products in the fiscal years 2011 and 2010, respectively. During the six months
ended December 31, 2012, we introduced an additional 116 new products. Our teams
of scientists and engineers have developed extensive intellectual properties and
technical knowledge that encompass major aspects of power semiconductors, which
we believe, would enable us to introduce innovative products to address the
increasingly complex power requirements of advanced electronics. We have an
extensive patent portfolio that consists of 289 patents and 206 patent
applications in the United States as of December 31, 2012. We differentiate
ourselves by integrating our expertise in technology, design and advanced
packaging to optimize product performance and cost. Our portfolio of products
targets high-volume applications, including portable computers, flat panel TVs,
LED lighting, smart phones, battery packs, consumer and industrial motor
controls and power supplies for TVs, computers, servers and telecommunications
equipment.
Our business model leverages global resources, including research and
development expertise in the United States and Asia, cost-effective
semiconductor manufacturing in the United States and Asia and localized sales
and technical support in several fast-growing electronics hubs. Our core
research and development team, based in Silicon Valley, California and
Hillsboro, Oregon, is complemented by our design center in Taiwan and process,
and packaging and testing engineers in China. In January 2012, we completed the
acquisition of a 200mm wafer fabrication facility located in Hillsboro, Oregon,
(the "Oregon fab") from Integrated Device Technology, Inc ("IDT"). Given the
highly unique nature of discrete power technology, this acquisition was critical
for us to accelerate proprietary technology development, speed up new product
introduction, reduce manufacturing costs and improve our long-term financial
performance. To meet market demand, we allocate our wafer manufacturing
requirements to in-house capacity for newer products and selected third-party
foundries for more mature high volume products. Since the acquisition, we have
created our next generation of low voltage MOSFET products, our Gen 5 AlphaMOS,
developed a new technology platform, AlphaIGBT and introduced AlphaMOSII high
voltage technology and new medium voltage products at the Oregon fab.
Additionally, we have made significant progress in ramping up production at our
Oregon fab since the acquisition. For assembly and test, we primarily rely upon
our in-house facilities in China. In addition, we utilize subcontracting
partners for industry standard packages. We believe our in-house packaging and
testing capability provides us with a competitive advantage in proprietary
packaging technology, product quality, cost and sales cycle time. Our in-house
packaging capability, together with the Oregon fab, position us to drive towards
technology leadership in a broad range of power semiconductors.
Factors affecting our performance
Our performance is affected by several key factors, including the following:
Global and regional economic conditions: Because our products primarily serve
consumer electronic applications, a deterioration of the global and regional
economic conditions could materially affect our revenue and results of
operations. For example, we experienced a general slowdown of global and
regional economic conditions, particularly in our core computing and consumer
markets, in the first three quarters of the fiscal year 2012, which adversely
affected our results of operations for
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the year. While we observed a gradual improvement in the quarters ended June
30,2012 and September 30, 2012, we expect the decline of consumer personal
computing ("PC") markets to have a negative impact on our business, financial
conditions, and results of operations. See the discussion under "The PC
industry" below.
Erosion of average selling price: Erosion of average selling prices of
established products is typical in our industry. Consistent with this historical
trend, we expect that average selling prices of our established products will
continue to decline in the future. However, as a normal course of business, we
seek to offset the effect of declining average selling prices by introducing new
and higher value products, expanding existing products for new applications and
new customers, and reducing manufacturing cost of existing products.
Distributor ordering patterns and seasonality: Our distributors place purchase
orders with us based on their forecasts of end customer demand, and this demand
may vary significantly depending on the sales outlooks and market and economic
conditions of end customers. Because these forecasts may not be accurate,
channel inventory held at our distributors may fluctuate significantly, which in
turn may prompt distributors to make significant adjustments to their purchase
orders placed with us. As a result, our revenue and operating results may
fluctuate significantly from quarter to quarter. In addition, because our
products are used in consumer electronics products, our revenue is subject to
seasonality. Our sales seasonality is affected by numerous factors, including
global and regional economic conditions, revenue generated from new products,
changes in distributor ordering patterns in response to channel inventory
adjustments and end customer demand for our products and fluctuations in
consumer purchase patterns prior to major holiday seasons. In recent periods,
broad fluctuations in the semiconductor markets and the global and regional
economic conditions have had a more significant impact on our results of
operations than seasonality.
Product introductions and customers' specification and market diversification:
Our success depends on our ability to introduce products on a timely basis that
meet our customers' specifications. Both factors, timeliness of product
introductions and conformance to customers' requirements, are equally important
in securing design wins with our customers. Recently we have introduced new mid-
and high-voltage products as part of our business strategy to diversify our
product portfolios and penetrate into new markets such as the telecommunications
and industrial markets. Our failure to introduce products on a timely basis that
meet customers' specifications and our inability to continue to expand our
serviceable markets could adversely affect our financial performance.
Manufacturing costs: Our gross margin may be affected by our manufacturing
costs, including utilization of our own manufacturing facilities, pricing of
wafers purchased from other foundries and semiconductor raw materials, which may
fluctuate from time to time largely due to the market demand and supply.
Capacity utilization affects our gross margin because we have certain fixed
costs associated with our in-house packaging and testing facilities and our
Oregon fab. If we are unable to utilize the capacity of our in-house
manufacturing facilities at a desirable level, our gross margin may be adversely
affected.
The PC industry: A significant amount of our revenue is derived from sales of
products in the PC markets, such as notebooks, motherboards and notebook battery
packs. Our revenue from the PC markets accounted for approximately 52.3% and
52.9% of our total revenue for the three and six months ended December 31, 2012,
respectively. The increasing popularity of smaller, mobile computing devices
such as tablets and smartphones with touch interfaces is rapidly changing the PC
markets both in the United States and internationally. Decrease in the rate of
growth of or decline in the PC markets, due to continued growth of demands in
tablets, worldwide economic conditions and/or industry inventory correction,
could have a negative impact on the demand for our products, revenue, factory
utilization, gross margin and other performance measures. Furthermore, we have
been executing strategies to diversify our product portfolio and penetrate into
other market segments, which we believe would mitigate and eventually overcome
the reduced demand resulting from the declining PC markets. However, if the rate
of decline in the PC markets is faster than we expected, or if we cannot
successfully diversify or introduce new products to keep pace with the declining
PC markets, we may not be able alleviate its negative impact, which will then
adversely affect our results of operations.
Principal line items of statements of income
The following describes the principal line items set forth in our condensed
consolidated statements of income:
Revenue
We generate revenue primarily from the sale of power semiconductors, consisting
of power discretes and power ICs. Historically, a majority of our revenue was
derived from power discrete products and a small amount was derived from power
IC products. Because our products typically have three-year to five-year life
cycles, the rate of new product introduction is an important driver of revenue
growth over time. We believe that expanding the breadth of our product portfolio
is important to
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our business prospects, because it provides us with an opportunity to increase
our total bill-of-materials within an electronic system and to address the power
requirements of additional electronic systems. In addition, a small percentage
of our total revenue is generated by providing packaging and testing services to
third-parties through one of our subsidiaries.
Our product revenue includes the effect of the estimated stock rotation returns
and price adjustments that we expect to provide to our distributors. Stock
rotation returns are governed by contract and are limited to a specified
percentage of the monetary value of products purchased by the distributor during
a specified period. At our discretion or upon our direct negotiations with the
original design manufacturers ("ODMs") or original equipment manufacturers
("OEMs"), we may elect to grant special pricing that is below the prices at
which we sold our products to the distributors. In these situations, we will
grant price adjustments to the distributors reflecting such special pricing. We
estimate the price adjustments for inventory at the distributors based on
factors such as distributor inventory levels, pre-approved future distributor
selling prices, distributor margins and demand for our products.
Cost of goods sold
Our cost of goods sold primarily consists of costs associated with semiconductor
wafers, packaging and testing, personnel, including share-based compensation
expense, overhead attributable to manufacturing, operations and procurement, and
costs associated with yield improvements, capacity utilization, warranty and
inventory reserves. As the volume of sales increases, we expect cost of goods
sold to increase.
Operating expenses
Our operating expenses consist of research and development and selling, general
and administrative expenses. We expect that our total operating expenses will
generally increase over time due to our belief that our business will continue
to grow. However, our operating expenses as a percentage of revenue may
fluctuate from period to period.
Research and development expenses. Our research and development expenses
consist primarily of salaries, bonuses, benefits, share-based compensation
expense, expenses associated with new product prototypes, travel expenses, fees
for engineering services provided by outside contractors and consultants,
amortization of software and design tools, depreciation of equipment and
overhead costs for research and development personnel. As we continue to invest
significant resources in developing new technologies and products, we expect our
research and development expenses to increase.
Selling, general and administrative expenses. Our selling, general and
administrative expenses consist primarily of salaries, bonuses, benefits,
share-based compensation expense, product promotion costs, occupancy costs,
travel expenses, expenses related to sales and marketing activities,
amortization of software, depreciation of equipment, maintenance costs and other
expenses for general and administrative functions as well as costs for outside
professional services, including legal, audit and accounting services. We expect
our selling, general and administrative expenses to increase as we expand our
business.
Income tax expense
We are subject to income taxes in various jurisdictions. Significant judgment
and estimates are required in determining our worldwide income tax expense. The
calculation of tax liabilities involves dealing with uncertainties in the
application of complex tax regulations of different jurisdictions globally. We
establish accruals for potential liabilities and contingencies based on a more
likely than not threshold to the recognition and de-recognition of uncertain tax
positions. If the recognition threshold is met, the applicable accounting
guidance permits us to recognize a tax benefit measured at the largest amount of
tax benefit that is more than likely to be realized upon settlement. If the
actual tax outcome of such exposures is different from the amounts that were
initially recorded, the differences will impact the income tax and deferred tax
provisions in the period in which such determination is made. Changes in the
location of taxable income (loss) could result in significant changes in our
income tax expense.
We record a valuation allowance against deferred tax assets if it is more likely
than not that a portion of the deferred tax assets will not be realized, based
on historical profitability and our estimate of future taxable income in a
particular jurisdiction. Our judgments regarding future taxable income may
change due to changes in market conditions, changes in tax laws, tax planning
strategies or other factors. If our assumptions and consequently our estimates
change in the future, the deferred tax assets may increase or decrease,
resulting in corresponding changes in income tax expense. Our effective tax rate
is highly dependent upon the geographic distribution of our worldwide profits or
losses, the tax laws and regulations in each geographical region where we have
operations, the availability of tax credits and carry-forwards and the
effectiveness of our tax planning strategies.
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Results of Operations
The following tables set forth statements of income, also expressed as a
percentage of revenue, for the three and six months ended December 31, 2012 and
2011. Our historical results of operations are not necessarily indicative of the
results for any future period.
Three Months Ended December 31, Six Months Ended December 31,
2012 2011 2012 2011 2012 2011 2012 2011
(in thousands) (% of revenue) (in thousands) (% of revenue)
Revenue $ 89,448 $ 80,713 100.0 % 100.0 % $ 185,209 $ 164,161 100.0 % 100.0 %
Cost of goods sold 68,854 62,440 77.0 % 77.4 % 139,082 125,311 75.1 % 76.3 %
Gross profit 20,594 18,273 23.0 % 22.6 % 46,127 38,850 24.9 % 23.7 %
Operating expenses
Research and
development 6,866 8,108 7.7 % 10.0 % 13,799 16,502 7.5 % 10.1 %
Selling, general and
administrative 8,838 7,833 9.9 % 9.7 % 17,619 17,116 9.5 % 10.4 %
Total operating
expenses 15,704 15,941 17.6 % 19.7 % 31,418 33,618 17.0 % 20.5 %
Operating income 4,890 2,332 5.5 % 2.9 % 14,709 5,232 7.9 % 3.2 %
Interest income 20 25 - % - % 37 64 - % - %
Interest expense (107 ) (44 ) (0.1 )% - % (189 ) (71 ) - % - %
Income before income
taxes 4,803 2,313 5.4 % 2.9 % 14,557 5,225 7.9 % 3.2 %
Income tax expense 1,085 839 1.2 % 1.1 % 2,897 1,612 1.6 % 1.0 %
Net income $ 3,718 $ 1,474 4.2 % 1.8 % $ 11,660 $ 3,613 6.3 % 2.2 %
Share-based compensation expense was allocated as follow:
Three Months Ended December 31, Six Months Ended December 31,
2012 2011 2012 2011 2012 2011 2012 2011
(in thousands) (% of revenue) (in thousands) (% of revenue)
Cost of goods sold $ 141 $ 133 0.2 % 0.2 % $ 339 $ 214 0.2 % 0.1 %
Research and
development 278 372 0.3 % 0.5 % 671 631 0.4 % 0.4 %
Selling, general and
administrative 494 948 0.6 % 1.2 % 1,344 1,830 0.7 % 1.1 %
Total $ 913 $ 1,453 1.1 % 1.9 % $ 2,354 $ 2,675 1.3 % 1.6 %
RevenueThe following is a summary of revenue by product type:
Three Months Ended December 31, Six Months Ended December 31,
2012 2011 Change 2012 2011 Change
(in thousands) (in thousands) (in percentage) (in thousands) (in thousands) (in percentage)
Power discrete $ 70,801 $ 62,491 $ 8,310 13.3 % $ 146,305 $ 126,205 $ 20,100 15.9 %
Power IC 12,936 12,967 (31 ) (0.2 )% 27,467 26,280 1,187 4.5 %
Packaging and testing
services 5,711 5,255 456 8.7 % 11,437 11,676 (239 ) (2.0 )%
$ 89,448 $ 80,713 $ 8,735 10.8 % $ 185,209 $ 164,161 $ 21,048 12.8 %
Total revenue was $89.4 million for the three months ended December 31, 2012, an
increase of $8.7 million, or 10.8%, as compared to $80.7 million for the same
period last year. The increase was primarily due to an increase of $8.3 million
in sales of power discrete products while sales of power IC products remained
flat. The increase in sales of power discrete products was mainly a result of a
21.0% increase in unit shipments, partially offset by a 6.3% decline in average
selling prices as compared to the same period of last year, mainly due to a
shift in product mix and, to the less extent, selling price erosion in
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the computing and consumer markets. Revenues in packaging and testing services
for the three months ended December 31, 2012 increased by $0.5 million as
compared to the same period last year.
Total revenue was $185.2 million for the six months ended December 31, 2012, an
increase of $21.0 million, or 12.8%, as compared to $164.2 million for the same
period last year. The increase consisted of $20.1 million and $1.2 million
increase in sales of power discrete and power IC products, respectively,
primarily as a result of a 20.5% increase in unit shipments, partially offset by
a 5.2% decrease in average selling price as compared to the same period of last
year mainly due to a shift in product mix and, to the less extent, selling price
erosion in the computing and consumer markets. The increase of total revenue was
partially offset by a $0.2 million decrease in packaging and testing services
due to softened demand.
Cost of goods sold and gross profit
Three Months Ended December 31, Six Months Ended December 31,
2012 2011 Change 2012 2011 Change
(in thousands) (in thousands) (in percentage) (in thousands) (in thousands) (in percentage)
Cost of goods sold $ 68,854 $ 62,440 $ 6,414
10.3 % $ 139,082 $ 125,311 $ 13,771 11.0 %
Percentage of revenue 77.0 % 77.4 % 75.1 % 76.3 %
Gross profit $ 20,594 $ 18,273 $ 2,321 12.7 % $ 46,127 $ 38,850 $ 7,277 18.7 %
Percentage of revenue 23.0 % 22.6 % 24.9 % 23.7 %
Cost of goods sold was $68.9 million for the three months ended December 31,
2012, an increase of $6.4 million, or 10.3%, as compared to $62.4 million for
the same period last year, primarily as a result of increased unit shipments.
Gross margin increased by 0.4 percentage point to 23.0% for the three months
ended December 31, 2012 as compared to 22.6% for the same period of last year.
The increase in gross margin was primarily due to tighter factory expense
control and improved factory utilization as compared to the same period last
year.
Cost of goods sold was $139.1 million for the six months ended December 31,
2012, an increase of $13.8 million, or 11.0%, as compared to $125.3 million for
the same period of last year primarily as a result of increased unit shipments.
Gross margin increased by 1.2 percentage point to 24.9% for the six months ended
December 31, 2012, as compared to 23.7% for the same period last year. The
increase in gross margin was primarily due to tighter factory expense control
and improved factory utilization as compared to the same period last year. We
expect our gross margin to continue to fluctuate in the future as a result of
variations in our product mix, factory utilization, semiconductor wafer and raw
material pricing, manufacturing labor cost and general economic conditions.
Research and development expenses
Three Months Ended December 31, Six Months Ended December 31,
2012 2011 Change 2012 2011 Change
(in thousands) (in thousands) (inpercentage) (in thousands) (in thousands) (in percentage)
Research and development $ 6,866 $ 8,108 $ (1,242 ) (15.3 )% $ 13,799 $ 16,502 $ (2,703 ) (16.4 )%
Research and development expenses were $6.9 million for the three months ended
December 31, 2012, a decrease of $1.2 million, or 15.3%, as compared to $8.1
million for the same period last year. The decrease was primarily attributable
to a $1.8 million decrease in product prototyping and engineering expenses, of
which $1.5 million was related to engineering wafers expenses incurred during
the three months ended December 31, 2011 under the then new foundry agreement
with IDT. The decrease was partially offset by a $0.7 million increase in
employee compensation and benefits primarily due to increase in headcount and
performance bonuses.
Research and development expenses were $13.8 million for the six months ended
December 31, 2012, a decrease of $2.7 million, or 16.4%, as compared to $16.5
million for the same period last year. The decrease was primarily attributable
to a $3.3 million decrease in product prototyping engineering expenses, mainly
related to engineering wafers expenses incurred during the six months ended
December 31, 2011 under the then new foundry agreement with IDT. The decrease
was partially offset by a $0.6 million increase in employee compensation and
benefits primarily due to increase in headcount. We continue to invest
significant resources in developing new technologies and new products utilizing
our own fabrication and packaging facilities. However, we expect that our
research and development expenses will fluctuate from time to time.
Selling, general and administrative expenses
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Three Months Ended December 31, Six Months Ended December 31,
2012 2011 Change 2012 2011 Change
(in thousands) (in thousands) (in percentage) (in thousands) (in thousands) (in percentage)
Selling, general and
administrative $ 8,838 $ 7,833 $ 1,005 12.8 % $ 17,619 $ 17,116 $ 503 2.9 %
Selling, general and administrative expenses were $8.8 million for the three
months ended December 31, 2012, an increase of $1.0 million, or 12.8%, as
compared to $7.8 million for the same period last year. The increase was
primarily due to a $1.2 million increase in employee compensation and benefits
due to increase in headcount and performance bonuses, a $0.1 million increase in
depreciation and amortization expenses primarily due to fixed assets acquired
during current and prior quarters, and a $0.3 million increase in business tax
primarily due to a business tax refund of a subsidiary in China during the same
period last year, partially offset by a $0.5 million decrease in share based
compensation due to the reduction of grants as well as increased cancellations
of stock options and other equity awards, and a $0.1 million decrease in bad
debt expenses.
Selling, general and administrative expenses were $17.6 million for the six
months ended December 31, 2012, an increase of $0.5 million, or 2.9%, as
compared to $17.1 million for the same period last year. The increase was
primarily due to a $1.6 million increase in employee compensation and benefits
due to increase in headcount and performance bonuses and a $0.3 million increase
in depreciation and amortization expenses primarily due to fixed assets acquired
during the six months ended December 31, 2012, partially offset by a $0.5
million decrease in share based compensation due to the reduction of grants as
wells as increased cancellations of stock options and other equity awards, a
$0.6 million decrease in accounting, Sarbanes-Oxley compliance and consulting
fees as the related compliance activities decreased, a $0.2 million decrease in
business taxes primarily due to a business tax refund of a subsidiary in China
during the six months ended December 31, 2012, and a $0.2 million decrease in
bad debt expenses.
Interest income and expenses
Interest income was primarily related to interest earned from cash and cash
equivalents. The decrease in interest income during the three and six months
ended December 31, 2012 as compared to the same periods last year was primarily
due to lower average interest rate.
Interest expense was primarily related to bank borrowings. The increase in
interest expenses during the three and six months ended December 31, 2012 was
primarily due to an increase in bank borrowings, including the $20.0 million
term loan obtained in May 2012 for working capital purposes as compared to the
same periods last year.
Income tax expense
Three Months Ended December 31, Six Months Ended December 31,
2012 2011 Change 2012 2011 Change
(in thousands) (in thousands) (in percentage) (in thousands) (in thousands) (in percentage)
Income tax expense $ 1,085 $ 839 $ 246 29.3 % $ 2,897 $ 1,612 $ 1,285 79.7 %
We recognized income tax expense of approximately $1.1 million and $0.8 million
for the three months ended December 31, 2012 and 2011, respectively. The
effective tax rate was 22.6% and 36.3% for the three months ended December 31,
2012 and 2011, respectively. Our effective tax rate for the three months ended
December 31, 2012 was lower than that for the same period last year primarily
due to changes in the mix of earnings in various geographic jurisdictions
between the two periods.
We recognized income tax expense of approximately $2.9 million and $1.6 million
for the six months ended December 31, 2012 and 2011, respectively. The effective
tax rate was 19.9% and 30.9% for the six months ended December 31, 2012 and
2011, respectively. Our effective tax rate for the six months ended December 31,
2012 was lower than that for the same period last year primarily due to changes
in the mix of earnings in various geographic jurisdictions between the two
periods.
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Liquidity and Capital Resources
Our principal need for liquidity and capital resources is to maintain working
capital sufficient to support our operations and to make capital expenditures to
finance the growth of our business. Currently, we primarily financed our
operations through funds generated from operations and borrowings under our
revolving lines of credit and term loans.
On May 11, 2012, we entered into a loan agreement with a financial institution
that provides a term loan of $20.0 million for general purposes and a $10.0
million non-revolving credit line for the purchase of equipment. Both the term
loan and equipment line will mature in May 2015. The borrowings may be made in
the form of either Eurodollar loans or Base Rate loans. Eurodollar loans accrue
interest based on an adjusted London Interbank Offer Rate ("LIBOR") as defined
in the agreement, plus a margin of 1.00% to 1.75%. Base Rate loans accrue
interest at the highest of (a) the lender's Prime Rate, (b) the Federal Funds
Rate plus 0.5% and (c) the Eurodollar Rate (for a one-month interest period)
plus 1%; plus a margin of -0.5% to 0.25%. The applicable margins for both
Eurodollar loans and Base Rate loans will vary from time to time in the
foregoing ranges based on the cash and cash equivalent balances maintained by us
and our subsidiaries with the lender. As of December 31, 2012, the outstanding
balance of the term loan and the equipment line was $17.9 million and $0,
respectively.
The obligations under the loan agreement are secured by substantially all assets
of two of our subsidiaries, including certain real property and related assets
located at the Oregon fab. In addition, we and certain of our subsidiaries have
agreed to guarantee full repayment and performance of the obligations under the
loan agreement. The loan agreement contains customary restrictive covenants and
includes certain financial covenants that require us to maintain on a
consolidated basis specified financial ratios including total liabilities to
tangible net worth, fixed charge coverage and current assets to current
liabilities. As of December 31, 2012, we were in compliance with these
covenants.
Two of our subsidiaries in China had revolving lines of credit that allow each
of the subsidiaries to draw down, from time to time, up to 80% of the accounts
receivable of such subsidiary, with an aggregated maximum amount of RMB 95
million (equivalent of $15.2 million based on the currency exchange rate as of
December 31, 2012) to finance the subsidiary's working capital with a maximum of
120-day repayment term. The interest rate on each draw down varied and indexed
to the published LIBOR per annum. These lines expired in August 2012 and were
renewed in November 2012 with substantially the same terms except the aggregated
maximum available amount of these two lines of credit increased from RMB 80
million to RMB 95 million. As of December 31, 2012, there was no outstanding
balance under these two revolving lines of credit.
During July 2012, we entered into a loan agreement with the State of Oregon for
an amount of $0.3 million. The loan is required to be used for training new and
re-training existing employees of the Oregon fab. The loan bears a compound
annual interest rate of 5.0% and is to be repaid in April 2014. The State may
forgive the loan and unpaid interest if certain conditions primarily relating to
hiring targets are met. As of December 31, 2012, the outstanding balance of the
loan including accrued interest was $0.3 million.
On October 22, 2010, our board of directors authorized a $25.0 million share
repurchase program. Under this repurchase program we may, from time to time,
repurchase shares from the open market or in privately negotiated transactions,
subject to supervision and oversight by the board. During the three and six
months ended December 31, 2012, the Company repurchased 600 shares with weighted
average repurchase price of $7.48 per share under the program. As of
December 31, 2012, we repurchased an aggregate of 241,770 shares from the open
market for a total cost of $2.3 million, at an average price of $9.40 per share,
since inception of the program. Shares repurchased are accounted for as treasury
shares and the total cost of shares repurchased is recorded as a reduction of
shareholders' equity. As at December 31, 2012, of the 241,770 repurchased
shares, 13,200 shares with a weighted average repurchase price of $13.80 per
share, were reissued at an average price of $4.92 per share for option exercises
and vested RSUs.
We believe that our current cash and cash equivalents and cash flows from
operations will be sufficient to meet our anticipated cash needs, including
working capital and capital expenditures, for at least the next twelve months.
In the long-term, we may require additional capital due to changing business
conditions or other future developments, including any investments or
acquisitions we may decide to pursue. If our cash is insufficient to meet our
needs, we may seek to raise capital through equity or debt financing. The sale
of additional equity securities could result in dilution to our shareholders.
The incurrence of indebtedness would result in increased debt service
obligations and may include operating and financial covenants that would
restrict our operations. We cannot be certain that any financing will be
available in the amounts we need or on terms acceptable to us, if at all.
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Cash and cash equivalents
As of December 31, 2012 and June 30, 2012, we had $91.9 million and $82.2
million of cash and cash equivalents, respectively. Our cash and cash
equivalents primarily consisted of cash on hand and short-term bank deposits
with original maturities of three months or less.
The following table shows our cash flows from operating, investing and financing
activities for the periods indicated:
Six Months Ended December 31,
2012 2011
(in thousands)
Net cash provided by operating activities $ 22,668 $ 22,769
Net cash used in investing activities (12,656 ) (22,009 )
Net cash provided by (used in) financing activities (326 ) 9,765
Effect of exchange rate changes on cash and cash equivalents 12 27
Net increase in cash and cash equivalents $ 9,698 $ 10,552
Cash flows from operating activities
Net cash provided by operating activities of $22.7 million for the six months
ended December 31, 2012 resulted primarily from net income of $11.7 million,
non-cash charges of $17.8 million and net decrease in working capital of $6.8
million. The non-cash charges of $17.8 million included (a) $14.8 million of
depreciation and amortization expenses, (b) $2.4 million of share-based
compensation expense, (c) $0.6 million of net deferred income taxes and (d) $0.1
million loss on disposal of property and equipment. The net decrease in working
capital of $6.8 million was primarily due to a (i) $4.1 million increase in
accounts receivable due to the timing of billings and collection of payments;
(ii) $5.7 million increase in inventories as we build up our inventories for the
Oregon fab ramp up and (iii) $1.5 million decrease in accrued and other
liabilities primarily related to performance bonuses, partially offset by (x)
$1.9 million decrease in other current and long term assets primarily due to
decrease in advance payments to suppliers; (y) $2.5 million increase in accounts
payable primarily due to increase in inventory purchase and timing of payment,
and (z) $0.2 million increase in income taxes payable.
Net cash provided by operating activities of $22.8 million for the six months
ended December 31, 2011 resulted primarily from net income of $3.6 million,
non-cash charges of $14.8 million and net increase in working capital of $4.4
million. The non-cash charges of $14.8 million included (a) $11.8 million of
depreciation and amortization expenses, (b) $2.7 million of share-based
compensation expense, (c) $0.2 million of allowance for doubtful accounts and
(d) $0.1 million of net deferred income taxes. The net increase in working
capital of $4.4 million was primarily due to a (i) $7.5 million decrease in
accounts receivable due to the timing of billings and collection of payments;
(ii) $19.1 million decrease in inventories as we reduced our inventories in
response to changes in market condition; and (iii) $2.0 million decrease in
other current and long term assets primarily due to decrease in advance payments
to suppliers; partially offset by a (x) $21.8 million decrease in accounts
payable primarily due to reduced inventory purchase and timing of payment, (y)
$1.7 million decrease in accrued and other liabilities primarily related to
performance bonuses, and (z) $0.8 million decrease in income taxes payable.
Cash flows from investing activities
Net cash used in investing activities of $12.7 million for the six months ended
December 31, 2012 was primarily attributable to $12.5 million for purchase of
property and equipment to increase our in-house production capacity and $0.1
million related to increase in restricted cash.
Net cash used in investing activities of $22.0 million for the six months ended
December 31, 2011 was primarily attributable to $21.9 million for purchase of
property and equipment to increase our in-house production capacity and $0.1
million related to the investment in a privately held company.
Cash flows from financing activities
23--------------------------------------------------------------------------------
Table of Contents
Net cash used in financing activities of $0.3 million for the six months ended
December 31, 2012 was primarily attributable to $1.9 million of net repayment to
our borrowings and $0.5 million in payment of capital lease obligations;
partially offset by a $2.1 million of proceeds from exercise of stock options
and issuance of shares under the ESPP.
Net cash provided by financing activities of $9.8 million for the six months
ended December 31, 2011 was primarily attributable to $10.7 million of net
proceeds from our revolving lines of credit and $0.9 million of proceeds from
exercise of stock options and ESPP, partially offset by $1.6 million for
repurchase of our common shares under the share repurchase program and $0.3
million in payment of capital lease obligations.
Capital expenditures
Capital expenditures were $12.5 million and $21.9 million for the six months
ended December 31, 2012 and 2011, respectively. Our capital expenditures
primarily consisted of the purchases of property and equipment. Capital
expenditures for the six months ended December 31, 2012 primarily consisted of
purchases of equipment for the Oregon fab. Following the acquisition of the
Oregon fab, we expect to use a combination of in-house capacity and third party
foundries to satisfy our wafer manufacturing requirements.
Capital expenditures for the six months ended December 31, 2011 primarily
consisted of purchases of packaging and testing equipment for our two in-house
packaging facilities and purchases of consigned equipment to a third-party
foundry. Following the acquisition of APM in December 2010, we relied primarily
on our in-house capacities for packaging and testing our products and expect to
continue to do so in the future.
Commitments
As of December 31, 2012 and June 30, 2012, we had approximately $30.9 million
and $43.3 million, respectively, of outstanding purchase commitments primarily
for purchases of semiconductor raw materials and wafers.
As of December 31, 2012 and June 30, 2012, we had approximately $0.5 million and
$2.6 million, respectively, of capital commitments for the purchase of property
and equipment.
Off-Balance Sheet Arrangements
As of December 31, 2012, we had no material off-balance sheet arrangements as
defined in Regulation S-K 303(a)(4)(ii) arrangements.
Recent Accounting Pronouncements
See Note 1 of the Notes to the Condensed Consolidated Financial Statements
contained in this Quarterly Report on Form 10-Q for a full description of recent
accounting pronouncements, including the expected dates of adoption and
estimated effects on results of operations and financial condition, which is
incorporated herein by reference.
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