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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 16-------------------------------------------------------------------------------- Table of Contents 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 17-------------------------------------------------------------------------------- Table of Contents 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. 18-------------------------------------------------------------------------------- Table of Contents 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 19-------------------------------------------------------------------------------- Table of Contents 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 20-------------------------------------------------------------------------------- Table of Contents 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. 21-------------------------------------------------------------------------------- Table of Contents 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. 22-------------------------------------------------------------------------------- Table of Contents 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. |