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AOSL > SEC Filings for AOSL > Form 10-Q on 6-May-2013All Recent SEC Filings

Show all filings for ALPHA & OMEGA SEMICONDUCTOR LTD | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ALPHA & OMEGA SEMICONDUCTOR LTD


6-May-2013

Quarterly Report


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

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 nine months ended March 31, 2013, we introduced an additional 156 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 and develop innovative products to address the increasingly complex power requirements of advanced electronics. We have an extensive patent portfolio that consists of 309 patents and 209 patent applications in the United States as of March 31, 2013. 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. We believe that 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:

The global, regional economic and PC market 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. In particular, because a significant amount of our revenue is derived from sales of products in the personal


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computing ("PC") markets, such as notebooks, motherboards and notebook battery packs, a significant decline or downturn in the PC markets can have a material adverse effect on our revenue and results of operations. Our revenue from the PC markets accounted for approximately 47.6% and 51.4%of our total revenue for the three and the nine months ended March 31, 2013, 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. A 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, have had a material negative impact on the demand for our products, revenue, factory utilization, gross margin, our ability to resell excess inventory, and other performance measures. In response to this trend, we have been executing and are continuing to execute 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 to alleviate its negative impact, which will adversely affect our results of operations.

In light of the continuing decline of the PC markets, we conducted an impairment review of certain of our long-lived assets during the quarter ended March 31, 2013. Based on such review, we recorded a non-cash impairment charge of $2.6 million as the changed circumstances indicated that the carrying amount of certain long-lived assets, consisting of manufacturing machinery and equipment for the packaging of PC-related product, may not be recoverable (see "Impairment of Long-Lived Assets" below for more details). In addition, based on our periodic review of inventory as of Mach 31, 2013, we recorded a non-cash, non-recurring inventory valuation charge in the amount of $7.7 million for certain excess and obsolete inventory consisting of products relating to PC applications, and to a lesser extent, products for power supplies. We determined that this non-recurring inventory write-down was required primarily due to loss of market share with certain customers, including a major OEM with whom we conducted business indirectly, as well as the effect of the continuing decline of the PC market. Although we believe our current provisions related to inventories and long-lived assets are considered adequate, there is no assurance that we will not incur additional inventory write-downs or impairment charges given the rapid and unpredictable changes of computing and consumer markets in which we compete. Such charges could materially adversely affect our financial conditions and operating results.
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. Product introductions and customers' product requirements: Our success depends on our ability to introduce products on a timely basis that meet or are compatible with our customers' specifications and performance requirements. 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 performance requirements and our inability to continue to expand our serviceable markets could adversely affect our financial performance, including loss of market shares with customers.
During the quarter ended March 31, 2013, we recorded a non-cash, non-recurring inventory valuation charge in the amount of $7.7 million for certain excess and obsolete inventory, consisting of products relating to PC applications, and to a lesser extent, products for power supplies. Approximately $5.7 million of the $7.7 million non-recurring inventory write-down was attributable to newly developed products for desktop PC applications for a major OEM because these products were not compatible with its particular applications. We are working closely with the OEM to address these issues and implement solutions to prevent future occurrences. However, there is no guarantee that we will be able to resolve these issues fully and regain all or any related loss of market shares. 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


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by numerous factors, including global and regional economic conditions as well as the PC market 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, in particular the decline of the PC market conditions, have had a more significant impact on our results of operations than seasonality.
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. In addition, the persistent decline of the PC markets as discussed above has led to reduced level of capacity utilization at our manufacturing facilities during the quarter ended March 31, 203. If we are not able to mitigate the negative impact of the declining PC markets, we may not be able to improve our factory utilization or offset the increasing manufacturing cost, which could have a material adverse effect on our gross margin. Principal line items of statements of operations The following describes the principal line items set forth in our condensed consolidated statements of operations:
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 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 expenses, selling, general and administrative expenses and impairment of long-lived assets. 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.


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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.
Impairment of Long-Lived Assets: Long-lived assets or asset groups are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. The recoverability of an asset or asset group is assessed by determining if the carrying value of the asset or asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life. The impairment loss is measured based on the difference between the carrying amount and estimated fair value. 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 operations, also expressed as a
percentage of revenue, for the three and nine months ended March 31, 2013 and
2012. Our historical results of operations are not necessarily indicative of the
results for any future period.
                               Three Months Ended March 31,                     Nine Months Ended March 31,
                         2013          2012        2013       2012        2013          2012         2013      2012
                           (in thousands)          (% of revenue)           (in thousands)           (% of revenue)
Revenue               $  75,015     $ 83,858     100.0  %   100.0  %   $ 260,224     $ 248,019     100.0  %   100.0 %
Cost of goods sold       69,770       64,564      93.0  %    77.0  %     208,852       189,875      80.3  %    76.6 %
Gross profit              5,245       19,294       7.0  %    23.0  %      51,372        58,144      19.7  %    23.4 %

Operating expenses
Research and
development               6,876        6,510       9.2  %     7.7  %      20,675        23,012       7.9  %     9.3 %
Selling, general and
administrative            8,917        9,028      11.9  %    10.8  %      26,536        26,144      10.2  %    10.5 %
Impairment of
long-lived assets         2,557            -       3.4  %       -  %       2,557             -       1.0  %       - %
Total operating
expenses                 18,350       15,538      24.5  %    18.5  %      49,768        49,156      19.1  %    19.8 %
Operating income
(loss)                  (13,105 )      3,756     (17.5 )%     4.5  %       1,604         8,988       0.6  %     3.6 %
Interest income              22           21         -  %       -  %          59            85         -  %       - %
Interest expense            (93 )       (135 )    (0.1 )%    (0.2 )%        (282 )        (206 )    (0.1 )%       - %
Income (loss) before
income taxes            (13,176 )      3,642     (17.6 )%     4.3  %       1,381         8,867       0.5  %     3.6 %
Income tax expense
(benefit)                    (3 )      1,038         -  %     1.2  %       2,894         2,650       1.1  %     1.1 %
Net income (loss)     $ (13,173 )   $  2,604     (17.6 )%     3.1  %   $  (1,513 )   $   6,217      (0.6 )%     2.5 %

Share-based compensation expense was allocated as follow:

                                Three Months Ended March 31,                         Nine Months Ended March 31,
                           2013           2012        2013       2012          2013           2012        2013       2012
                            (in thousands)            (% of revenue)            (in thousands)            (% of revenue)
Cost of goods sold   $      191         $   171       0.3 %       0.2 %   $     530        $    385       0.2 %       0.2 %
Research and
development                 353             285       0.5 %       0.3 %       1,024             916       0.4 %       0.4 %
Selling, general and
administrative              678             840       0.9 %       1.0 %       2,022           2,670       0.8 %       1.1 %
Total                $    1,222         $ 1,296       1.7 %       1.5 %   $   3,576        $  3,971       1.4 %       1.7 %

Revenue
The following is a summary of revenue by product type:
                                         Three Months Ended March 31,                                      Nine Months Ended March 31,
                           2013         2012                     Change                     2013          2012                     Change
                            (in thousands)         (in thousands)     (in percentage)         (in thousands)          (in thousands)    (in percentage)
Power discrete          $ 58,374     $ 66,256     $       (7,882 )         (11.9 )%      $ 204,679     $ 192,461     $       12,218            6.3  %
Power IC                  12,252       12,756               (504 )          (4.0 )%         39,719        39,036                683            1.7  %
Packaging and testing

services 4,389 4,846 (457 ) (9.4 )% 15,826 16,522 (696 ) (4.2 )% $ 75,015 $ 83,858 $ (8,843 ) (10.5 )% $ 260,224 $ 248,019 $ 12,205 4.9 %

Total revenue was $75.0 million for the three months ended March 31, 2013, a decrease of $8.8 million, or 10.5%, as compared to $83.9 million for the same period last year. The decrease was primarily due to the decrease in sales of $7.9 million, $0.5 million, and $0.5 million of power discrete, power IC products and packaging and testing services, respectively.


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The decrease in sales of power discrete and power IC products was mainly a result of a 5.8% decrease in unit shipments, and a 5.1% decline in average selling prices as compared to the same period of last year, mainly due to the reduced demand for our products related to PC applications, and to a lesser extent, selling price erosion in the computing and consumer markets. Revenues in packaging and testing services for the three months ended March 31, 2013 decreased by $0.5 million as compared to the same period last year due to reduced demand.
Total revenue was $260.2 million for the nine months ended March 31, 2013, an increase of $12.2 million, or 4.9%, as compared to $248.0 million for the same period last year. The increase consisted of $12.2 million and $0.7 million increase in sales of power discrete and power IC products, respectively, primarily as a result of a 11.5% increase in unit shipments, partially offset by a 5.1% decrease in average selling price as compared to the same period of last year mainly due to a shift in product mix and, to a lesser extent, selling price erosion in the computing and consumer markets. The increase of total revenue was partially offset by a $0.7 million decrease in packaging and testing services due to reduced demand.
Cost of goods sold and gross profit

                                        Three Months Ended March 31,                                      Nine Months Ended March 31,
                          2013         2012                     Change                     2013          2012                      Change
                           (in thousands)         (in thousands)     (in percentage)         (in thousands)          (in thousands)     (in percentage)
Cost of goods sold     $ 69,770     $ 64,564     $        5,206             8.1  %      $ 208,852     $ 189,875     $       18,977            10.0  %
 Percentage of revenue     93.0 %       77.0 %                                               80.3 %        76.6 %

Gross profit           $  5,245     $ 19,294     $      (14,049 )         (72.8 )%      $  51,372     $  58,144     $       (6,772 )         (11.6 )%
 Percentage of revenue      7.0 %       23.0 %                                               19.7 %        23.4 %

Cost of goods sold was $69.8 million for the three months ended March 31, 2013, an increase of $5.2 million, or 8.1%, as compared to $64.6 million for the same period last year, primarily as a result of a $7.7 million non-recurring inventory write-down for certain excess and obsolete inventory consisting of newly developed products for desktop PC applications for a major OEM that were not compatible with its particular applications, and to a lesser extent, products for power supplies. The increase was partially offset by the impact of reduced unit shipments during the three months ended March 31, 2013. Gross margin decreased by 16.0 percentage points to 7.0% for the three months ended March 31, 2013 as compared to 23.0% for the same period of last year. The decrease in gross margin was primarily due to the negative impact of the $7.7 million non-recurring inventory write-down as well as lower factory utilization primarily due to the lower demand in the declining PC markets.

Cost of goods sold was $208.9 million for the nine months ended March 31, 2013, an increase of $19.0 million, or 10.0%, as compared to $189.9 million for the same period of last year primarily as a result of a $7.7 million non-recurring inventory write-down for certain excess and obsolete inventory consisting of . . .

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