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AOSL > SEC Filings for AOSL > Form 10-K on 30-Aug-2013All Recent SEC Filings

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

Form 10-K for ALPHA & OMEGA SEMICONDUCTOR LTD


30-Aug-2013

Annual Report


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

You should read the following discussion of the financial condition and results of our operations in conjunction with our consolidated financial statements and the notes to those statements included elsewhere in this annual report. Our consolidated financial statements contained in this annual report are prepared in accordance with U.S. GAAP.
Overview

We are a designer, developer and global supplier of a broad portfolio of power semiconductors. Our portfolio of power semiconductors includes over 1,300 products, and has grown rapidly with the introduction of over 195 new products during the fiscal year 2013, and over 240 and 190 new products in the fiscal years 2012 and 2011, respectively. Our teams of scientists and engineers have developed extensive intellectual properties and technical knowledge that encompass major aspects of power semiconductors, which we believe enables 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 329 patents and 209 patent applications in the United States as of June 30, 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 personal 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.

During the fiscal year ended June 30, 2013, we continued our diversification program by introducing new silicon and packaging platforms to expand our serviceable available market ("SAM") and offer higher performance products. Our metal-oxide-semiconductor field-effect transistors ("MOSFET") portfolio expanded significantly across a full range of voltage applications. In response to the rapid decline of the personal computer ("PC") markets, we have developed new technologies and products designed to penetrate into other markets, including the consumer, communications and industrial markets. For example, for the power discrete products, since mid 2012 we have been shipping high volume of our Gen5 series low-voltage MOSFET silicon platform introduced in the September quarter of 2011. During the December quarter of 2012, we released the new high voltage AlphaMOSII MOSFET platform that features a 35% reduction of on-resistance when compared to prior-generation products. In the same quarter, we also released the XSFET technology platform to provide a high performance option to the current solutions targeting the advanced computing and high efficiency telecommunications and industrial applications. In addition, we expanded our recently developed AlphaIGBT technology platform with low power and high power products that meet the growing demand for energy efficient switching devices for motor control and power conversion applications in household appliances, renewable energy systems and advanced power supplies. We have also expanded our portfolio of medium voltage MOSFETs with new 80V, 100V and 150V products, thus enabling a full portfolio of products that allows significant improvements in power supply efficiency. For the power IC products, we continue to expand the product family by introducing new solutions to LED lighting and LED back lighting for LCD-TV. We also released high efficiency EZBuck II Converters and our new DrMOS product family targeting Ultrabook and advanced computing. Our business model leverages global resources, including research and development and manufacturing in the United States and Asia. Our sales and technical support teams are localized in several growing markets. We operate a 200mm wafer fabrication facility located in Hillsboro, Oregon, ("the Oregon fab") which is critical for us to accelerate proprietary technology development, new product introduction and improve our financial performance in the long run. For example, in calendar year 2012, we were able to triple the number of new technology platforms released as compared to prior years. These platforms have allowed us to develop a new generation of low voltage MOSFET products, our Gen 5 AlphaMOS, and introduce AlphaMOSII high voltage technology and new medium voltage products. To meet the market demand for the more mature high volume products, we also utilize the wafer manufacturing capacity of selected third party foundries. 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 cycle time.
Our revenue was $337.4 million for the fiscal year ended June 30, 2013, which represented a decrease of $4.9 million or 1.4%, from $342.3 million for the fiscal year ended June 30, 2012. Our net loss was $5.6 million, or $(0.22) per diluted share, for the fiscal year ended June 30, 2013, compared to a net income of $12.9 million, or $0.50 per diluted share, for the fiscal year ended June 30, 2012.
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 computer ("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 50.0%, 54.4% and 57.0% of our total revenue for the years ended June 30, 2013, 2012 and 2011, respectively. A decline in the PC markets, due to continued growth of demands in tablets and smartphones, 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 during the fiscal year.

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, such as the consumer, communication and industrial market segments, which we believe would mitigate and eventually overcome the reduced demand resulting from the declining PC markets. As we develop and sell new products that serve more diversified markets, we expect that sales based on the PC markets, as a percentage of the total revenue, will continue to decline. 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 third quarter of fiscal year 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 for the quarter ended March 31, 2013, 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, we have also recorded a non-cash, non-recurring inventory valuation charge in the amount of $7.7 million for certain excess and obsolete inventory for the quarter ended March 31, 2013, 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 have fully resolved the issue and maintain the business relationship with the OEM and 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 results of operations.
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 existing 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. As we accelerate the development of new technology platforms, we expect to increase the pace at which we introduce new products and obtain design wins. 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.
As discussed above, we recorded a non-cash, non-recurring inventory valuation charge in the amount of $7.7 million during the third quarter of fiscal 2013, and approximately $5.7 million of which 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 have been working closely with the OEM to address these issues and implement solutions to prevent future occurrences of incompatibility. While we have fully resolved this issue with the OEM, similar product compatibility issues may arise with other products or OEMs, or that the solutions we implemented may not be fully effective in preventing future occurrences.
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 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 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 desired level, our gross margin may be adversely affected. In addition, the continuing decline of the PC markets as discussed above has led to reduced level of capacity utilization at our manufacturing facilities during the fiscal year 2013. 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 costs, which could have a material adverse effect on our gross margin. For example, the gross margin for the first quarter of the fiscal year 2013 was 26.7%, primarily as a result of higher utilization of our manufacturing facilities, while the adjusted gross margin for the last three quarters of the fiscal year 2013, without giving effect to the $7.7 million non-recurring inventory write-down recorded in the third quarter of the fiscal year 2013, was 19.4%. This decrease was largely due to the reduced level of utilization of our manufacturing facilities during that period. The adjusted gross margin used here is a non-GAAP financial measure. We believe this information is meaningful to investors as it excludes the impact that the non-recurring inventory write-down has on gross margin and facilitates comparisons between reporting periods and peer companies. While we believe that the adjusted gross margin is useful supplemental information, such adjusted measure is not intended to replace our GAAP financial measures and should be read in conjunction with the GAAP results. The GAAP gross margin for the last three quarters of the fiscal year 2013 was 16.2%. Other factors that may affect comparability APM acquisition: We held a 40.3% equity interest in Agape Package Manufacturing Ltd. ("APM"), at June 30, 2010. We made an additional equity investment of $1.8 million in APM in October 2010 resulting in a 43.0% equity interest in APM. The investment was accounted for under the equity method of accounting through the date of acquisition. On December 3, 2010, we acquired APM and APM's operating results were reflected in our consolidated financial statements subsequent to that date.
Change in accounting estimate: During fiscal year 2011, upon the completion of APM acquisition, we performed a review and assessment of the useful lives of certain of our property and equipment. Based on the results of our review, we revised the estimated useful life of the related manufacturing and facility equipment from 5 years to 8 years beginning December 1, 2010 on a prospective basis. The effect of this change was to decrease depreciation expense related to cost of goods sold by $5.1 million, increase net income by approximately $3.9 million, net of a tax effect of $1.2 million, increase basic net income per share by approximately $0.17 and increase diluted net income per share by approximately $0.16 for fiscal year 2011.

Conversion of IFRS to U.S. GAAP. We formerly prepared our consolidated financial statements under IFRS and filed our IFRS financial statements for the fiscal year ended June 30, 2010 in our annual report on Form 20-F. Pursuant to the SEC requirements, we assessed our ownership structure as of December 31, 2010 and determined that we no longer qualified as a foreign private issuer. As a result, started on July 1, 2011, we were required to report our financial statements under U.S. GAAP and file our annual report on Form 10-K, as well as to comply with additional SEC reporting obligations as a domestic issuer. Accordingly, we have converted our consolidated financial statements from IFRS to U.S. GAAP. See "Item 6. Selected Financial Data" for a discussion of relevant differences of individual items in the financial statements between IFRS and U.S. GAAP. Principal line items of statements of income The following describes the principal line items set forth in our 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 smaller 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 cost associated with yield improvements, capacity utilization, warranty and inventory reserves. As the volume of sales increases, we expect cost of goods sold to increase. We have recently implemented a process to improve our factory capacity utilization rates by transferring more wafer production to our Oregon fab and reducing our reliance on outside foundries. While our utilization rates cannot be immune to the market conditions, our goal is to make them less vulnerable to market fluctuations. We believe our market diversification strategy and product growth will drive higher volume of manufacturing which will improve our factory utilization rates and gross margin in the long run. Operating expenses
Our operating expenses consist of research and development, 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.
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 on equity investment in APM
We had a 40.3% equity interest in APM as of September 30, 2010. In October, 2010, we made an additional equity investment of $1.8 million in APM which resulted in aggregate a 43.0% equity interest in APM prior to the APM acquisition on December 3, 2010. Our investment in APM was accounted for under the equity method of accounting prior to December 3,


2010 and we recorded income on equity investment in APM prior to the APM acquisition. APM's operating results were consolidated in our financial statements since the acquisition.
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.


Operating results
The following tables set forth our results of operations and as a percentage of revenue for the fiscal years ended June 30, 2013, 2012 and 2011. Our historical results of operations are not necessarily indicative of the results for any future period.

                                                         Year Ended June 30,
                               2013          2012          2011          2013         2012         2011
                                        (in thousands)                           (% of revenue)
Revenue                     $ 337,436     $ 342,291     $ 361,308       100.0  %     100.0  %     100.0  %
Cost of goods sold (1)        272,851       259,126       256,087        80.9  %      75.7  %      70.9  %
Gross profit                   64,585        83,165       105,221        19.1  %      24.3  %      29.1  %

Operating expenses:
Research and development
(1)                            27,833        30,630        29,470         8.2  %       8.9  %       8.2  %
Selling, general and
administrative (1)             35,473        35,800        37,937        10.5  %      10.5  %      10.5  %
Impairment of long-lived
assets                          2,557             -             -         0.8  %         -  %         -  %
Total operating expenses       65,863        66,430        67,407        19.5  %      19.4  %      18.7  %
Operating income (loss)        (1,278 )      16,735        37,814        (0.4 )%       4.9  %      10.4  %

Interest income                    76           105           280           -  %         -  %       0.1  %
Interest expense                 (372 )        (342 )        (263 )      (0.1 )%      (0.1 )%      (0.1 )%
Income on equity investment
in APM                              -             -         1,768           -  %         -  %       0.5  %
Gain on equity interest in
APM                                 -             -           837           -  %         -  %       0.3  %
Income (loss) before income
taxes                          (1,574 )      16,498        40,436        (0.5 )%       4.8  %      11.2  %
Income tax expense              4,001         3,581         2,609         1.2  %       1.0  %       0.7  %
Net income (loss)           $  (5,575 )   $  12,917     $  37,827        (1.7 )%       3.8  %      10.5  %

(1) Includes share-based compensation expense allocated as follows:

                                                     Year Ended June 30,
                                      2013       2012       2011     2013    2012    2011
                                            (in thousands)              (% of revenue)
Cost of goods sold                  $   700    $   532    $   629    0.2 %   0.2 %   0.2 %
Research and development              1,402      1,361      1,716    0.4 %   0.4 %   0.5 %
Selling, general and administrative   2,717      3,529      3,829    0.8 %   1.0 %   1.1 %
                                    $ 4,819    $ 5,422    $ 6,174    1.4 %   1.6 %   1.8 %

Revenue
The following is a summary of revenue by product type:
                          Year Ended June 30,                                              Change
                    2013          2012          2011                      2013                                 2012
                             (in thousands)                 (in thousands)   (in percentage)     (in thousands)   (in percentage)
Power discrete   $ 265,150     $ 267,059     $ 284,094     $       (1,909 )        (0.7 )%      $      (17,035 )        (6.0 )%
Power IC            52,841        53,396        62,706               (555 )        (1.0 )%              (9,310 )       (14.8 )%
. . .
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