Business context and reporting period
Alpha and Omega Semiconductor Limited designs, develops and supplies power semiconductors for computing, consumer electronics, communications and industrial applications. This unaudited Form 10-Q covers the fiscal second quarter and six months ended December 31, 2012; comparisons are with the corresponding 2011 periods. Unless indicated otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2012 |
|---|---|---|
| Revenue | $89.4 million, up 10.8% | $185.2 million, up 12.8% |
| Gross profit / gross margin | $20.6 million / 23.0% | $46.1 million / 24.9% |
| Operating income / margin | $4.9 million / 5.5% | $14.7 million / 7.9% |
| Net income | $3.7 million; diluted EPS $0.14 | $11.7 million; diluted EPS $0.45 |
| Operating cash flow | Not separately provided | $22.7 million |
| Capital expenditures | Not separately provided | $12.5 million |
At December 31, 2012, cash and cash equivalents were $91.9 million, versus $82.2 million at June 30, 2012. Total current assets were $213.3 million and current liabilities $58.9 million. Balance-sheet debt was $18.1 million ($2.9 million short-term and $15.3 million long-term); capital lease liabilities totaled $1.6 million. The company reported $17.9 million outstanding under its term loan and no equipment-line or China revolving-credit borrowings. Total liabilities were $81.3 million and shareholders’ equity was $295.4 million.
Material changes versus the prior comparable periods
- For the quarter, revenue rose 10.8% and net income increased to $3.7 million from $1.5 million. For the six months, revenue increased 12.8% and net income rose to $11.7 million from $3.6 million.
- Power discrete revenue drove growth: up 13.3% for the quarter and 15.9% for six months. Management attributed higher shipments to increased unit volumes, partly offset by lower average selling prices (down 6.3% quarterly and 5.2% for six months).
- Gross margin improved 0.4 percentage point for the quarter and 1.2 points for six months, which management attributed primarily to tighter factory expense control and improved utilization.
- Operating expenses fell 1.5% for the quarter and 6.5% for six months. Lower R&D expense reflected reduced prototyping and engineering-wafer costs; SG&A rose modestly for six months, including increased employee compensation.
- Six-month operating cash flow was nearly unchanged from 2011 ($22.7 million versus $22.8 million), while investing cash outflow declined to $12.7 million from $22.0 million, primarily because property and equipment purchases were lower. Financing cash flow was a $0.3 million outflow versus a $9.8 million inflow in 2011.
Outlook, commentary, risks and contingencies
- Management said current cash and expected operating cash flows should cover anticipated working-capital and capital-expenditure needs for at least the next 12 months. No quantified revenue or earnings guidance is provided.
- Management expects established-product selling prices to continue to erode and gross margins to fluctuate with product mix, factory utilization, wafer and raw-material costs, labor costs and economic conditions. R&D spending is expected to fluctuate; the company expects expenses generally to increase as the business grows.
- PC-related products represented approximately 52.3% of quarterly revenue and 52.9% for the six-month period. The filing identifies declining PC demand, including reduced demand from Taiwan distributors and customers, as a material risk; diversification into other markets may not offset that decline.
- Revenue is highly concentrated: Customer B represented 43.8% of quarterly revenue and 42.6% for six months. The three customers individually exceeding 10% collectively represented 79.2% of quarterly revenue. Distributor forecasts and channel inventory changes may cause significant revenue fluctuations.
- The $20 million term loan and $10 million equipment facility mature in May 2015. Borrowings are secured by substantially all assets of two subsidiaries, with guarantees and financial covenants; the company reported covenant compliance at quarter-end. A $0.25 million Oregon training loan may be forgiven if hiring-related conditions are met.
- Commodity risks include gold and other semiconductor materials; the company does not formally hedge commodity exposure and may be unable to pass cost increases to customers. It is converting some products from gold to copper wire.
- Unrecognized tax benefits were approximately $7.2 million; tax years remain open to examination in the U.S. and foreign jurisdictions. Management did not anticipate material changes in uncertain tax positions over the next 12 months.
- Outstanding purchase commitments were approximately $30.9 million and capital commitments $0.5 million at December 31, 2012. The company reported no material legal proceedings, no material off-balance-sheet arrangements, and no material change in previously disclosed market risks. New conflict-minerals disclosure requirements may raise compliance costs and affect sourcing.
- Disclosure controls were assessed as effective, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether PC-market contraction and customer concentration—particularly Customer B’s large revenue share—continue to affect orders and results.
- Whether shipment growth can continue to offset average selling-price erosion, and whether improved factory utilization and gross margins are sustainable.
- Inventory and receivables trends: inventories increased to $71.5 million from $65.8 million at June 30, while receivables rose to $43.0 million from $38.9 million; management cited fab ramp-up and billing/collection timing.
- Cash generation relative to capital needs, purchase commitments, debt service and the secured-loan covenants.
- Progress in diversifying beyond PC-related markets, ramping the Oregon fab, and managing commodity, tax and conflict-minerals exposure.