SemiLEDs Corporation — Q2 FY2012 Form 10-Q
Reporting period: Three and six months ended February 29, 2012. Financial statement amounts are in U.S. dollars; figures below are in millions unless noted. SemiLEDs develops, manufactures and sells LED chips and components, with operations primarily in Taiwan and sales concentrated in China, Taiwan, Russia and North America.
Financial performance and position
| Metric | Three months ended Feb. 29, 2012 | Six months ended Feb. 29, 2012 |
|---|---|---|
| Revenue | $7.9 | $14.7 |
| Gross profit (loss); margin | $(0.7); (9)% | $(1.5); (11)% |
| Operating loss | $(5.8) | $(12.2) |
| Net loss attributable to SemiLEDs stockholders | $(7.1) | $(14.8) |
| Loss per share, basic and diluted | $(0.26) | $(0.54) |
- Cash flow: For the six months, operating cash flow was $(8.0), investing cash flow $(9.3), and financing cash flow $(0.2). Cash declined $17.2 to $66.4.
- Liquidity and debt: Current assets were $89.8 and current liabilities $11.1 at February 29. Bank notes payable were $1.1; long-term debt, including current installments, was $6.5. The company reported $7.8 of unused line-of-credit capacity.
- Other balance-sheet items: Total assets were $161.2; inventory was $17.9, including $1.6 of inventory write-downs during the six-month period. Investments in unconsolidated entities were $12.8.
Changes versus prior comparable periods
- Quarterly revenue fell 21% from $10.0; six-month revenue fell 36% from $23.0. LED chip sales declined sharply, reflecting lower volumes and selling prices. Component revenue rose, but average selling prices also fell substantially.
- Gross margin deteriorated from 23% to (9)% for the quarter and from 39% to (11)% for the six-month period. Management cited price declines, lower capacity utilization and inventory write-downs.
- Six-month operating results moved from $4.3 of operating income to a $12.2 loss; net results moved from $2.7 of income to a $15.1 consolidated loss. The 2012 loss attributable to SemiLEDs stockholders was $14.8.
- Research and development expense increased to $3.7 for six months from $1.2; selling, general and administrative expense rose to $7.0 from $3.5, including higher professional, legal, staffing and public-company costs.
- Cash from operations changed from $3.3 provided in the prior-year six-month period to $8.0 used. Investing outflows decreased to $9.3 from $12.1; prior-year financing inflows included $92.7 of stock issuance proceeds.
Outlook, commentary, risks and unusual items
- Liquidity outlook: Management believed existing cash, liquidity sources and anticipated operating funds would meet cash needs for at least 12 months. It cautioned that continued negative operating cash flow could require additional financing, which might not be available on favorable terms. No specific revenue or earnings guidance was provided.
- Management attributed weaker demand partly to reduced government spending on Asian outdoor street-lighting projects, alongside aggressive industry competition and pricing pressure. Lower manufacturing utilization left fixed costs under-absorbed. The company had substantially converted chip production to 4-inch wafers and continued research on yields, brightness and product improvements.
- China SemiLEDs, a 49%-owned joint venture, generated losses; SemiLEDs recorded $2.7 of equity-method losses for the six months. Management expected the venture to incur losses in the near term.
- Customer and market concentration: The top ten customers represented 70% of quarterly and 60% of six-month revenue; the three largest customers represented 57% of quarterly revenue. Four key markets accounted for 81% of six-month revenue.
- Litigation: Cree alleged patent infringement and seeks injunctive relief and unspecified damages, including treble damages on willfulness claims. Trial was scheduled for March 2013 in Cree’s case and November 2013 in SemiLEDs’ separate infringement suit against Cree. Management assessed an unfavorable outcome as reasonably possible but not probable, and estimated any reasonably possible damages would not be material; outcomes remain uncertain.
- Purchase commitments for property, plant and equipment were $7.2. Operating lease commitments totaled $4.3. The filing reported no off-balance-sheet arrangements and stated that disclosure controls were effective at a reasonable-assurance level, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue, pricing and capacity utilization stabilize, and whether inventory write-downs or negative gross margins continue.
- Cash burn, remaining cash and credit availability, future capital spending, and the assumptions supporting management’s 12-month liquidity assessment.
- Customer concentration, order cancellations or delays, and demand exposure in the company’s key markets.
- Developments in both Cree patent cases, including potential injunctions, damages and litigation costs.
- China SemiLEDs’ operating progress and losses, and the recoverability of SemiLEDs’ investment.