Alpha and Omega Semiconductor Limited — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2013. The company designs and supplies power semiconductors, with products serving computing, consumer electronics, communications and industrial applications. Financial statements are unaudited.
Key financial results
| Metric | Three months ended Dec. 31, 2013 | Year-over-year change | Six months ended Dec. 31, 2013 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $76.3 million | Down 14.7% | $160.4 million | Down 13.4% |
| Gross profit / margin | $13.6 million / 17.9% | Margin down 5.1 percentage points | $30.8 million / 19.2% | Margin down 5.7 percentage points |
| Operating income / margin | $1.3 million / 1.8% | Down from $4.9 million / 5.5% | $2.7 million / 1.7% | Down from $14.7 million / 7.9% |
| Net income | $0.2 million; diluted EPS $0.01 | Down from $3.7 million; $0.14 diluted EPS | $0.5 million; diluted EPS $0.02 | Down from $11.7 million; $0.45 diluted EPS |
| Operating cash flow | Not separately provided for the quarter | $15.0 million | Down from $22.7 million | |
| Cash and cash equivalents | $102.5 million at Dec. 31, 2013 | Up from $92.4 million at June 30, 2013 |
- For the six-month period, investing activities used $3.0 million, including $3.3 million of capital expenditures; financing activities used $1.9 million. Cash increased by $10.1 million.
- At December 31, total assets were $350.2 million, current assets $210.1 million and current liabilities $47.1 million. Total liabilities were $66.1 million.
- Balance-sheet short- and long-term debt totaled $15.3 million; capital lease liabilities totaled $0.8 million. The company reported compliance with its loan covenants. Cash substantially exceeded these stated borrowings and leases.
Changes and drivers
- Revenue declines were led by power discrete products: down 16.7% in the quarter and 15.2% for six months. Six-month unit shipments fell 8.0% and average selling prices fell 5.6%; the quarter’s power discrete unit shipments fell 17.6%, while average selling prices were relatively flat.
- Management attributed weakness primarily to the continuing PC-market decline, reduced demand and lower factory utilization. PC-related revenue was approximately 46.0% of quarterly revenue, versus 52.3% a year earlier.
- Gross margin contracted as lower factory utilization and pricing pressure outweighed lower costs from reduced shipments and cost controls. Operating expenses also fell, but not enough to offset lower gross profit.
- Power IC revenue rose 2.2% in the quarter, supported by industrial and advanced-computing demand, but declined 2.3% for the six months. Packaging and testing services revenue declined 28.3% for the quarter and 17.3% for six months.
- Net income was further pressured by elevated effective tax rates: 87.5% for the quarter and 82.0% for six months, versus 22.6% and 19.9%, respectively, a year earlier. Management attributed the increase to changes in the geographic mix of earnings.
Outlook, risks and other notable items
- No quantified revenue or earnings guidance is provided. Management expects margins to fluctuate with product mix, factory utilization, wafer and raw-material pricing, labor costs and economic conditions. It expects average selling prices for existing products to continue to decline and is pursuing diversification into consumer, communications and industrial markets.
- During the quarter, the company used shutdowns, headcount reductions and temporary compensation cuts to control costs amid PC weakness; selected employees’ compensation was restored to prior levels beginning January 2014. Management cautions that continued PC-market decline could further impair demand, utilization, margins and results.
- Customer concentration is substantial: Customer B represented 42.2% of quarterly revenue and 43.3% of six-month revenue. The three customers individually identified as each exceeding 10% collectively represented 77.9% of quarterly and 77.3% of six-month revenue. Customer B accounted for 35.9% of receivables at December 31.
- Purchase commitments were approximately $30.0 million and capital commitments approximately $4.2 million at December 31. There were no material off-balance-sheet arrangements or material legal proceedings reported.
- The $15.0 million term loan is due in May 2015 and is secured by substantially all assets of two subsidiaries, including Oregon fab property. China subsidiary credit lines expired in September 2013; renewal was in progress, with no balance outstanding at quarter-end. A $0.3 million Oregon training loan is due in April 2014 and may be forgiven if hiring conditions are met.
- Unrecognized tax benefits were approximately $7.6 million; tax years 2001–2013 remained open to U.S. examination and 2005–2013 to foreign examination. The company did not anticipate material changes in uncertain tax positions over the following 12 months.
- Management identified Oregon fab utilization, production interruptions, manufacturing yields and potential future fabrication-facility capital needs as risks. It also noted possible compliance costs and sourcing constraints from conflict-minerals requirements. Disclosure controls were considered effective; no material change in internal control over financial reporting was reported.
- On February 3, 2014, the company entered into a financial consulting agreement at $375 per hour, expiring July 13, 2014 unless extended.
Important facts for investors to verify
- Whether PC-market weakness, customer concentration and distributor demand continue to affect shipments and revenue.
- Whether production utilization and gross margins recover, and how product diversification contributes to sales.
- The sustainability of operating cash flow and the amount and timing of purchase and capital commitments.
- The effect of geographic earnings mix, tax examinations and the $7.6 million of unrecognized tax benefits on future earnings.
- Renewal status of the expired China credit lines and progress toward repayment or potential forgiveness of the Oregon loan.