Document and Entity Information

3 Months Ended
Sep. 30, 2011

Oct. 31, 2011

Entity Information [Line Items]

Entity Registrant Name

ALPHA & OMEGA SEMICONDUCTOR Ltd

Entity Central Index Key

0001387467

Current Fiscal Year End Date

--06-30

Entity Filer Category

Accelerated Filer

Document Type

10-Q

Document Period End Date

Sep. 30, 2011

Document Fiscal Year Focus

2012

Document Fiscal Period Focus

Q1

Amendment Flag

FALSE

Entity Common Stock, Shares Outstanding

24,444,340

CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)

In Thousands

Sep. 30, 2011

Jun. 30, 2011

Current assets:

Cash and cash equivalents

$ 88,400

$ 86,708

Restricted cash

38

54

Accounts receivable, net

25,434

42,503

Inventories

53,309

65,251

Deferred tax assets

1,831

1,773

Other current assets

3,668

5,056

Total current assets

172,680

201,345

Property and equipment, net

131,730

127,839

Intangible assets, net

1,456

1,599

Deferred tax assets

8,960

9,048

Other long-term assets

6,620

7,607

Total assets

321,446

347,438

Current liabilities:

Bank borrowings

4,000

0

Accounts payable

37,773

64,678

Accrued liabilities

11,425

15,123

Income taxes payable

1,218

2,377

Deferred margin

382

495

Capital leases - current portion

161

306

Total current liabilities

54,959

82,979

Income taxes payable - long term

3,139

3,081

Deferred income tax liabilities

24

25

Capital leases - long term portion

130

Deferred rent

1,041

973

Total liabilities

59,293

87,188

Commitments and contingencies (Note 10)

Preferred shares, par value $0.002 per share:

Authorized: 10,000 shares; Issued and outstanding: none at September 30, 2011 and June 30, 2011

0

Common shares, par value $0.002 per share:

Authorized: 50,000 shares; Issued and outstanding: 24,650 shares and 24,409 shares at September 30, 2011 and 24,612 shares and 24,562 shares at June 30, 2011

49

Treasury shares at cost; 241 shares at September 30, 2011 and 50 shares at June 30, 2011

(2,267)

(693)

Additional paid-in capital

154,353

153,004

Accumulated other comprehensive income

923

934

Retained earnings

109,095

106,956

Total shareholders’ equity

262,153

260,250

Total liabilities and shareholders’ equity

$ 321,446

$ 347,438

CONDENSED CONSOLIDATED BALANCE SHEETS Parenthetical (USD $)

In Thousands, except Per Share data

Sep. 30, 2011

Jun. 30, 2011

Common stock, par value

$ 0.002

Common stock, shares authorized

50,000

Common stock, shares issued

24,650

24,612

Common stock, shares outstanding

24,409

24,562

Preferred stock, par value

$ 0.002

Preferred stock, shares authorized

10,000

Preferred stock, shares issued

0

Preferred stock, shares outstanding

0

Treasury shares

241

50

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (USD $)

In Thousands, except Per Share data

3 Months Ended
Sep. 30,

2011

2010

Revenue

$ 83,448

$ 89,417

Cost of goods sold

62,871

65,272

Gross profit

20,577

24,145

Operating expenses:

Research and development

8,394

6,259

Selling, general and administrative

9,283

9,198

Total operating expenses

17,677

15,457

Operating income

2,900

8,688

Interest income

39

28

Interest expense

(27)

(46)

Income on equity investment in APM

0

886

Income before income taxes

2,912

9,556

Income tax expense

773

756

Net income

$ 2,139

$ 8,800

Net income per share

Basic per share

$ 0.09

$ 0.40

Diluted per share

$ 0.08

$ 0.37

Weighted-average number of shares used in computing net income per share

Basic shares

24,472

22,115

Diluted shares

25,495

23,662

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)

In Thousands

3 Months Ended
Sep. 30,

2011

2010

Cash flows from operating activities

Net income

$ 2,139

$ 8,800

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation

5,707

2,821

Amortization

143

50

Allowance for doubtful accounts

60

Share-based compensation expense

1,222

1,548

Income on equity investment in APM

0

(886)

Loss on disposal of property and equipment

0

5

Changes in working capital:

Accounts receivable

17,010

(1,658)

Inventories

11,942

(1,866)

Other current and long term assets

575

(84)

Deferred tax assets and liabilities

28

(75)

Accounts payable

(22,166)

10,044

Account payable to APM

0

(1,010)

Income taxes payable

(1,101)

655

Accrued and other liabilities

(3,618)

(87)

Net cash provided by operating activities

11,941

18,257

Cash flows from investing activities

Purchase of property and equipment

(12,568)

(11,649)

Restricted cash released

16

629

Investment in a privately held company

(100)

Net cash used in investing activities

(12,652)

(11,020)

Cash flows from financing activities

Proceeds from exercise of share options

126

57

Payment for IPO related expenses

0

(610)

Payment for repurchase of common shares

(1,574)

0

Proceeds from bank borrowings

4,002

4,400

Repayments of bank borrowings

0

(3,680)

Principal payments on capital leases

(145)

(136)

Net cash provided by financing activities

2,409

31

Net increase in cash and cash equivalents

1,698

7,268

Cash and cash equivalents at beginning of period

86,708

119,001

Exchange gains (losses) on cash and cash equivalents

(6)

27

Cash and cash equivalents at end of period

88,400

126,296

Supplemental disclosures of non cash investing and financing information:

Increase (decrease) of property and equipment purchased within accounts payable and accrued liabilities

$ (4,880)

$ (3,581)

The Company and Its Significant Accounting Policies

The Company and Significant Accounting Policies

The Company

Alpha and Omega Semiconductor Limited and its subsidiaries (the “Company”, "AOS", "we" or "us") design, develop and supply a broad range of power semiconductors. The Company's portfolio of products targets high-volume applications, including portable computers, flat panel TVs, smart phones, battery packs, portable media players, motor control and power supplies. The Company conducts its operations primarily in the United States of America (“USA”), Hong Kong, Macau, China, Taiwan, Korea and Japan.

Basis of Preparation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Article 10 of Securities and Exchange Commission Regulation S-X. They do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended June 30, 2011. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results of operations for the period presented have been included in the interim period. Operating results for the three months ended September 30, 2011 are not necessarily indicative of the results that may be expected for other interim periods or the year ending June 30, 2012. The condensed consolidated financial data at June 30, 2011 is derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2011.

Use of Estimates

The preparation of our consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. To the extent there are material differences between these estimates and actual results, the Company's consolidated financial statements will be affected. On an ongoing basis, the Company evaluates the estimates, judgments and assumptions including those related to revenue recognition, inventory reserves, warranty reserve, income taxes, share-based compensation, variable interest entities and useful lives for property and equipment and for intangible assets.

Recently Issued Accounting Guidance

In September 2011, the FASB issued an amendment to Topic 350, Intangibles-Goodwill and Other, which simplifies how entities test goodwill for impairment. Previous guidance under Topic 350 required an entity to test goodwill for impairment using a two-step process on at least an annual basis. First, the fair value of a reporting unit was calculated and compared to its carrying amount, including goodwill. Second, if the fair value of a reporting unit was less than its carrying amount, the amount of impairment loss, if any, was required to be measured. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the entity to determine that it is more likely than not that its fair value is less than its carrying amount. If after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the two-step impairment test is unnecessary. If the entity concludes otherwise, then it is required to test goodwill for impairment under the two-step process as described under Topic 350. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The Company currently does not have goodwill and does not expect the adoption of the updated guidance have an impact on its consolidated financial statements

Concentration of Credit Risk and Significant Customers

The Company manages its credit risk associated with exposure to distributors and direct customers on outstanding trade receivables through the application of credit approvals, credit ratings and other monitoring procedures. In some instances, the Company also obtains letters of credit from certain customers.

Credit sales, which are mainly on credit terms of 30 to 60 days, are only made to customers who meet the Company's credit standards, while sales to new customers or customers with low credit ratings are usually made on an advance payment basis. The Company's management considers the Company's financial assets to be of good credit quality because its key distributors and direct customers have long-standing business relationships with the Company and the Company has not experienced any significant bad debt write-offs of trade receivables in the past. The Company's management closely monitors the aging of receivables from its distributors and direct customers, and regularly reviews their financial positions, when available.

Summarized below are individual customers whose revenue or trade receivable balances were 10% or higher than the respective total consolidated amounts:



	Three Months Ended September 30,
Percentage of revenue	2011		2010
Customer A	17.3	%	30.7	%
Customer B	44.9	%	37.6	%
Customer C	14.4	%	11.1	%



	September 30,		June 30,
Percentage of trade receivables	2011		2011
Customer A	14.1	%	28.5	%
Customer B	7.6	%	32.7	%
Customer C	36.7	%	14.0	%

Segment and Geographic information

Segment and Geographic Information

The Company is organized as, and operates in, one operating segment: design, development and marketing of power semiconductor products for computing, consumer electronics, communication and industrial applications. The chief operating decision-maker is the Chief Executive Officer. The financial information presented to the Company's Chief Executive Officer is on a consolidated basis, accompanied by information about revenue by customer and geographic region, for purposes of evaluating financial performance and allocating resources. The Company has one business segment, and there are no segment managers who are held accountable for operations, operating results and plans for products or components below the consolidated unit level. Accordingly, the Company reports as a single operating segment.

The Company sells its products primarily to distributors in the Asia Pacific region, who in turn sell these products to end customers. Because the Company's distributors sell their products to end customers which may have global presence, revenue by geographical location is not necessarily representative of the geographical distribution of sales to end user markets. The revenue by geographical location in the following tables is based on the country or region to which the products were shipped:



	Three Months Ended
	September 30,
	2011		2010
	(in thousands)
Hong Kong	$	64,852	$	85,860
China	14,622		—
Korea	2,458		2,121
United States	401		695
Other countries	1,115		741
	$	83,448	$	89,417

The following is a summary of revenue by product type:



	Three Months Ended
	September 30,
	2011		2010
	(in thousands)
Power discrete	$	63,714	$	72,159
Power IC	13,313		17,258
Packaging and testing services	6,421		—
	$	83,448	$	89,417

The location and net book value of the Company's property and equipment are as follows:



	September 30, 2011		June 30, 2011
	(in thousands)
China	$	120,376	$	116,955
United States	10,933		10,426
Other countries	421		458
	$	131,730	$	127,839

Balance Sheet Components

Accounts receivable:



	September 30, 2011			June 30, 2011
	(in thousands)
Accounts receivable	$	45,080		$	61,768
Less: Allowance for price adjustments	(19,556		)	(19,235		)
Less: Allowance for doubtful accounts	(90		)	(30		)
Accounts receivable, net	$	25,434		$	42,503

Inventories:



	September 30, 2011		June 30, 2011
	(in thousands)
Raw materials	$	32,327	$	30,713
Work in-process	10,204		20,513
Finished goods	10,778		14,025
	$	53,309	$	65,251

Property and equipment:



	September 30, 2011			June 30, 2011
	(in thousands)
Manufacturing machinery and equipment	$	112,149		$	107,555
Equipment and tooling	9,603			9,232
Computer equipment and software	11,969			11,906
Office furniture and equipment	1,597			1,597
Leasehold improvements	19,156			15,949
	154,474			146,239
Less accumulated depreciation and amortization	(44,230		)	(38,617		)
	110,244			107,622
Equipment and construction in progress	21,486			20,217
	$	131,730		$	127,839

Other long term assets:



	September 30, 2011		June 30, 2011
	(in thousands)
Prepayment for acquisition of wafer fabrication assets	$	5,000	$	5,000
Prepayments for property and equipment	1,004		2,086
Investment in a privately held company	100		—
Deposits on office leases	516		521
	$	6,620	$	7,607

Accrued liabilities:



	September 30, 2011		June 30, 2011
	(in thousands)
Accrued salaries and wages	$	2,741	$	2,322
Accrued vacation	1,110		1,383
Accrued bonuses	967		3,760
Warranty accrual	695		664
Stock rotation accrual	1,293		1,880
Accrued professional fees	951		1,101
ESPP payable	575		206
Customer deposits	270		204
Other accrued expenses	2,823		3,603
	$	11,425	$	15,123

A summary of the warranty accrual, which was included in accrued liabilities, is as follows:



	Three Months Ended
	September 30,
	2011			2010
	(in thousands)
Beginning balance	$	664		$	1,275
Charged to costs	260			72
Utilization	(229		)	(64		)
Ending balance	$	695		$	1,283

A summary of the stock rotation accrual, which was included in accrued liabilities, is as follows:



	Three Months Ended
	September 30,
	2011			2010
	(in thousands)
Beginning balance	$	1,880		$	513
Charged to statement of income	1,330			1,274
Utilization	(1,917		)	(45		)
Ending balance	$	1,293		$	1,742

Borrowings

Bank Borrowings

As of September 30, 2011, one of the Company's subsidiaries in China had a revolving line of credit that allows the Company to draw down, from time to time, up to 80% of the balance of the subsidiary's accounts receivable with a maximum amount of 40 million Chinese Renminbi (equivalent of $6,253,000 as of September 30, 2011) to finance the subsidiary's accounts receivable on a maximum of 120-day repayment term. The interest rate on each drawdown varies and indexes to the published London Interbank Offered Rate per annum. As of September 30, 2011, the outstanding loan balance was $4,000,000. The effective interest rate for the borrowing was 3.6% for the three months ended September 30, 2011. There was no outstanding borrowing balance at June 30, 2011.

Shareholders' Equity and Share-based Compensation

Shares Repurchase

On October 22, 2010, the Company's board of directors authorized a $25.0 million share repurchase program. Under this repurchase program the Company may, from time to time, repurchase shares from the open market or in privately negotiated transactions, subject to supervision and oversight by the board. During the three months ended September 30, 2011, the Company repurchased 191,170 shares from the open market for a total cost of $1,574,000, at an average price of $8.23 per share. As of September 30, 2011, the Company repurchased an aggregate of 241,170 shares for a total cost of $2,267,000, at an average price of $9.40 per share. Shares repurchased are accounted for as treasury shares and the total cost of shares repurchased is recorded as a reduction to shareholders' equity.

Share Options

A summary of the status of share options granted under the Company's 2000 Share Plan and 2009 Share Options/Share Issuance Plan and changes during the three months ended September 30, 2011 and 2010 is presented as follows:



			Weighted		Weighted		Aggregate
	Number of		Average		Average Grant		Intrinsic Value
	Options		Exercise Price		Date Fair Value		at Date of
	Outstanding		Per Share		Per Share		Each Exercise
As of June 30, 2010	4,733,133		$	8.7
Options granted	6,000		10.22		$	5.54
Options exercised	(26,062	)	2.18				$	255,097
Options cancelled or forfeited	(5,965	)	10.86
As of September 30, 2010	4,707,106		8.74

As of June 30, 2011	4,461,875		9.56
Options granted	—
Options exercised	(36,427	)	3.46				$	241,827
Options cancelled or forfeited	(42,477	)	11.49
As of September 30, 2011	4,382,971		9.59

Information with respect to share options outstanding and share options exercisable at the end of the three months ended September 30, 2011 is presented as follows:



	Options Outstanding					Options Vested and Exercisable
	Number Outstanding		Weighted-Average Remaining Life (years)	Weighted-Average Exercise Price		Number Outstanding	Weighted-Average Exercise Price
Total options outstanding	4,382,971		5.82	$	9.59	3,071,602	$	7.95

Options vested and expected to vest	4,258,912		5.74	$	9.47

Aggregate intrinsic value of options outstanding	$	7,137,139
Aggregate intrinsic value of options vested and expected to vest	$	7,134,796
Aggregate intrinsic value of options exercisable	$	7,092,352

Options expected to vest are the result of applying the pre-vesting forfeiture rate assumption to total outstanding options.

Share option exercises were settled with newly issued common shares. The weighted average fair values of the options granted on the date of grant were determined using the Black-Scholes option pricing model. There were no options granted during the three months ended September 30, 2011. The significant inputs into the model for the three months ended September 30, 2010 were as follows:



	Three Months Ended
	September 30,
	2010
Volatility rate		49%
Risk-free interest rate		1.3% - 1.9%
Expected option life		5.5 years
Dividend yield		0%

Restricted Stock Units (the "RSU")

A summary of the RSU activity under the 2009 Share Options/Share Issuance Plan and changes during the three months ended September 30, 2011 and 2010 is presented as follows:



	Restricted Stock Units			Weighted Average Grant Date Fair Value Per Share		Weighted Average Remaining Recognition Period (Years)		Aggregate Intrinsic Value
Outstanding at July 1, 2010		—
Awards granted		14,200		$	10.92
Awards released		—
Awards forfeited		—
Outstanding at September 30, 2010		14,200

Outstanding at July 1, 2011		213,300
Awards granted		48,700		$	10.46
Awards released		(1,640	)
Awards forfeited		(11,000	)
Outstanding at September 30, 2011		249,360					2.35	$	2,047,246

Ending RSU vested and expected to vest		210,914					2.21	$	1,731,607

The estimated fair value of RSU is based on the market price of the Company's stock on the grant date.

Employee Stock Purchase Plan (the “ESPP”)

The Employee Shock Purchase Plan was established in May 2010 upon the completion of the Company's initial public offering. The fair values of common shares to be issued under the ESPP were determined using the Black-Scholes pricing model. The significant inputs into the model were as follows:



	Three Months Ended
	September 30,
	2011	2010
Volatility rate	50%	50%
Risk-free interest rate	0.2% - 1.0%	0.2% - 1.0%
Expected term	1.3 years	1.3 years
Dividend yield	0%	0%

The total share-based compensation expenses, including the share options, the ESPP and the RSU described above, recognized in the condensed consolidated statement of income are as follows:



	Three Months Ended
	September 30,
	2011		2010
	(in thousands)
Cost of goods sold	$	81	$	137
Research and development expenses	259		387
Selling, general and administrative expenses	882		1,024

	$	1,222	$	1,548

Total unrecognized compensation expense from the share options , the RSU and the ESPP as of September 30, 2011 was $6,196,000 including estimated forfeitures, which is expected to be recognized over a weighted-average period of 1.94 years.

Net Income Per Share

The following table presents the calculation of basic and diluted net income per share attributable to common shareholders:



	Three months ended September 30,
	2011		2010
	(in thousands, except per share data)
Numerator:
Net income - basic and diluted	$	2,139	$	8,800

Denominator:
Basic:
Weighted average shares of common share used in computing basic net income per share	24,472		22,115
Diluted:
Add weighted average effect of dilutive securities:
Share options, RSU and ESPP	1,023		1,547
Weighted average shares of common share used in computing diluted net income per share	25,495		23,662
Net income per share:
Basic	$	0.09	$	0.40
Diluted	$	0.08	$	0.37

The following potential dilutive securities are not included in the above calculation because their effect was anti-dilutive for the periods indicated:



	Three months ended September 30,
	2011	2010
	(in thousands)
Share options to purchase common shares	940	1,786
ESPP to purchase common shares	401	259
Total potential dilutive securities	1,341	2,045

Comprehensive Income

The components of total comprehensive income were as follows:



	Three Months Ended
	September 30,
	2011			2010
	(in thousands)
Net income	$	2,139		$	8,800
Other comprehensive income (loss):
Currency translation differences	(11		)	116
Total comprehensive income	$	2,128		$	8,916

Income Taxes

The Company recognized income tax expense of approximately $773,000 and $756,000 for the three months ended September 30, 2011 and 2010, respectively. The estimated effective tax rate was 26.5% and $7.9% for the three months ended September 30, 2011 and 2010, respectively. The effective tax rate for the three months ended September 30, 2011 was substantively higher than the effective tax rate for the three months ended September 30, 2010 primarily due to a change in the mix of earnings in various geographic jurisdictions between the two periods. The effective tax rates for the three months ended September 30, 2011 and 2010 were lower than the U.S. statutory tax rate of 34% primarily as a result of the Company's net income in jurisdictions in which the tax rates are lower than the U.S. statutory tax rate.

The Company files federal and state income tax returns in the United States and in various foreign jurisdictions. The tax years 2001 to 2011 remain open to examination by U.S. federal and state tax authorities. The tax years 2005 to 2011 remain open to examination by material foreign tax authorities.

The Company is subject to ongoing tax examinations of our tax returns by the Internal Revenue Service and other tax authorities in various jurisdictions. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. These assessments can require considerable estimates and judgments. As of September 30, 2011, the gross amount of unrecognized tax benefits was approximately $6,600,000. If the estimates of income tax liabilities proves to be less than the ultimate assessment, then a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period in which the Company determines the liabilities are no longer necessary. The Company does not anticipate any material changes to its uncertain tax positions during the next twelve months.

Commitments

Commitments and Contingencies

As of September 30 and June 30, 2011, the Company had approximately $22,455,000 and $22,014,000 outstanding purchase commitments for purchases of semiconductor raw materials, wafers and packaging and testing services, respectively.

As of September 30, and June 30, 2011, the Company had approximately $2,733,000 and $5,170,000 capital commitments for the purchase of property and equipment, respectively.

The Company is currently not a party to any material legal proceedings. The Company had in the past, and may from time to time in the future, becomes involved in legal proceedings arising from the normal course of business activities. The semiconductor industry is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. Irrespective of the validity of such claims, the Company could incur significant costs in the defense thereof or could suffer adverse effects on its operations.