ALPHA AND OMEGA SEMICONDUCTOR LIMITED 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 withU.S. GAAP. Overview We are a designer, developer and global supplier of a broad portfolio of power semiconductors. Our portfolio of power semiconductors includes approximately 2,500 products, and has grown significantly with the introduction of over 130 new products in the fiscal year endedJune 30, 2022 , and over 160 new products in each of the fiscal year endedJune 30, 2020 and 2019, 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 888 patents and 62 patent applications inthe United States as ofJune 30, 2022 . We also have a total of 936 foreign patents, which primarily were based on our research and development efforts throughJune 30, 2022 . We differentiate ourselves by integrating our expertise in technology, design and advanced manufacturing and packaging to optimize product performance and cost. Our portfolio of products targets high-volume applications, including personal computers, graphic cards, game consoles, flat panel TVs, home appliances, power tools, smart phones, battery packs, consumer and industrial motor controls and power supplies for TVs, computers, servers and telecommunications equipment. Our business model leverages global resources, including research and development and manufacturing inthe United States andAsia . Our sales and technical support teams are localized in several growing markets. We operate an 8-inch wafer fabrication facility located inHillsboro, Oregon , or theOregon Fab, which is critical for us to accelerate proprietary technology development, new product introduction and improve our financial performance. 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 inChina . 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 sales cycle time. OnMarch 29, 2016 , we formed theJV Company with the Chongqing Funds, for the purpose of constructing and operating the Chongqing Fab in the LiangJiang New Area ofChongqing, China . The Chongqing Fab is being built in phases. As ofDecember 1, 2021 , we owned 50.9%, and the Chongqing Funds owned 49.1% of the equity interest in theJV Company .The JV Company was accounted under the provisions of the consolidation guidance since we had controlling financial interest untilDecember 1, 2021 . EffectiveDecember 1, 2021 , we entered into a share transfer agreement ("STA") with a third-party investor (the "Investor"), pursuant to which we sold to the Investor approximately 2.1% of outstanding equity interest held by us in theJV Company for an aggregate purchase price ofRMB 108 million or approximately$16.9 million . The STA contained customary representations, warranties and covenants. The Transaction was closed onDecember 2, 2021 . As a result of the Transaction, as of the Closing Date, our equity interest in theJV Company decreased from 50.9% to 48.8%. Also, our right to designate directors on the board ofJV Company was reduced to three (3) out of seven (7) directors, from four (4) directors prior to the Transaction. As ofDecember 2, 2021 , we no longer have a controlling financial interest in theJV Company under generally accepted accounting principles. Loss of control is deemed to have occurred when, among other things, a parent company owns less than a majority of the outstanding common stock in the subsidiary, lacks a controlling financial interest in the subsidiary and, is unable to unilaterally control the subsidiary through other means such as having, or the ability to obtain or represent, a majority of the subsidiary's board of directors. All of these loss of control factors were present for us as ofDecember 2, 2021 . Accordingly, sinceDecember 2, 2021 , we have deconsolidated theJV Company in our Consolidated Financial Statements and accounted for our investment in theJV Company using the equity method of accounting. OnDecember 24, 2021 , we entered into a share transfer agreement with another third-party investor, pursuant to which we sold to this investor 1.1% of outstanding equity interest held by us in theJV Company for an aggregate purchase price ofRMB 60 million or approximately$9.4 million based on the currency exchange rate as ofDecember 24, 2021 . In addition, onDecember 30, 2021 , theJV Company adopted an employee equity incentive plan and issued an equity interest equivalent to 3.99% of theJV Company to exchange in cash. As a result, we owned 45.8% of the equity interest in theJV Company as ofDecember 31, 2021 . OnJanuary 26, 2022 , theJV Company completed a financing transaction pursuant to the Financing Agreement between theJV Company and certainNew Investors . Under the Financing Agreement, theNew Investors purchased newly issued equity interest of theJV Company for a total purchase price ofRMB 509 million (or approximately$80 million based on the currency 46 --------------------------------------------------------------------------------
exchange rate as of
We reduced our ownership of theJV Company to below 50% to increase the flexibility of theJV Company to raise capital to fund its future expansion. Following the Transaction and the successful ramp up to its Phase I target run rate in the September quarter of 2021, as planned, theJV Company commenced an effort to raise up to$200 million of additional capital, including an$80 million round that was completed onJanuary 26, 2022 through private funding for its Phase II expansion. In addition to immediate private funding rounds, theJV Company is also contemplating an eventual listing on the Science and Technology Innovation Board, or STAR Market, of theShanghai Stock Exchange . The Transaction assists theJV Company in meeting certain regulatory listing requirements. A potential STAR Market listing may take several years to consummate and there is no guarantee that such listing by theJV Company will be successful or will be completed in a timely manner, or at all. In addition, theJV Company will continue to provide us with significant level of foundry capacity to enable us to develop and manufacture our products. OnJuly 12, 2022 , the current shareholders of theJV Company entered into a shareholders contract, pursuant to which theJV Company provided us a monthly wafer production capacity guarantee, subject to future increase when theJV Company's production capacity reaches certain goal. During the fiscal year endedJune 30, 2022 , we continued our diversification program by developing new silicon and packaging platforms to expand our serviceable available market, or SAM and offer higher performance products. Our metal-oxide-semiconductor field-effect transistors, or MOSFET, and power IC product portfolio expanded significantly. Our high performance products and deepened customer relationships with our OEM and ODM customers have contributed to the achievement of our record high revenue of$777.6 million for the fiscal year 2022, a 18.4% growth compared to the last fiscal year. Impact of COVID-19 Pandemic to our Business Our business operations have been impacted by the global COVID-19 pandemic and the resulting economic downturn. Numerous governmental jurisdictions, including the States ofCalifornia ,Oregon andTexas in theU.S. and countries throughout theAsia Pacific region have imposed various restrictions on commercial activities, resulting in business closures, work stoppages, labor shortage, disruptions to ports, vaccine mandates and other shipping infrastructure, border closures, thereby negatively impacting our customers, suppliers, distributors, employees, offices, and the entire semiconductor ecosystem. As a result of the COVID-19 pandemic and changing consumer behaviors due to various government restrictions and the growing trend to provide remote-working options by employers, we have experienced shifting market trends, including an increasing demand in markets for notebooks, personal computing ("PC"), gaming devices and other products. While we have benefited from the increasing demand for PC related products, there is no guarantee that this trend will continue, and such increasing demand may discontinue or decline if government authorities relax or terminate COVID-19 related restrictions and consumer behaviors change in response to the reopening of certain economic activities. In an effort to protect the health and safety of our employees and to comply with various government and regulatory guidelines, we also took proactive actions to adopt policies and protocols at our locations around the world, including social distancing guidelines, vaccine and testing protocols. Since the start of the second quarter of calendar year 2021, there have been increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on social, business, travel, and government activities and functions, and a gradual resumption of economic activities and consumer spending in our industries. However, infection rates continued to fluctuate in various regions and new strains of the virus remain a risk, including a surge of COVID-19 cases and hospitalization due to the spread of Omicron variants in late 2021 and early 2022. During the first half of calendar year 2022, COVID-19 cases and hospitalization rate continued to decline and governments in various jurisdictions, including theU.S. andEurope , have lifted various restrictions and limitations on economic activities. At the same time, however, new variants of COVID-19 continued to emerge and contributed to recent rise of infection rates in various jurisdictions in which we operate, includingChina andU.S. Furthermore, we may be subject to the ongoing global impacts resulting from the pandemic, including disruption of the product supply chains, shortages of semiconductor components, and delays in shipments, product development, and product launches and rising inflation rates. InApril 2022 , the operations of our two packaging and testing facilities inShanghai, China were suspended due to a strict lockdown of the city imposed by the local government in response to surging COVID cases. Our facilities inShanghai were required to shut down and production was halted beginning in early April. Transportation suspension in and out ofShanghai also interrupted the shipping of raw materials and finished parts to and from our facilities. We received permission to reopen our facilities partially in early May. We gradually ramped up production at these facilities in May and returned to normal operation inJune 2022 . The suspension of ourShanghai facilities, and the subsequent partial resumption of production, 47 -------------------------------------------------------------------------------- reduced our ability to complete orders from our customers in a timely manner, which adversely affected our revenue and results of operation for the three months endedJune 30, 2022 . We cannot guarantee that theShanghai government will not impose similar restrictions and lockdown in the future, and any such restrictions and lockdown will adversely affect our operations and financial performance. The full extent of the longer-term impact of the COVID-19 pandemic on our operational and financial performance is uncertain and will depend on many factors outside our control, including, without limitation, the timing, extent, trajectory and duration of the pandemic; the availability, distribution and effectiveness of vaccines; the spread of new variants of COVID-19; the continued and renewed imposition of protective public safety measures, including local and regional lockdown and quarantines; the disruption of global supply chain; and the impact of the pandemic on the global economy and demand for consumer products. Although we are unable to predict the full impact and duration of the COVID-19 pandemic on our business, we are actively managing our business operations and financial expenditures in response to continued uncertainty.
Other Factors affecting our performance
In addition to the COVID-19 pandemic and related events as described above, 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, any significant change in global and regional economic conditions could materially affect our revenue and results of operations. A significant amount of our revenue is derived from sales of products in the PC markets, such as notebooks, motherboards and notebook battery packs, therefore a substantial decline or downturn in the PC market could have a material adverse effect on our revenue and results of operations. The PC markets have experienced a modest global decline in recent years due to continued growth of demand in tablets and smart phones, worldwide economic conditions and the industry inventory correction which had and may continue to have a material impact on the demand for our products. However, we recently have experienced a significant increase of demand in PC market due to the impact of the COVID-19 pandemic and resulting shift in market trend and consumer behaviors. We cannot predict whether and how long this trend will continue due to the uncertainty and unpredictability of COVID-19 pandemic. A decline of the PC market may have a negative impact on our revenue, factory utilization, gross margin, our ability to resell excess inventory, and other performance measures. We have executed and continue to execute strategies to diversify our product portfolio, penetrate other market segments, including the consumer, communications and industrial markets, and improve gross margins and profit by implementing cost control measures. While making efforts to reduce our reliance on the computing market, we continue to support our computing business and capitalize on the opportunities in this market with a more focused and competitive PC product strategy to gain market share. Manufacturing costs and capacity availability: Our gross margin is affected by a number of factors including our manufacturing costs, utilization of our manufacturing facilities, the product mixes of our sales, pricing of wafers from third party foundries and pricing of semiconductor raw materials. Capacity utilization affects our gross margin because we have certain fixed costs at ourShanghai facilities and our Oregon Fab. If we are unable to utilize our manufacturing facilities at a desired level, our gross margin may be adversely affected. For example, inApril 2022 , the operations of our packaging and testing facilities inShanghai, China were suspended due to a strict lockdown of the city imposed by the local government in response to surging COVID cases. The facilities were required to be shut down and production was halted since early April. Transportation suspension in and out ofShanghai also interrupted the shipping of raw materials and finished parts to and from our facilities. We received permission to reopen our facilities partially in early May. We gradually ramped up production at these facilities in May and returned to normal operation inJune 2022 . However, there is no guarantee that additional restrictions and lockdown will not be reimposed by the government, which is outside of our control, and any extension of the lockdown will continue to have a negative impact on our results of operation and financial condition. In addition, from time to time, we may experience wafer capacity constraints, particularly at third party foundries, that may prevent us from meeting fully the demand of our customers. For example, the recent global shortage of semiconductor manufacturing capacity has provided us with both challenges and opportunities in the market, and highlighted the importance of maintaining sufficient and independent in-house manufacturing capabilities to meet increasing customer demands. While we can mitigate these constraints by increasing and re-allocating capacity at our own fab, we may not be able to do so quickly or at sufficient level, which could adversely affect our financial conditions and results of operations. In addition, we recently commenced a plan to enhance the manufacturing capability and capacity of our Oregon Fab by investing in new equipment and expanding our factory facilities, which we expect will have a positive impact on our future new product development and revenue, particularly during the period of global shortage of capacity. The expansion is expected to be completed in the fiscal quarter endingMarch 31, 2023 . We also rely substantially on theJV Company to provide foundry capacity to manufacture our products, therefore it is critical that we maintain continuous access to such capacity, which may not be available at sufficient level or at a pricing terms favorable to us because of lack of control over theJV Company's operation. As a result of sales of ourJV Company equity interests and issuance of additional equity interests by theJV Company to third-party investors in financing transactions, our 48 -------------------------------------------------------------------------------- equity interest in theJV Company was reduced to 42.2%, which reduced our control and influence over theJV Company . While we continue to maintain a business relationship with theJV Company to ensure uninterrupted supply of manufacturing capacity, and we are currently negotiating a foundry agreement for theJV Company to provide guarantee level of capacity, theJV Company may take actions or make decisions that adversely impact our ability to access required capacity, and our lack of control and influence may prevent us from eliminating or mitigating such risk. Erosion and fluctuation of average selling price: Erosion of average selling prices of established products is typical in our industry. Consistent with this historical trend, we expect our average selling prices of existing products to decline in the future. However, in the normal course of business, we seek to offset the effect of declining average selling price by introducing new and higher value products, expanding existing products for new applications and new customers and reducing the manufacturing cost of existing products. These strategies may cause the average selling price of our products to fluctuate significantly from time to time, thereby affecting our financial performance and profitability. 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. As we accelerate the development of new technology platforms, we expect to increase the pace at which we introduce new products and seek and acquire design wins. If we were to fail to introduce new products on a timely basis that meet customers' specifications and performance requirements, particularly those products with major OEM customers, and continue to expand our serviceable markets, then we would lose market share and our financial performance would be adversely affected. Distributor ordering patterns, customer demand 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 outlook 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. Furthermore, our revenue may be impacted by the level of demand from our major customers due to factors outside of our control. If these major customers experience significant decline in the demand of their products, encounter difficulties or defects in their products, or otherwise fail to execute their sales and marketing strategies successfully, it may adversely affect our revenue and results of operations.
Principal line items of statements of operations
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 has
been derived from power discrete 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 is reported net of 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.
49
--------------------------------------------------------------------------------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 costs associated with yield improvements, capacity utilization, warranty and valuation of inventories. As the volume of sales increases, we expect cost of goods sold to increase. 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, and selling, general and administrative expenses. We expect our operating expenses as a percentage of revenue to fluctuate from period to period as we continue to exercise cost control measures in response to the declining PC market as well as align our operating expenses to the revenue level.
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. We continue to invest in developing new technologies and products utilizing our own fabrication and packaging facilities as it is critical to our long-term success. We also evaluate appropriate investment levels and stay focused on new product introductions to improve our competitiveness. We expect that our research and development expenses will fluctuate from time to time.
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 fluctuate in the near future as we continue to exercise cost control measures.
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 likely than not to be realized upon settlement with a taxing authority. 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.
OnDecember 22, 2017 ,the United States enacted tax reform legislation through the Tax Cuts and Jobs Act ("the Tax Act"), which significantly changes the existingU.S. tax laws, including, but not limited to, (1) a reduction in the corporate tax rate from 35% to 21%, (2) a shift from a worldwide tax system to a territorial system, (3) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized, (4) bonus depreciation that will allow for full 50 -------------------------------------------------------------------------------- expensing of qualified property, (5) creating a new limitation on deductible interest expense and (6) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning afterDecember 31, 2017 . The Company is not currently subject to the Base Erosion and Anti-Abuse (BEAT) tax, which is a tax imposed on certain entities who make payments to their nonU.S. affiliates, where such payments reduce theU.S. tax base . The BEAT tax is imposed at a rate of 10% on Adjusted Taxable Income, excluding certain payments to foreign related entities. It is an incremental tax over and above the corporate income tax and is recorded as a period cost. It is possible that this tax could be applicable in future periods, which would cause an increase to the effective tax rate and cash taxes.
OnMarch 27, 2020 ,the United States enacted the CARES Act, which made the changes to existingU.S. tax laws, including, but not limited to, (1) allowingU.S. federal net operating losses originated in the 2018, 2019 or 2020 tax years to be carried back five years to recover taxes paid based upon taxable income in the prior five years, (2) eliminated the 80% of taxable income limitation on net operating losses for the 2018, 2019 and 2020 tax years (the 80% limitation will be reinstated for tax years after 2020), (3) accelerating the refund of prior year alternative minimum tax credits, (4) modifying the bonus depreciation for qualified improvement property and (5) modifying the limitation on deductible interest expense. As a result of the ability to carryback net operating losses from theJune 2018 andJune 2019 years to theJune 2015 toJune 2017 tax years, net operating losses which were previously tax-effected using the current 21%U.S. federal tax rate were revalued to theU.S. tax rates in effect for theJune 2015 toJune 2017 tax years due to the ability of receiving tax refunds for the taxes paid in these years. Accordingly, we reported a discrete tax benefit of$1.1 million in the third quarter of fiscal year 2020 related to the re-measurement of the net operating losses that could be realized via the new net operating loss carryback provisions.
"
OnDecember 27, 2020 ,the United States enacted the Consolidated Appropriations Act, 2021, which made changes to existingU.S. tax laws. There was no material impact of the tax law changes included in the Consolidated Appropriations Act, 2021 to the Company.
"The American Rescue Plan Act of, 2021", Enacted
OnMarch 11, 2021 ,the United States enacted the American Rescue Plan Act of 2021, which made changes to existingU.S. tax laws. There was no material impact of the tax law changes included in the American Rescue Plan Act of 2021 to the Company.
"The Chip and Science Act of 2022", Enacted
InAugust 2022 theU.S. enacted the Chip and Science Act of 2022 (the Chips Act). The Chips Act provides incentives to semiconductor chip manufacturers inthe United States , including providing manufacturing investment credits of 25% for investments in semiconductor manufacturing property placed in service afterDecember 31, 2022 , for which construction begins beforeJanuary 1, 2027 . Property investments qualify for the 25% credit if, among other requirements, the property is integral to the operation of an advanced manufacturing facility, defined as having a primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment. Currently, we are evaluating the impact of the Chips Act to us. 51
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Operating results
The following tables set forth our results of operations and as a percentage of revenue for the fiscal years endedJune 30, 2022 , 2021 and 2020. Our historical results of operations are not necessarily indicative of the results for any future period. Year Ended June 30, 2022 2021 2020 2022 2021 2020 (in thousands) (% of revenue) Revenue$ 777,552 $ 656,902 $ 464,909 100.0 % 100.0 % 100.0 % Cost of goods sold (1) 508,996 452,359 362,178 65.5 % 68.9 % 77.9 % Gross profit 268,556 204,543 102,731 34.5 % 31.1 % 22.1 % Operating expenses: Research and development (1) 71,259 62,953 51,252 9.2 % 9.6 % 11.0 % Selling, general and administrative (1) 95,259 77,514 64,816 12.3 % 11.8 % 13.9 % Impairment of privately-held investment - - 600 - % - % 0.1 % Total operating expenses 166,518 140,467 116,668 21.5 % 21.4 % 25.0 % Operating income (loss) 102,038 64,076 (13,937) 13.0 % 9.7 % (2.9) % Other income (loss), net 999 2,456 (1,229) 0.1 % 0.4 % (0.3) % Interest expenses, net (3,920) (6,308) (2,743) (0.5) % (1.0) % (0.6) % Gain on deconsolidation of the JV Company 399,093 - - 51.3 % - % - % Loss on changes of equity interest in the JV Company, net (3,140) - - (0.4) % - % - % Net income (loss) before income taxes 495,070 60,224 (17,909) 63.5 % 9.1 % (3.8) % Income tax expense 39,258 3,935 348 5.0 % 0.6 % 0.1 % Net income (loss) before loss from equity method investment 455,812 56,289 (18,257) 58.5 % 8.5 % (3.9) % Equity method investment loss from equity investee 2,629 - - 0.3 % - % - % Net income (loss) 453,183 56,289 (18,257) 58.2 % 8.5 % (3.9) % Net income (loss) attributable to noncontrolling interest 20 (1,827) (11,661) 0.0 % (0.3) % (2.5) % Net income (loss) attributable to Alpha and Omega Semiconductor Limited$ 453,163 $ 58,116 $ (6,596) 58.2 % 8.8 % (1.4) %
(1) Includes share-based compensation expense as follows:
Year Ended June 30,
2022 2021 2020 2022 2021 2020
(in thousands) (% of revenue)
Cost of goods sold $ 5,125 $ 1,756 $ 1,530 0.7 % 0.3 % 0.3 %
Research and development 7,049 5,352 2,895 0.9 % 0.8 % 0.6 %
Selling, general and administrative 19,150 8,216 6,029 2.5 % 1.3 % 1.3 %
$ 31,324 $ 15,324 $ 10,454 4.1 % 2.4 % 2.2 %
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Revenue
The following is a summary of revenue by product type:
Year Ended June 30, Change
2022 2021 2020 2022 2021
(in thousands) (in thousands) (in percentage) (in thousands) (in percentage)
Power discrete $ 545,135 $ 482,718 $ 391,941 $ 62,417 12.9 % $ 90,777 23.2 %
Power IC 220,882 161,726 66,360 59,156 36.6 % 95,366 143.7 %
Packaging and
testing services 11,535 12,458 6,608 (923) (7.4) % 5,850 88.5 %
$ 777,552 $ 656,902 $ 464,909 $ 120,650 18.4 % $ 191,993 41.3 %
Fiscal 2022 vs 2021
Total revenue was $777.6 million for fiscal year 2022, an increase of $120.7
million , or 18.4%, as compared to $656.9 million for fiscal year 2021. The
increase was primarily due to an increase of $62.4 million in sales of power
discrete products and an increase of $59.2 million in sales of power IC
products. The increase in power discrete and power IC product sales was
primarily due to a 21.0% increase in average selling price as compared to last
fiscal year due to a shift in product mix, partially offset by a 2.1% decrease
in unit shipments. The decrease in revenue of packaging and testing services for
the fiscal year 2022 as compared to last fiscal year was primarily due to
decreased demand. During fiscal year 2022, we accelerated the development of new
technology platforms which allowed us to introduce 49 medium and high voltage
MOSFET products, targeting primarily the industrial markets and communication
marketing, and 7 module products primarily for the consumer markets, as well as
14 low voltage MOSFET products primarily for the computing and communication
markets. In addition, we introduced 69 Power IC new products for computing
applications, communication and consumer markets.
Fiscal 2021 vs 2020
Total revenue was$656.9 million for fiscal year 2021, an increase of$192.0 million , or 41.3%, as compared to$464.9 million for fiscal year 2020. The increase was primarily due to an increase of$90.8 million in sales of power discrete products and an increase of$95.4 million in sales of power IC products. The increase in power discrete and power IC product sales was primarily due to a 23.0% increase in unit shipments and a 14.5% increase in average selling price due to a shift in product mix as compared to last fiscal year. The increase in revenue of packaging and testing services for the fiscal year 2021 as compared to last fiscal year was primarily due to increased demand.
Cost of goods sold and gross profit
Year Ended June 30, Change
2022 2021 2020 2022 2021
(in thousands) (in thousands) (in percentage) (in thousands) (in percentage)
Cost of goods sold $ 508,996 $ 452,359 $ 362,178 $ 56,637 12.5 % $ 90,181 24.9 %
Percentage of revenue 65.5 % 68.9 % 77.9 %
Gross profit $ 268,556 $ 204,543 $ 102,731 $ 64,013 31.3 % $ 101,812 99.1 %
Percentage of revenue 34.5 % 31.1 % 22.1 %
Fiscal 2022 vs 2021
Cost of goods sold was $509.0 million for fiscal year 2022, an increase of $56.6
million , or 12.5%, as compared to $452.4 million for fiscal year 2021. The
increase was primarily due to 18.4% increase in revenue. Gross margin increased
by 3.4 percentage points to 34.5% for the fiscal year 2022, as compared to 31.1%
for the fiscal year 2021. The increase in gross margin was primarily due to
better product mix during the fiscal year ended June 30, 2022 . We expect our
gross margin to continue to fluctuate in the future as a result of variations in
our product mix, semiconductor wafer and raw material pricing, manufacturing
labor cost and general economic and PC market conditions.
53
--------------------------------------------------------------------------------Fiscal 2021 vs 2020
Cost of goods sold was$452.4 million for fiscal year 2021, an increase of$90.2 million , or 24.9%, as compared to$362.2 million for fiscal year 2020. The increase was primarily due to 41.3% increase in revenue. Gross margin increased by 9.0 percentage points to 31.1% for the fiscal year 2021, as compared to 22.1% for the fiscal year 2020. OurJV Company continued its ramp during the fiscal year 2021, which resulted in an increase in the capacity utilization and contributed to the increase in gross margin.
Research and development expenses
Year Ended June 30, Change
2022 2021 2020 2022 2021
(in thousands) (in thousands) (in percentage) (in thousands) (in percentage)
Research and development $ 71,259 $ 62,953 $ 51,252 $ 8,306 13.2 % $ 11,701 22.8 %
Fiscal 2022 vs 2021
Research and development expenses were $71.3 million for fiscal year 2022, an
increase of $8.3 million , or 13.2%, as compared to $63.0 million for fiscal year
2021. The increase was primarily attributable to a $6.8 million increase in
employee compensation and benefit expense mainly due to higher bonus accrual,
increased headcount and annual merit increase, a $1.7 million increase in
share-based compensation expense due to an increase in stock awards granted, a
$0.2 million increase in depreciation expenses, and a $0.2 million increase in
professional fees, partially offset by a $0.8 million decrease in product
prototyping engineering expense as a result of decreased engineering activities.
We continue to evaluate and invest resources in developing new technologies and
products utilizing our own fabrication and packaging facilities. We believe the
investment in research and development are important to meet our strategic
objectives.
Fiscal 2021 vs 2020
Research and development expenses were$63.0 million for fiscal year 2021, an increase of$11.7 million , or 22.8%, as compared to$51.3 million for fiscal year 2020. The increase was primarily attributable to a$4.0 million increase in employee compensation and benefit expense mainly due to higher bonus accrual, a$4.2 million increase in product prototyping engineering expense as a result of increased engineering activities, a$2.5 million increase in share-based compensation expense due to higher stock awards price, and a$0.5 million increase in facility expenses as a result of higher office rental expenses and higher utility costs.
Selling, general and administrative expenses
Year Ended June 30, Change
2022 2021 2020 2022 2021
(in thousands) (in thousands) (in percentage) (in thousands) (in percentage)
Selling, general and
administrative $ 95,259 $ 77,514 $ 64,816 $ 17,745 22.9 % $ 12,698 19.6 %
Fiscal 2022 vs 2021
Selling, general and administrative expenses were $95.3 million for fiscal year
2022, an increase of $17.7 million , or 22.9%, as compared to $77.5 million for
fiscal year 2021. The increase was primarily attributable to a $8.6 million
increase in employee compensation and benefits expenses mainly due to increased
headcount, annual merit increase, higher bonus expenses and increased employee
and business insurance expenses, as well as $10.9 million increase in
share-based compensation expense due to increase in stock award granted,
partially offset by a $2.2 million decrease in legal expense related to the
government investigation.
Fiscal 2021 vs 2020
Selling, general and administrative expenses were$77.5 million for fiscal year 2021, an increase of$12.7 million , or 19.6%, as compared to$64.8 million for fiscal year 2020. The increase was primarily attributable to a$13.2 million increase in 54 -------------------------------------------------------------------------------- employee compensation and benefits expenses, mainly due to increased headcount, higher bonus expenses and increased employee insurance expenses, as well as$2.2 million increase in share-based compensation expense due to higher stock rewards price. The increase was partially offset by a$1.9 million decrease in legal expense related to the government investigation, and a$0.9 million decrease in business travel expenses as a result of the COVID-19 pandemic.
Impairment of privately-held investment
Year Ended June 30, Change
2022 2021 2020 2022 2021
(in thousands) (in thousands) (in percentage) (in thousands) (in percentage)
Impairment of privately-held
investment $ - $ - $ 600 $ - - % $ (600) 100.0 %
During the fiscal year 2020, we recorded an other-than-temporary impairment
charge for our investment of $0.6 million in a privately-held start-up company.
As of June 30, 2022 and 2021, we have remaining a privately-held investment of
$0.1 million .
Other income (loss), net
Year Ended June 30, Change
2022 2021 2020 2022 2021
(in thousands) (in thousands) (in percentage) (in thousands) (in percentage)
Other income (loss), net
(59.3) % $ 3,685 (299.8) %
Other income (loss), net decreased by
Other income (loss), net increased by
Interest expense, net
Year Ended June 30, Change
2022 2021 2020 2022 2021
(in thousands) (in thousands) (in percentage) (in thousands) (in percentage)
Interest expense, net $ (3,920) $ (6,308) $ (2,743) $ 2,388 (37.9) % $ (3,565) 130.0 %
Interest expense was primarily related to bank borrowings. Interest expense
decreased by $2.4 million in fiscal year 2022 as compared to the prior fiscal
year primarily because of deconsolidation of the JV Company in December 2021 .
Interest expense increased by $3.6 million in fiscal year 2021 as compared to
the fiscal year 2020 primarily due to an increase in bank borrowings as well as
to a reduction in the interest refund from the Chinese government to the JV
Company .
Gain on deconsolidation of the
EffectiveDecember 1, 2021 , we entered into the STA with the Investor, pursuant to which we sold to the Investor approximately 2.1% of outstanding equity interest held by us in theJV Company for an aggregate purchase price ofRMB 108 million or approximately$16.9 million . The STA contained customary representations, warranties and covenants. The Transaction was closed onDecember 2, 2021 . As a result of the Transaction, as of the Closing Date, our equity interest in theJV Company decreased from 50.9% to 48.8%. Also, our right to designate directors on the board ofJV Company was reduced to three (3) out of seven (7) directors, from four (4) directors prior to the Transaction. We no longer have a controlling financial interest in theJV Company under generally accepted accounting principles. Loss of control is deemed to have occurred when, among other things, a parent company owns less than a majority of the outstanding common stock in the subsidiary, lacks a controlling financial interest in the subsidiary and, is unable to unilaterally control the subsidiary through 55 -------------------------------------------------------------------------------- other means such as having, or the ability to obtain, a majority of the subsidiary's board of directors. All of these loss of control factors were present for us as ofDecember 2, 2021 . Accordingly, sinceDecember 2, 2021 , AOS has accounted for its investment in theJV Company using the equity method of accounting. OnDecember 24, 2021 , we entered into a share transfer agreement with another third-party investor, pursuant to which we sold to this investor 1.1% of outstanding equity interest held by us in theJV Company for an aggregate purchase price ofRMB 60 million or approximately$9.4 million . In addition, theJV Company adopted an employee equity incentive plan and issued an equity interest equivalent to 3.99% of theJV Company to exchange in cash. As a result, the Company owned 45.8% of the equity interest in theJV Company as ofDecember 31, 2021 . OnJanuary 26, 2022 , theJV Company completed a financing transaction pursuant to the Financing Agreement between theJV Company and certainNew Investors . Under the Financing Agreement, theNew Investors purchased newly issued equity interest of theJV Company for a total purchase price ofRMB 509 million (or approximately$80 million based on the currency exchange rate as ofJanuary 26, 2022 ). Following the closing of the Investment, the percentage of outstandingJV Company equity interest beneficially owned by us was reduced to 42.2%. During the fiscal year endedJune 30, 2022 , we recorded a gain of$399.1 million on deconsolidation of theJV Company , and a$3.1 million of loss on changes of equity interest in theJV Company . We account for our investment in theJV Company as an equity method investment and report our equity in earnings or loss of theJV Company on a three-month lag due to an inability to timely obtain financial information of theJV Company . For the fiscal year endedJune 30, 2022 using lag reporting, we recorded$2.6 million of its equity in loss of theJV Company . Income tax expense Year Ended June 30, Change 2022 2021 2020 2022 2021 (in thousands) (in thousands) (in percentage) (in thousands) (in percentage) Income tax expense$ 39,258 $ 3,935 $ 348 $ 35,323 897.7 %$ 3,587 1,030.7 % Fiscal 2022 vs 2021 Income tax expense for fiscal years 2022 and 2021 was$39.3 million and$3.9 million , respectively. Income tax expense increased by$35.3 million , or 897.7% in fiscal year 2022 as compared to fiscal year 2021. The income tax expense of$39.3 million for the year endedJune 30, 2022 included a$33.5 million discrete tax expense related to the Company's$396.0 million of income from the sale of equity interest in a joint venture and the related deconsolidation gain as the Company changed from the consolidation method of accounting to the equity method of accounting. In addition, we recorded a tax benefit of$0.4 million from other discrete income tax items. The income tax expense of$3.9 million for the year endedJune 30, 2021 included a$0.3 million discrete tax benefit. Excluding the discrete income tax items ($396.0 million of income from the sale of equity interest in a joint venture and the related deconsolidation gain as well as other discrete items), the effective tax rate for the years endedJune 30, 2022 and 2021 was 6.3% and 7.1%, respectively. The changes in the tax expense and effective tax rate between the periods resulted primarily from the Company reporting pretax book income of$495.0 million ($99.0 million of pretax book income plus the$396.0 million of income from the sale of equity interest in a joint venture and the related deconsolidation gain) for the year endedJune 30, 2022 as compared to a pretax book income of$60.2 million for the year endedJune 30, 2021 as well as changes in the mix of earnings in various geographic jurisdictions between the current year and the same period of last year.
Fiscal 2021 vs 2020
Income tax expense for fiscal years 2021 and 2020 was$3.9 million and$0.3 million , respectively. Income tax expense increased by$3.6 million in fiscal year 2021 as compared to fiscal year 2020, primarily due to an approximate$80 million increase in pretax book income in fiscal 2021 (in which we reported a pretax book income of$60.2 million ) vs. fiscal 2020 (in which we reported pretax book loss of$17.9 million ). Excluding discrete income tax items, the effective tax rate for the current fiscal year was 7.1%, compared to (9.6%) for the prior fiscal year. The changes in the effective tax rate and tax expense between the fiscal years resulted primarily from changes in the mix of earnings in various geographic jurisdictions between the current fiscal year and prior fiscal year. 56
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Liquidity and Capital Resources
Our principal need for liquidity and capital resources is to maintain sufficient working capital to support our operations and to invest adequate capital expenditures to grow our business. To date, we finance our operations and capital expenditures primarily through funds generated from operations and borrowings under our term loans, financing lease and other debt agreements.
OnAugust 18, 2021 ,Jireh Semiconductor Incorporated ("Jireh") entered into a term loan agreement with a financial institution (the "Bank") in an amount up to$45.0 million for the purpose of expanding and upgrading the Company's fabrication facility located inOregon . The obligation under the loan agreement is secured by substantially all assets of Jireh and guaranteed by the Company. The agreement has a 5.5 year term and matures onFebruary 16, 2027 . Jireh is required to make consecutive quarterly payments of principal and interest. The loan accrues interest based on adjusted London Interbank Offered Rate ("LIBOR") plus the applicable margin based on the outstanding balance of the loan. This agreement contains customary restrictive covenants and includes certain financial covenants that the Company is required to maintain. Jireh drew down$45.0 million onFebruary 16, 2022 . As ofJune 30, 2022 , Jireh was in compliance with these covenants and the outstanding balance of this loan was$45.0 million . InOctober 2019 , the Company' subsidiary inChina entered into a line of credit facility withBank of Communications Limited inChina . This line of credit matured onFebruary 14, 2021 and was based on the China Base Rate multiplied by 1.05, or 4.99% onOctober 31, 2019 . The purpose of the credit facility is to provide short-term borrowings. The Company could borrow up to approximatelyRMB 60.0 million or$8.5 million based on the currency exchange rate between the RMB and theU.S. Dollar onOctober 31, 2019 . InSeptember 2021 , this line of credit was renewed with maximum borrowings up toRMB 140.0 million with the same terms and a maturity date ofSeptember 18, 2022 . During the three months endedDecember 31, 2021 , the Company borrowedRMB 11.0 million , or$1.6 million , at an interest rate of 3.85% per annum, with principal due onNovember 18, 2022 . As ofJune 30, 2022 , there was$1.6 million outstanding balance under the loan. OnNovember 16, 2018 , the Company' subsidiary inChina entered into a line of credit facility with Industrial and Commercial Bank of China. The purpose of the credit facility was to provide short-term borrowings. The Company could borrow up to approximatelyRMB 72.0 million or$10.3 million based on currency exchange rate between RMB andU.S. Dollar onNovember 16, 2018 . TheRMB 72.0 million consisted ofRMB 27.0 million for trade borrowings with a maturity date ofDecember 31, 2021 , andRMB 45.0 million for working capital borrowings or trade borrowings with a maturity date ofSeptember 13, 2022 . During the three months endedDecember 31, 2021 , the Company borrowedRMB 5.0 million , or$0.8 million , at an interest rate of 3.7% per annum, with principal due onSeptember 12, 2022 . As ofJune 30, 2022 , the total outstanding balance of this loan was$0.5 million . InSeptember 2021 ,Jireh Semiconductor Incorporated ("Jireh") entered into a financing arrangement agreement with a company ("Lender") for the lease and purchase of a machinery equipment manufactured by a supplier. The total purchase price of this machinery equipment waseuro 12.0 million , or$12.8 million based on the currency exchange rate between the euro andU.S. Dollar onJune 30, 2022 . InApril 2021 , Jireh made a down payment ofeuro 6.0 million , representing 50% of the total purchase price of the equipment, to the supplier. InJune 2022 , the equipment was delivered to Jireh after Lender paid 40% of the total purchase price, foreuro 4.8 million , to the supplier on behalf of Jireh. Based on the terms of the agreement between Jireh and Lender, after the installation and configuration of the equipment for its intended use, Lender will make the remaining 10% payment for the total purchase price and reimburse Jireh for the down payment made to the supplier. By that time, the title of the equipment will be transferred to Lender. This agreement has a 5 years term, after which Jireh has the option to purchase the equipment for$1 . Jireh is required to make a monthly payment of interest at an implied interest rate of 4.75% per annum to Lessor. Principal payment is required to be paid monthly after the completion of the title transfer. The financing arrangement is secured by this machinery equipment which had the carrying amount of$12.8 million as ofJune 30, 2022 . As ofJune 30, 2022 , the outstanding balance of this debt financing was$5.0 million . OnAugust 9, 2019 , one of the Company' wholly-owned subsidiaries (the "Borrower") entered into a factoring agreement with theHongkong and Shanghai Banking Corporation Limited ("HSBC"), whereby the Borrower assigns certain of its accounts receivable with recourse. This factoring agreement allowed the Borrower to borrow up to 70% of the net amount of its eligible accounts receivable of the Borrower with a maximum amount of$30.0 million . The interest rate was based on one month London Interbank Offered Rate ("LIBOR") plus 1.75% per annum. The Company was the guarantor for this agreement. The Company is accounting for this transaction as a secured borrowing under the Transfers and Servicing of Financial Assets guidance. In addition, any cash held in the restricted bank account controlled by HSBC had a legal right of offset against the borrowing. This agreement, with certain financial covenants required, had no expiration date. OnAugust 11, 2021 , the Borrower signed an agreement with HSBC to decrease the borrowing maximum amount to$8.0 million with certain financial covenants required. Other terms remain the same. The Borrower was in compliance with these covenants as ofJune 30, 2022 . As ofJune 30, 2022 , there was no outstanding balance and the Company had unused credit of approximately$8.0 million . 57 -------------------------------------------------------------------------------- OnMay 1, 2018 , Jireh entered into a loan agreement with the Bank that provided a term loan in an amount of$17.8 million . The obligation under the loan agreement is secured by certain real estate assets of Jireh and guaranteed by the Company. The loan has a five-year term and matures onJune 1, 2023 . BeginningJune 1, 2018 , Jireh made consecutive monthly payments of principal and interest to the Bank. The outstanding principal shall accrue interest at a fixed rate of 5.04% per annum on the basis of a 360-day year. The loan agreement contains customary restrictive covenants and includes certain financial covenants that require the Company to maintain, on a consolidated basis, specified financial ratios. InAugust 2021 , Jireh signed an amendment of this loan with the Bank to modify the financial covenants requirement to align with the new term loan agreement entered into onAugust 18, 2021 discussed above. The amendment was accounted for as a debt modification and no gain or loss was recognized. The Company was in compliance with these covenants as ofJune 30, 2022 . As ofJune 30, 2022 , the outstanding balance of the term loan was$14.2 million . OnAugust 15, 2017 , Jireh entered into a credit agreement with the Bank that provided a term loan in an amount up to$30.0 million for the purpose of purchasing certain equipment for the fabrication facility located inOregon . The obligation under the credit agreement is secured by substantially all assets of Jireh and guaranteed by the Company. The credit agreement has a five-year term and matures onAugust 15, 2022 . InJanuary 2018 andJuly 2018 , Jireh drew down on the loan in the amount of$13.2 million and$16.7 million , respectively. Beginning inOctober 2018 , Jireh is required to pay to the Bank on each payment date, the outstanding principal amount of the loan in monthly installments. The loan accrues interest based on an adjusted LIBOR as defined in the credit agreement, plus specified applicable margin in the range of 1.75% to 2.25%, based on the outstanding balance of the loan. The credit agreement contains customary restrictive covenants and includes certain financial covenants that require the Company to maintain, on a consolidated basis, specified financial ratios and fixed charge coverage ratio. InAugust 2021 , Jireh signed an amendment of this loan with the Bank to modify the financial covenants requirement to align with the new term loan agreement entered into onAugust 18, 2021 , discussed above. The amendment was accounted for as a debt modification and no gain or loss was recognized. The Company was in compliance with these covenants as ofJune 30, 2022 . As ofJune 30, 2022 , the outstanding balance of the term loan was$1.9 million . InSeptember 2017 , the board of directors approved a repurchase program (the "Repurchase Program") that allowed us to repurchase our common shares from the open market pursuant to a pre-established Rule 10b5-1 trading plan or through privately negotiated transactions up to an aggregate of$30.0 million . The amount and timing of any repurchases under the Repurchase Program depend on a number of factors, including but not limited to, the trading price, volume, availability of our common shares and the amount of available cash reserve. Shares repurchased under this program are accounted for as treasury shares and the total cost of shares repurchased is recorded as a reduction of shareholders' equity. During fiscal year 2022, 2021 and 2020, we did not repurchase any shares pursuant to the repurchase program. As ofJune 30, 2022 , the Company had repurchased an aggregate of 6,784,648 shares for a total cost of$67.3 million , at an average price of$9.92 per share, excluding fees and related expenses, since inception of the program. No repurchased shares have been retired. Of the 6,784,648 repurchased shares, 167,395 shares with a weighted average repurchase price of$10.06 per share, were reissued at an average price of$5.00 per share for option exercises and vested restricted stock units ("RSU"). As ofJune 30, 2022 ,$13.4 million remain available under the share repurchase program. The Chinese government imposes certain currency exchange controls on cash transfers out ofChina . Regulations inChina permit foreign owned entities to freely convert the Renminbi into foreign currency for transactions that fall under the "current account," which includes trade related receipts and payments, interests, and dividend payments. Accordingly, subject to the review and verification of the underlying transaction documents and supporting documents by the account banks inChina , our Chinese subsidiaries may use Renminbi to purchase foreign exchange currency for settlement of such "current account" transactions without the pre-approval fromChina's State Administration of Foreign Exchange (SAFE) or its provincial branch. Pursuant to applicable regulations, foreign-invested enterprises inChina may pay dividends only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In calculating accumulated profits, foreign-invested enterprises inChina are required to allocate at least 10% of their profits each year, if any, to fund the equity reserve account unless the reserve has reached 50% of the registered capital of the enterprises. While SAFE approval is not statutorily required for eligible dividend payments to the foreign parent, in practice, before making the dividend payment, the account bank may seek SAFE's opinion with respect to a dividend payment if the payment involves a relatively large amount, which may delay the dividend payment depending on the then overall status of cross-border payments and receipts ofChina . Transactions that involve conversion of Renminbi into foreign currency in relation to foreign direct investments and provision of debt financings inChina are classified as "capital account" transactions. Examples of "capital account" transactions include repatriations of investments by foreign owners and repayments of loan principal to foreign lenders. "Capital account" transactions require prior approval from SAFE or its provincial branch or an account bank delegated by SAFE to convert a remittance into a foreign currency, such asU.S. dollars, and transmit the foreign currency outside ofChina . As a result of this and other restrictions under PRC laws and regulations, ourChina subsidiaries are restricted in their ability to transfer a portion of their net assets to us, and such restriction may adversely affect our ability to generate sufficient liquidity to fund our operations or other expenditures. As ofJune 30, 2022 and 2021, such restricted portion amounted to approximately 58 --------------------------------------------------------------------------------$92.4 million and$209.9 million , or 10.8% and 50.4%, of our total consolidated net assets attributable to the Company, respectively. The decrease of restricted net assets was primarily from deconsolidation of theJV Company inChina . We believe that our current cash and cash equivalents and cash flows from operations will be sufficient to meet our anticipated cash needs, including working capital and capital expenditures, for at least the next twelve months. In addition, we recently commenced an investment plan to expand the manufacturing capacity and upgrade the operational capabilities of ourOregon Fab. We intend to fund the costs by a combination of cash reserve, bank loans and equipment leases. In the long-term, we may require additional capital due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our cash is insufficient to meet our needs, we may seek to raise capital through equity or debt financing. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and may include operating and financial covenants that would restrict our operations. We cannot be certain that any financing will be available in the amounts we need or on terms acceptable to us, if at all.
Cash, cash equivalents and restricted cash
As ofJune 30, 2022 and 2021, we had$314.7 million and$204.8 million of cash, cash equivalents and restricted cash, respectively. Our cash, cash equivalents and restricted cash primarily consisted of cash on hand, restricted cash and short-term bank deposits with original maturities of three months or less. Of the$314.7 million and$204.8 million cash and cash equivalents,$212.6 million and$134.6 million , respectively, were deposited with financial institutions outsidethe United States .
The following table shows our cash flows from operating, investing and financing activities for the periods indicated:
Year Ended June 30,
2022 2021 2020
(in thousands)
Net cash provided by operating activities $ 218,865 $ 128,744 $ 62,315
Net cash used in investing activities (130,822) (72,539) (60,849)
Net cash provided by (used in) financing activities 21,854 (18,991) 37,651
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(59) 4,895 (708)
Net increase in cash, cash equivalents and restricted cash
$ 109,838
Cash flows from operating activities
Net cash provided by operating activities of$218.9 million for fiscal year 2022 resulted primarily from net income of$453.2 million , non-cash charges of$287.6 million and net change in assets and liabilities providing net cash of$53.3 million . The non-cash charges of$287.6 million included depreciation and amortization expenses of$42.9 million , share-based compensation expense of$31.3 million , gain on deconsoidation of theJV Company of$399.1 million , loss on changes of equity interest in theJV Company , net of$3.1 million , deferred income tax on deconsolidation and changes of equity interest in theJV Company of$30.0 million , loss on equity investment of$2.6 million , and net deferred income taxes of$1.6 million . The net change in assets and liabilities providing net cash of$53.3 million was primarily due to$76.4 million increase in accrued and other liabilities, income taxes payable on deconsolidation and changes of equity interest in the JV company of$3.5 million , other payable on equity investee of$48.2 million , and$23.8 million increase in accounts payable primarily due to timing of payment, partially offset by$30.1 million increase in accounts receivable due to timing of billings and collection of payments,$57.4 million increase in inventories,$9.4 million increase in other current and long-term assets primarily due to decrease in advance payments to suppliers, and$1.7 million decrease in income taxes payable. Net cash provided by operating activities of$128.7 million for fiscal year 2021 resulted primarily from net income of$56.3 million , non-cash charges of$70.0 million and net change in assets and liabilities providing net cash of$2.5 million . The non-cash charges of$70.0 million included depreciation and amortization expenses of$52.7 million , share-based compensation expense of$15.3 million , loss on disposal of property and equipment of$0.4 million , and net deferred income taxes of$1.6 million . The net change in assets and liabilities providing net cash of$2.5 million was primarily due to$48.5 million increase in accrued and other liabilities and$1.7 million increase in income taxes payable, partially offset by$22.5 million increase in accounts receivable due to timing of billings and collection of payments,$18.8 million increase in inventories,$5.8 million increase in other current and long-term assets primarily due to decrease in advance payments to suppliers, and$0.5 million decrease in accounts payable primarily due to timing of payments. 59 -------------------------------------------------------------------------------- Net cash provided by operating activities of$62.3 million for fiscal year 2020 resulted primarily from net loss of$18.3 million , non-cash charges of$56.1 million and net change in assets and liabilities providing net cash of$24.4 million . The non-cash charges of$56.1 million included depreciation and amortization expenses of$45.1 million , share-based compensation expense of$10.5 million , impairment of our investment in a privately-held start-up company of$0.6 million , gain on disposal of property and equipment of$0.1 million , and net deferred income taxes of$0.1 million . The net change in assets and liabilities providing net cash of$24.4 million was primarily due to$27.3 million decrease in other current and long-term assets primarily due to increase in advance payments to suppliers,$11.0 million decrease in accounts receivable due to timing of billings and collection of payments, and$11.0 million increase in accrued and other liabilities, partially offset by$22.8 million increase in inventories,$1.8 million decrease in accounts payable primarily due to timing of payments, and$0.3 million decrease in income taxes payable.
Cash flows from investing activities
Net cash used in investing activities of$130.8 million for the fiscal year 2022 was primarily attributable to$138.0 million purchases of property and equipment, and$20.7 million deconsolidation of cash and cash equivalents of theJV Company , partially offset by$1.4 million government grant related to equipment in theJV Company ,$26.3 million proceeds from sale of equity interest in theJV Company and$0.1 million proceeds from sale of property and equipment. Net cash used in investing activities of$72.5 million for the fiscal year 2021 was primarily attributable to$72.7 million purchases of property and equipment, which was partially offset by$0.1 million government grant related to equipment in theJV Company . Net cash used in investing activities of$60.8 million for the fiscal year 2020 was primarily attributable to$62.4 million purchases of property and equipment, which was partially offset by$1.3 million government grant related to equipment in theJV Company and$0.3 million of proceeds from sale of property and equipment.
Cash flows from financing activities
Net cash used in financing activities of$21.9 million for the fiscal year 2022 was primarily attributable to$64.3 million of proceeds from borrowings and$6.1 million of proceeds from exercises of share options and issuance of shares under the ESPP, partially offset by$8.6 million in common shares acquired to settle withholding tax related to vesting of restricted stock units,$4.2 million in payments of capital lease obligations, and$35.7 million in repayments of borrowings. Net cash used in financing activities of$19.0 million for the fiscal year 2021 was primarily attributable to$6.9 million in common shares acquired to settle withholding tax related to vesting of restricted stock units,$16.5 million in payments of capital lease obligations, and$66.6 million in repayments of borrowings, partially offset by$65.9 million of proceeds from borrowings and$5.1 million of proceeds from exercises of share options and issuance of shares under the ESPP. Net cash provided by financing activities of$37.7 million for the fiscal year 2020 was primarily attributable to$96.2 million of proceeds from borrowings, and$3.4 million of proceeds from exercises of share options and issuance of shares under the ESPP, partially offset by$1.5 million in common shares acquired to settle withholding tax related to vesting of restricted stock units,$11.0 million in payments of capital lease obligations, and$49.4 million in repayments of borrowings. 60
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Contractual Obligations
Our contractual obligations as of
Payments Due by Period
Less than More than
Total 1 year 1-3 years 3-5years 5 years
(in thousands)
Bank borrowings $ 68,218 $ 25,638 $ 19,951 $ 22,395 $ 234
Finance leases 5,318 993 2,166 2,159 -
Operating leases 29,141 5,206 7,275 6,323 10,337
Capital commitments with respect to property and
equipment 63,438 63,438 - - -
Purchase commitments with respect to inventories
and others 89,863 89,863 - - -
Total contractual obligations $ 255,978 $ 185,138 $ 29,392 $ 30,877 $ 10,571
As of June 30, 2022 , we had recorded liabilities of $2.0 million for uncertain
tax positions and $0.2 million for potential interest and penalties, which are
not included in the above table because we are unable to reliably estimate the
amount of payments in individual years that would be made in connection with
these uncertain tax positions.
Commitments
See Note 15 of the Notes to the Consolidated Financial Statements contained in this Annual Report on Form 10-K for a description of commitments.
Off-Balance Sheet Arrangements
As of
61
--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires us 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, our consolidated financial statements will be affected. On an ongoing basis, we evaluate the estimates, judgments and assumptions including those related to stock rotation returns, price adjustments, allowance for doubtful accounts, valuation of inventories, warranty accrual, income taxes, leases, equity method investment, share-based compensation, recoverability of and useful lives for property, plant and equipment and intangible assets, as well as economic implications of the COVID-19 pandemic.
Revenue recognition
We determine revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, a performance obligation is satisfied. We recognize revenue at a point in time when product is shipped to the customer, net of estimated stock rotation returns and price adjustments to certain distributors. We present revenue net of sales taxes and any similar assessments. Our standard payment terms range from 30 to 60 days. We sell our products primarily to distributors, who in turn sell our products globally to various end customers. Our revenue is net of the effect of the variable consideration relating to estimated stock rotation returns and price adjustments that we expect to provide to certain distributors. Stock rotation returns are governed by contract and are limited to a specified percentage of the monetary value of the products purchased by distributors during a specified period. We estimate provision for stock rotation returns based on historical returns and individual distributor agreements. We also provide special pricing to certain distributors primarily based on volume, to encourage resale of our products. We estimate the expected price adjustments at the time the revenue is recognized based on distributor inventory levels, pre-approved future distributor selling prices, distributor margins and demand for our products. If actual stock rotation returns or price adjustments differ from our estimates, adjustments may be recorded in the period when such actual information is known. Allowance for price adjustments is recorded against accounts receivable and provision for stock rotation is recorded in accrued liabilities on the consolidated balance sheets. Our performance obligations relate to contracts with a duration of less than one year. We elected to apply the practical expedient provided in ASC 606, "Revenue from Contracts with Customers". Therefore, we are not required to disclose the aggregate amount of transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. We recognize the incremental direct costs of obtaining a contract, which consist of sales commissions, when control over the products they relate to transfers to the customer. Applying the practical expedient, we recognize commissions as expense when incurred, as the amortization period of the commission asset we would have otherwise recognized is less than one year.
Packaging and testing services revenue is recognized at a point in time upon shipment of serviced products to the customer.
Equity method investment
We use the equity method of accounting when we have the ability to exercise significant influence, but not control, as determined in accordance with general accepted accounting principles, over the operating and financial policies of the investee. EffectiveDecember 2, 2021 , we reduced our equity interest in theJV Company , which resulted in deconsolidation of our investment in theJV Company . As a result, beginningDecember 2, 2021 , we record our investment under equity method of accounting. Due to difficulties in obtaining accurate financial information from theJV Company in a timely manner, we record our share of earnings or losses of such affiliate on a one quarter lag. Therefore, our share of losses of theJV Company for the period fromDecember 2, 2021 toMarch 31, 2022 was recorded in our Consolidated Statement of Operations for the fiscal year endedJune 30, 2022 . We recognize and disclose intervening events at theJV Company in the lag period that could materially affect our consolidated financial statements. We record our interest in the net earnings of our equity method investees, along with adjustments for unrealized profits or losses on intra-entity transactions and amortization of basis differences, within earnings or loss from equity interests in the Consolidated Statements of Income. Profits or losses related to intra-entity sales with its equity method investees are eliminated until realized by the investor and investee. Basis differences represent differences between the cost of the investment and the underlying equity in net assets of the investment and are generally amortized over the lives of the related assets that gave rise to them. Equity method goodwill is not amortized or tested for impairment; instead the equity method investment is tested for impairment. We review for impairment whenever factors indicate that the carrying amount of the 62 -------------------------------------------------------------------------------- investment might not be recoverable. In such a case, the decrease in value is recognized in the period the impairment occurs in the Condensed Consolidated Statements of Income. Valuation of inventories We carry inventories at the lower of cost (determined on a first-in, first-out basis) or net realizable value. Cost primarily consists of semiconductor wafers and raw materials, labor, depreciation expenses and other manufacturing expenses and overhead, and packaging and testing fees paid to third parties if subcontractors are used. Valuation of inventories is based on our periodic review of inventory quantities on hand as compared with our sales forecasts, historical usage, aging of inventories, production yield levels and current product selling prices. If actual market conditions are less favorable than those forecasted by us, additional future inventory write-downs may be required that could adversely affect our operating results. Adjustments to inventory, once established are not reversed until the related inventory has been sold or scrapped. If actual market conditions are more favorable than expected and the products that have previously been written down are sold, our gross margin would be favorably impacted. Accounting for income taxes We are subject to income taxes in a number of jurisdictions. We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the calculation of certain tax assets and liabilities which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as interest and penalties related to uncertain tax positions. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. We establish accruals for certain tax contingencies based on estimates of whether additional taxes may be due. While the final tax outcome of these matters may differ from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. As a result, significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period. Significant management judgment is also required in determining whether deferred tax assets will be realized in full or in part. When it is more likely than not that all or some portion of specific deferred tax assets such as net operating losses or foreign tax credit carryforwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that cannot be realized. We consider all available positive and negative evidence on a jurisdiction-by-jurisdiction basis when assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating results, the existence of cumulative losses in recent years and our forecast of future taxable income. We will maintain a partial valuation allowance equal to the state research and development credit carryforwards until sufficient positive evidence exists to support reversal of the valuation allowance. We have not provided for withholding taxes on the undistributed earnings of our foreign subsidiaries because we intend to reinvest such earnings indefinitely. However, we have recorded a deferred tax liability of$29.6 million atJune 30, 2022 related to our investment in theJV Company . As ofJune 30, 2022 , the cumulative amount of undistributed earnings of our foreign subsidiaries considered permanently reinvested was$314.7 million . The determination of the unrecognized deferred tax liability on these earnings is not practicable. Should we decide to remit this income to theBermuda parent company in a future period, our provision for income taxes may increase materially in that period. TheFinancial Accounting Standards Board ("FASB") has issued guidance which clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely to be realized upon ultimate settlement. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax law and regulations in a multitude of jurisdictions. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what is currently estimated, a material impact on income tax expense could result. Our provision for income taxes is subject to volatility and could be adversely impacted by changes in earnings or tax laws and regulations in various jurisdictions. We are subject to the continuous examination of our income tax returns by the 63 -------------------------------------------------------------------------------- Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of changes to reserves, as well as the related net interest and penalties.
Share-based compensation expense
We maintain an equity-settled, share-based compensation plan to grant restricted share units and stock options. We recognize share-based compensation expense based on the estimated fair value of the awards, using the accelerated attribution method. The fair value of restricted share units is based on the fair value of the Company's common share on the date of grant. For restricted stock awards subject to market conditions, the fair value of each restricted stock award is estimated at the date of grant using theMonte-Carlo pricing model. Share-based compensation expense is significant to the consolidated financial statements and is calculated using our best estimates, which involve inherent uncertainties and the application of management's judgment. The Black-Scholes option valuation model requires the input of subjective assumptions, including the expected term and stock price volatility. In addition, judgment is also required in estimating the number of stock-based awards that are expected to be forfeited. Forfeitures are estimated based on historical experience at the time of grant. Changes in estimated forfeitures are recognized in the period of change and impact the amount of stock compensation expenses to be recognized in future periods, which could be material if actual results differ significantly from estimates.
Recently Issued Accounting Pronouncements
See Note 1 of the Notes to the consolidated financial statements under Item 15
in this Annual Report on Form 10-K for a full description of recent accounting
pronouncements, including the expected dates of adoption and estimated effects
on results of operations and financial condition.
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