Aehr Test Systems — FY2018 Form 10-K
Business context and reporting period. Aehr Test Systems designs and sells semiconductor test and burn-in equipment, including ABTS packaged-part systems and FOX wafer-level and singulated-die systems. This annual filing covers the fiscal year ended May 31, 2018; the fourth quarter ended May 31, 2018.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $29.6 million | $18.9 million |
| Gross profit / margin | $12.4 million / 41.9% | $6.8 million / 35.9% |
| Operating income (loss) | $0.9 million | ($4.9 million) |
| Net income (loss) | $0.5 million; $0.02 per diluted share | ($5.7 million); ($0.35) per share |
| Cash used in operating activities | $1.4 million | $4.5 million |
| Cash and cash equivalents at year-end | $16.8 million | $17.8 million |
| Working capital at year-end | $18.3 million | $21.5 million |
- Sales rose 56.4%, driven by TDBI products ($16.5 million, up about $7.3 million) and wafer-level products ($13.1 million, up about $3.5 million). Gross margin improved primarily from manufacturing efficiencies as sales increased.
- FY2018 quarterly sales were $7.0 million, $7.9 million, $7.4 million and $7.3 million. Fourth-quarter net income was $191,000, compared with $10,000 in Q1, $60,000 in Q2 and $267,000 in Q3.
- Cash from operations remained negative despite the annual profit. Inventory increased $2.1 million, while customer deposits and deferred revenue fell $1.5 million and accounts payable fell $1.1 million.
- At May 31, 2018, total assets were $31.0 million and shareholders’ equity was $19.3 million. Convertible notes of $6.11 million were classified as current liabilities; the notes bear 9% interest and mature April 10, 2019 unless converted or otherwise repurchased. Conversion is at $2.30 per share, subject to adjustment, and the debt is secured by substantially all company assets.
- Backlog was $8.4 million, down from $12.7 million a year earlier. Management cautions that orders can be rescheduled or canceled and backlog is not necessarily indicative of future sales.
Changes, outlook and material risks
- The company returned to annual profitability after losses in FY2017 and FY2016. Lower interest expense reflected full amortization of convertible-note issuance costs by the end of FY2017.
- FY2018 included a $73,000 income tax benefit, primarily reflecting a $90,000 refundable federal AMT credit under the Tax Cuts and Jobs Act. Deferred tax assets remain fully offset by a valuation allowance.
- Management stated that cash, expected operating income, receivable collections, backlog shipments, inventory sales and customer deposits should be adequate for liquidity needs over the next 12 months. No specific revenue or earnings guidance was provided.
- Customer concentration is significant: the five largest customers generated 86% of FY2018 sales; Texas Instruments, STMicroelectronics and Astronics Test Systems represented approximately 34%, 26% and 13%, respectively. Approximately 71% of sales were for delivery outside the United States.
- Key risks include dependence on a small number of customers and high-value system orders; FOX product qualification and market adoption; intense competition and price pressure; reliance on single- or limited-source suppliers; semiconductor-cycle volatility; and foreign exchange, trade-policy and cybersecurity risks. The company reported prior cyber threats/incidents but no material adverse effect to date.
- Contractual commitments included $3.9 million of operating lease payments and $2.5 million of purchase obligations; $2.5 million of purchases were due within 12 months. There were no legal proceedings reported under Item 3; management said ordinary-course proceedings were not expected to have a material effect. Maximum exposure under indemnification agreements could not be determined.
- The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an ICFR attestation.
Most important facts for investors to verify
- Whether sales growth and gross-margin gains continue, particularly across the concentrated customer base and FOX/wafer-level products.
- Whether operating cash flow improves as inventory is converted to shipments and customer deposits and payables change.
- How the $6.11 million, 9% convertible notes are repaid, refinanced or converted by the April 2019 maturity, including potential share dilution.
- Whether the $8.4 million backlog converts to revenue on schedule, given customer cancellation and rescheduling rights.
- Whether customer concentration, supplier constraints, foreign-market exposure and product qualification risks change materially.