Business context and reporting period
Aehr Test Systems designs, manufactures and markets semiconductor test and burn-in equipment, including ABTS and FOX systems and wafer-level products. This unaudited Form 10-Q covers the third quarter and nine months ended February 28, 2014; comparisons are with the same periods in 2013. Fiscal year-end is May 31.
Financial performance and position
| Metric | Three months ended Feb. 28, 2014 | Three months ended Feb. 28, 2013 | Nine months ended Feb. 28, 2014 | Nine months ended Feb. 28, 2013 |
|---|---|---|---|---|
| Net sales | $5.612 million | $3.340 million | $14.314 million | $13.226 million |
| Gross profit / margin | $2.870 million / 51.1% | $0.765 million / 22.9% | $7.308 million / 51.1% | $5.484 million / 41.5% |
| Operating income (loss) | $0.262 million | $(1.431) million | $0.284 million | $(2.461) million |
| Net income (loss) | $0.212 million | $(1.458) million | $0.183 million | $(2.565) million |
| Diluted earnings (loss) per share | $0.02 | $(0.16) | $0.02 | $(0.28) |
Quarterly sales rose 68.0%; nine-month sales rose 8.2%. For the quarter, TDBI sales were $3.3 million, up approximately $1.7 million, and wafer-level sales were $2.3 million, up approximately $0.6 million. For nine months, wafer-level sales increased approximately $1.8 million to $6.0 million, while TDBI sales declined approximately $0.6 million to $8.2 million.
Gross margin improvement reflected lower direct material costs, including use of previously written-down materials, and manufacturing efficiencies as sales increased. Management attributed 11.5 percentage points of quarterly margin improvement to lower direct material costs and 7.7 points to manufacturing efficiencies. Nine-month operating expenses were $7.024 million, down from $7.945 million; quarterly operating expenses increased to $2.608 million from $2.196 million.
Cash, debt and liquidity
At February 28, 2014, cash and cash equivalents were $1.846 million, working capital was $6.1 million, total assets were $11.943 million, total liabilities were $5.580 million and shareholders’ equity was $6.363 million. The company had $0.406 million drawn on its asset-secured line of credit, with $1.039 million available to borrow; it was in compliance with covenants. The facility’s $2.5 million limit and term through August 22, 2014 are material to liquidity planning.
For the nine months, operating cash use was $0.169 million, investing cash use was $0.104 million and financing cash use was $0.193 million. Cash declined $0.478 million from $2.324 million. Operating cash use reflected increases in receivables and inventory and a reduction in customer deposits/deferred revenue, partly offset by higher payables and non-cash stock compensation. Net repayments on the credit line were $0.695 million; equity issuance and option exercises provided $0.502 million.
Material changes versus the prior comparable period
- Quarterly results shifted from a substantial loss to profitability, alongside higher sales and gross margin. Nine-month results also improved from a net loss to modest net income.
- Nine-month SG&A and R&D expenses fell 13.6% and 7.4%, respectively. R&D included $0.5 million of non-recurring engineering milestone expenditures transferred to cost of goods sold and prepaid expenses.
- Cash decreased, but less than in the prior-year nine-month period; line-of-credit borrowings declined from $1.101 million at May 31, 2013 to $0.406 million.
- Customer concentration remained high: the five largest customers accounted for approximately 95% of quarterly sales and 94% of nine-month sales. Four customers represented 36%, 28%, 19% and 11% of quarterly sales; two customers represented 46% and 33% of nine-month sales.
Outlook, risks and unusual items
Management expects existing cash, operating cash flows and available credit to meet working capital and capital equipment needs through fiscal 2015. Beyond that, financing may be needed depending on growth and profitability; availability and terms are not assured. No specific revenue or earnings guidance is provided.
Key risks include dependence on a small number of customers and large, cancellable or deferrable system orders; semiconductor-industry cyclicality; FOX product market acceptance and qualification; product reliability, warranty and supplier constraints; foreign-exchange exposure without hedging; and possible future financing needs. Management reported no material change in critical accounting policies, no off-balance-sheet financing arrangements and no pending legal proceedings. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Unusual or notable items include gross-margin benefit from selling systems using previously written-down materials, foreign-exchange losses included in other expense, and a $5,000 nine-month income tax benefit from reversal of previously established tax liabilities. The company maintains a full valuation allowance against deferred tax assets.
Important facts for investors to verify
- Whether the strong quarterly sales and margin improvement persist, given the benefit from previously written-down inventory.
- Customer concentration, order cancellation/rescheduling exposure and the timing of major shipments and collections.
- Credit-facility renewal or replacement before its August 22, 2014 expiration, including borrowing availability and covenants.
- Cash conversion, inventory levels and working-capital movements as shipments grow.
- FOX and other wafer-level product acceptance, and any supplier, reliability or warranty issues.