Business context and reporting period
Alpha and Omega Semiconductor designs and supplies power semiconductors for computing, consumer electronics, communications and industrial applications. This Form 10-Q covers the quarter ended December 31, 2017 (fiscal Q2 2018) and the six months then ended. One contents-page description calls the period the fiscal first quarter, but the filing’s MD&A identifies it as the second quarter.
Financial performance
Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data. Comparisons are with the corresponding 2016 periods.
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $103.9; up 9.7% | $208.8; up 8.7% |
| Gross profit / margin | $28.1 / 27.0%, versus $22.1 / 23.3% | $55.6 / 26.6%, versus $44.0 / 22.9% |
| Operating income | $3.2, versus $2.8 | $7.8, versus $6.6 |
| Net income attributable to AOS | $6.8, or $0.27 diluted per share, versus $2.8, or $0.11 | $11.6, or $0.46 diluted per share, versus $6.2, or $0.25 |
| Operating cash flow | Not separately provided in the filing text | $21.9, versus $18.1 |
| Cash and cash equivalents | $146.2 at December 31, 2017, versus $115.7 at June 30, 2017 |
Quarterly sales growth was led by power discretes (+21.9%); power IC revenue declined 27.9%. Management attributed higher product revenue to increased shipments and average selling prices, primarily from product mix. Gross-margin improvement reflected product mix and release of approximately $1.0 million of a specific reserve. Operating expenses rose substantially: R&D increased 25.0% and SG&A 31.6% in the quarter. The quarter’s $2.1 million income tax benefit included a $2.7 million discrete benefit from remeasurement of U.S. deferred tax balances after the Tax Cuts and Jobs Act.
Financial position, liquidity and material changes
At December 31, current assets were $265.3 million and current liabilities $125.3 million; total assets were $520.6 million and total liabilities $127.5 million. Cash increased by $30.5 million during the six-month period. Operating cash flow of $21.9 million was more than offset by $75.1 million of investing outflows, chiefly capital spending, including $41.6 million invested in the Chongqing joint venture, and $10.4 million for intangible assets. Financing provided $82.5 million, including $87.0 million of noncontrolling-interest contributions; AOS repurchased $6.0 million of shares.
The balance sheet reported capital lease obligations of approximately $1.3 million and no drawn term-loan balance at December 31. A previously arranged facility of up to $30.0 million was drawn by $13.2 million on January 12, 2018; the loan is secured by substantially all Jireh Semiconductor assets and guaranteed by AOS. Management said the company was in compliance with its covenants and expected existing cash and operating cash flows to cover anticipated needs for at least twelve months.
Capital expenditures were $64.8 million for the six months, versus $23.7 million a year earlier. Outstanding purchase commitments were $34.7 million and capital commitments $128.7 million at December 31. Cash included $130.5 million held outside the United States. A new $30.0 million share-repurchase program had approximately $24.0 million remaining after 346,621 shares were repurchased at an average $17.34 per share.
Outlook, commentary and risks
- Management expected the Chongqing joint venture to begin initial production in mid-calendar 2018, with assembly and testing construction expected to be completed during the quarter ending March 31, 2018. It anticipated near-term higher pre-production expenses and said additional financing may be required for equipment; if financing is unavailable, AOS may contribute additional cash.
- The joint venture’s EPC contract was approximately $78.0 million, with about $44.9 million of payments expected in calendar 2018. Its remaining construction and equipment needs, ramp timing and ability to achieve anticipated savings are execution risks.
- AOS expects short-term startup costs for its digital power business, following the $17.0 million STMicro technology license, and said revenue may not cover these costs in the near term. It estimated a fiscal 2018 blended effective tax rate of approximately 27% before discrete items and expected tax reform to benefit future net income, EPS and cash flow.
- Key business risks include dependence on two customers, which represented 64.5% of quarterly revenue combined; exposure to PC-market demand (42.6% of quarterly revenue); distributor ordering and seasonality; product pricing pressure; foundry capacity and factory utilization; and the joint venture’s construction, funding, operating and China-related risks. The filing also identifies digital-power commercialization, foreign exchange exposure and potential IP litigation as risks. No material legal proceedings or material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the Chongqing facility meets its construction, financing and production milestones, and whether forecast benefits outweigh ramp costs and commitments.
- Whether power discrete growth can continue and offset declining power IC sales, customer concentration and PC-market exposure.
- How much of reported earnings growth reflects recurring operations versus the discrete tax benefit and reserve release.
- Whether rising R&D, SG&A and share-based compensation can be supported by revenue growth and margins.
- Post-quarter borrowing, covenant terms, capital requirements, and the effect of the remaining repurchase authorization on liquidity.