Alpha and Omega Semiconductor Limited — Form 10-Q Summary
Period: Three and nine months ended March 31, 2019; balance-sheet comparisons are to June 30, 2018. The filing describes March 31 as its fiscal second quarter in one place, although its statements present the three months ended March 31. Amounts below are in U.S. dollars.
Business context
AOS designs and supplies power semiconductors for computing, consumer electronics, communications and industrial applications. Its Chongqing joint venture (JV), which AOS controlled and consolidated with a 50.9% ownership interest at period-end, was ramping assembly and testing production and producing customer samples from its 12-inch wafer fabrication facility.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $109.1 million, up 6.0% year over year | $339.1 million, up 8.8% |
| Gross profit / margin | $25.6 million / 23.5%, versus $27.1 million / 26.4% | $87.7 million / 25.9%, versus $82.7 million / 26.6% |
| Operating income (loss) | $(3.7) million, versus $0.7 million | $(6.1) million, versus $8.5 million |
| Net income (loss) attributable to AOS | $(1.6) million, or $(0.06) per diluted share, versus $1.7 million, or $0.07 | $(0.7) million, or $(0.03) per diluted share, versus $13.2 million, or $0.53 |
| Operating cash flow | Not separately presented for the quarter | $23.2 million, versus $14.3 million |
| Capital spending | Not separately presented for the quarter | $89.9 million for property and equipment, versus $122.7 million |
For the nine-month period, net cash used in investing activities was $90.3 million and financing activities provided $77.5 million. Cash, cash equivalents and restricted cash increased by $9.8 million to $141.5 million. At March 31, cash and cash equivalents were $139.1 million; restricted cash totaled approximately $2.3 million.
Financial position and material changes
- Total assets were $740.7 million, up from $667.0 million at June 30, 2018. Property, plant and equipment rose to $391.6 million from $331.7 million, reflecting ongoing investment, including in the JV.
- Inventory increased to $107.9 million from $90.2 million. Accounts receivable, net, decreased to $28.4 million from $33.8 million.
- Reported short- and long-term debt totaled $89.1 million, compared with $30.6 million at June 30, 2018. Capital lease liabilities totaled $58.0 million. The company reported covenant compliance for its Jireh subsidiary loans.
- Operating expenses rose to $29.4 million for the quarter and $93.8 million for nine months, driven in part by higher R&D, digital-power development and JV pre-production costs. Interest expense also increased materially, primarily due to additional borrowings.
- For the quarter, power discrete and power IC revenue increased, while packaging and testing service revenue declined 53.6%. Management attributed product revenue growth largely to improved product mix and higher average selling prices, partly offset by lower unit shipments.
Outlook, risks and unusual items
- Management expected to ramp JV assembly and testing and begin small-volume production from the 12-inch fab within the next two quarters. It cautioned that production delays, customer acquisition challenges or insufficient JV financing could impair results; AOS might need to contribute additional cash.
- Management said current cash and expected operating cash flows should cover anticipated needs for at least the next 12 months. It also expected capital expenditures to continue increasing to support the JV and digital-power business. No numerical revenue or earnings guidance was provided.
- Management identified JV ramp-up costs, semiconductor capacity utilization, pricing pressure, PC-market exposure, distributor ordering and seasonality, product-launch execution, and customer concentration as important business risks. Two customers represented 63.0% of quarterly revenue; PC-related sales represented 47.5%.
- The JV’s Chongqing Funds invested $24.0 million during the nine months, reducing AOS ownership from 54.4% to 50.9%. The JV’s accumulated losses attributable to noncontrolling interest were $11.7 million for the nine-month period.
- AOS adopted ASC 606 on July 1, 2018, recording a $1.0 million increase to opening retained earnings. Adoption principally changed the timing of revenue recognition for two U.S. distributors; reported nine-month revenue was $0.3 million higher than it would have been under the prior guidance.
- Purchase commitments were $47.3 million and capital commitments were $23.0 million at March 31, 2019. The filing reported no pending material legal proceedings, no material changes to previously disclosed risk factors, and no material off-balance-sheet arrangements.
- Unrecognized tax benefits were approximately $7.4 million; $4.5 million could reduce the effective tax rate if recognized. Tax years 2001–2018 remained open to U.S. examination and 2011–2018 to foreign examination.
Important facts for investors to verify
- Whether the JV meets its production and customer-ramp milestones, and whether it can obtain remaining financing without further AOS funding.
- How JV and digital-power costs, debt service and capital spending affect margins, cash flow and liquidity as production scales.
- Whether higher average selling prices and product mix can offset lower unit shipments, gross-margin pressure and ongoing pricing erosion.
- The sustainability of revenue given customer concentration, PC-market exposure and distributor inventory and ordering patterns.
- The filing’s fiscal-quarter labeling, which is inconsistent: it identifies March 31 as the fiscal second quarter in one heading while presenting March 31 results as the quarter ended.