Alpha and Omega Semiconductor Limited — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2018 (the three months ended September 30); comparable period is the three months ended September 30, 2017. Amounts below are in U.S. dollars unless noted.
Business context and financial results
AOS designs and supplies power semiconductors for computing, consumer electronics, communications and industrial applications. Its Chongqing joint venture is building packaging, testing and wafer-fabrication capacity; AOS owned 54.4% of the JV at quarter-end and consolidates its results.
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $115.1 million | $104.9 million | Up 9.7% |
| Gross profit / margin | $32.6 million / 28.3% | $27.5 million / 26.3% | Margin up 2.0 percentage points |
| Operating expenses | $31.7 million | $22.9 million | Up 38.3% |
| Operating income / margin | $0.9 million / 0.7% | $4.6 million / 4.5% | Lower |
| Net income (loss), including noncontrolling interest | $(0.9) million | $3.3 million | Declined |
| Net income attributable to AOS / diluted EPS | $2.4 million / $0.10 | $4.8 million / $0.19 | Lower |
| Operating cash flow | $18.0 million | $12.3 million | Higher |
| Capital expenditures | $49.5 million | $28.3 million | Higher |
Margins and earnings: Gross margin improved mainly due to higher average selling prices from a more favorable product mix. Revenue rose despite unit shipments declining 5.5%, as average selling prices increased 16.2%. R&D increased 36.7% to $11.4 million, and SG&A increased 39.3% to $20.4 million, reflecting digital-power development, hiring and JV pre-production costs. Interest expense increased to $1.5 million from $0.02 million, largely due to new borrowings. The consolidated loss includes a $3.3 million loss attributable to noncontrolling interests, primarily the JV; AOS shareholders nevertheless reported net income.
Balance sheet, liquidity and debt
At September 30, 2018, cash and cash equivalents were $113.2 million and restricted cash was $0.2 million, versus $131.5 million and $0.2 million, respectively, at June 30. Total current assets were $281.3 million and current liabilities $168.7 million. Total debt was $47.0 million net of issuance costs; capital-lease liabilities were $58.8 million. Cash, cash equivalents and restricted cash together declined $18.4 million during the quarter.
Operating cash flow of $18.0 million was more than offset by $49.5 million of investing outflows, primarily equipment and JV spending. Financing provided $14.7 million, including $16.7 million of borrowing proceeds. Management said cash and operating cash flows should be sufficient for anticipated needs for at least the next 12 months. AOS also reported $49.2 million of purchase commitments and $32.5 million of capital commitments at quarter-end.
Material changes and notable items
- Revenue increased 9.7% year over year; power discrete sales rose 10.3% and power IC sales 7.3%.
- Operating income fell from $4.6 million to $0.9 million as operating expenses grew substantially faster than revenue, despite improved gross margin.
- Cash investment increased, including $34.3 million of property and equipment purchases at the JV. Assembly and testing began small-scale mass production in September; the 12-inch wafer fab was substantially complete, with trial production expected toward the end of calendar 2018.
- AOS adopted ASC 606 on July 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by approximately $1.0 million; the reported-quarter revenue impact was small.
- The company repurchased 111,509 shares for $1.5 million during the quarter; approximately $13.4 million remained under its $30 million repurchase authorization.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided. Management expects near-term JV ramp-up and digital-power development costs to weigh on results; it expects the JV to reduce manufacturing costs over the longer term. AOS noted risks from facility ramp delays, capacity utilization, pricing pressure, third-party foundry constraints, seasonality and economic conditions. PC-related revenue was 43.8% of quarterly revenue. Two customers accounted for 27.7% and 38.0% of revenue, respectively, creating significant customer concentration.
In November 2018, after quarter-end, AOS obtained a bank waiver for a minimum adjusted quick-ratio covenant violation relating to Jireh term loans and stated that it was in compliance with all term-loan covenants following the waiver. The filing reports $7.3 million of gross unrecognized tax benefits and no pending material legal proceedings. The JV’s RMB-denominated financing and remaining construction payments expose it to foreign-exchange and funding risks; management said the JV may need additional financing and AOS could contribute further cash if financing is unavailable.
Important facts for investors to verify
- Whether JV wafer-fab trial production and the expected production ramp occurred on schedule, and what incremental costs or financing were required.
- Current status of Jireh’s covenant compliance and the terms and continuing conditions of the November 2018 waiver.
- Whether revenue growth, pricing and product mix can offset lower unit shipments and rising operating expenses.
- Exposure to the two major customers, PC-market demand, and the geographic and foreign-exchange concentration of operations and cash.
- Whether capital commitments, purchase commitments and debt service can be funded while preserving the stated liquidity outlook.