Alpha and Omega Semiconductor Limited — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended March 31, 2018 (filed May 3, 2018). The request metadata says “2017 Q3,” but this filing reports fiscal Q3 2018.
Business context and results
AOS designs and supplies power semiconductors for computing, consumer, communications and industrial applications. Amounts below are in U.S. dollars; financial statement amounts are unaudited.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $102.9 million, up 10.3% year over year | $311.7 million, up 9.2% |
| Gross profit / margin | $27.1 million / 26.4%, versus $22.7 million / 24.3% | $82.7 million / 26.6%, versus $66.7 million / 23.4% |
| Operating income / margin | $0.7 million / 0.7%, versus $3.0 million / 3.2% | $8.5 million / 2.8%, versus $9.6 million / 3.4% |
| Net income attributable to AOS | $1.7 million, versus $3.6 million | $13.2 million, versus $9.7 million |
| Diluted EPS | $0.07, versus $0.14 | $0.53, versus $0.39 |
Quarterly consolidated results included a $0.5 million loss including noncontrolling interest; AOS reported attributable income because the filing separately deducts $2.1 million of JV losses attributable to noncontrolling owners. For the nine-month period, consolidated net income was $8.0 million and noncontrolling owners’ share of the loss was $5.3 million.
Cash, debt and liquidity
- At March 31, cash and cash equivalents were $125.2 million, versus $115.7 million at June 30, 2017. Current assets were $262.0 million and current liabilities $144.4 million. Cash held outside the United States was $112.1 million.
- For the nine months, operating cash flow was $14.3 million, down from $29.1 million. Investing cash outflow was $136.7 million, including $87.1 million of JV property and equipment purchases and $14.0 million for intangible assets. Financing cash inflow was $130.0 million, including $129.0 million of noncontrolling-interest contributions and $13.2 million of borrowings. Cash increased by $9.5 million.
- Debt at March 31 included $13.0 million of term-loan borrowings ($2.1 million current and $10.9 million long term); capital lease liabilities totaled about $1.1 million. A further $17.8 million fixed-rate loan at 5.04% was obtained by the Oregon subsidiary on May 1, 2018. The company said it was in compliance with existing loan covenants.
- Management said cash and operating cash flow should meet anticipated needs, including working capital and capital expenditures, for at least the next 12 months. This outlook depends in part on continued access to JV financing and planned construction spending.
Material changes and management commentary
- Revenue growth came mainly from power discretes, up 18.6% in the quarter and 19.2% for nine months. Power IC revenue fell 18.8% and 22.8%, respectively. Management attributed net product revenue growth to higher unit shipments and favorable product mix/average selling prices.
- Gross margin improved, which management attributed to product mix, higher factory utilization and, for the nine-month period, release of approximately $1.0 million of a specific warranty reserve. Operating expenses rose materially: quarterly R&D increased 30.7% and SG&A 36.6%, reflecting increased staffing, compensation, product development and share-based compensation. As a result, operating income declined despite higher revenue and gross margin.
- The Chongqing JV, owned 51% by AOS and 49% by local investment funds, remains pre-production. AOS expected assembly and testing facilities to be completed in the quarter ending June 30, 2018 and fabrication facilities in December 2018. The JV’s EPC contract was approximately $78 million; about $57 million had been paid by March 31, with approximately $28.8 million expected to be paid in 2018. Management said the JV may need additional financing and AOS could use cash reserves if it cannot obtain adequate financing.
- AOS expects short-term expense increases from JV start-up and its new digital-power business, and warned these costs may not initially be offset by revenue. Longer-term, management expects the JV to reduce manufacturing costs and support growth. The company introduced 116 products in the first nine months of fiscal 2018.
- Management estimated a fiscal 2018 blended effective tax rate of approximately 27% before discrete items, versus nearly 35% in the prior year, and expected the U.S. Tax Cuts and Jobs Act to benefit future net income, diluted EPS and cash flow. Nine-month tax expense was only $0.03 million, including a $2.7 million discrete benefit from remeasuring U.S. deferred taxes. The quarter’s $0.83 million tax expense was high relative to pre-tax income.
Risks, commitments and unusual items
- Two customers accounted for 25.9% and 37.0% of quarterly revenue. PC-related products were 41.3% of quarterly revenue. A downturn, distributor inventory changes or loss of major-customer demand could affect results.
- The filing identifies potential U.S.-China tariffs as a new risk that could reduce demand or pressure prices and margins. Other key risks include product price erosion, manufacturing utilization and capacity constraints, JV construction/funding and execution, and foreign-exchange exposure, including RMB exposure on construction costs.
- Outstanding purchase commitments were $38.4 million and capital commitments approximately $89.6 million at March 31. The company also had approximately $18.0 million remaining under its $30.0 million share-repurchase authorization; it repurchased 402,315 shares during the quarter for $6.0 million.
- No material pending legal proceedings or material off-balance-sheet arrangements were reported. The company had $6.7 million of gross unrecognized tax benefits and did not anticipate material changes in uncertain tax positions over the next 12 months.
- AOS planned to adopt ASC 606 on July 1, 2018, using the modified retrospective method. The expected cumulative retained-earnings adjustment related to two U.S. distributors was estimated at a net $0.8 million as of June 30, 2017, and was not expected to be materially different at June 30, 2018.
Important facts for investors to verify
- Whether the Chongqing facilities met the stated completion targets, and whether the JV secured financing for remaining construction and equipment needs.
- Whether product mix, pricing and factory utilization can sustain gross-margin gains while R&D, SG&A and JV start-up costs remain elevated.
- How customer concentration, PC-market exposure and any U.S.-China tariffs affect demand, pricing and margins.
- Actual cash conversion and capital spending, including outstanding capital commitments and the May 2018 loan.
- The final ASC 606 adoption adjustment and the development of the effective tax rate. The filing contains inconsistent wording in its MD&A describing quarterly tax as a “benefit”; the financial statements report tax expense of $0.83 million.