Alpha and Omega Semiconductor Limited — FY2018 Form 10-K
Period clarification: The filing is the annual report for the fiscal year ended June 30, 2018, not a report solely for 2017 Q4. Its fourth-quarter figures are for the quarter ended June 30, 2018. Amounts below are in U.S. dollars.
Business context
AOS designs and supplies power semiconductors, including power discretes and power ICs, for computing, consumer electronics, communications and industrial markets. It reported approximately 1,900 products and introduced 200 new products during FY2018. The company is expanding beyond its PC-focused business through new products, a digital power business and a manufacturing joint venture in Chongqing, China.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $421.6 million | $383.3 million |
| Gross profit / margin | $111.9 million / 26.6% | $91.8 million / 24.0% |
| Operating income / margin | $8.4 million / 2.0% | $13.1 million / 3.5% |
| Net income attributable to AOS | $14.3 million; diluted EPS $0.57 | $13.8 million; diluted EPS $0.56 |
| Net income including noncontrolling interest | $4.9 million | $9.3 million |
| Cash from operating activities | $3.5 million | $42.6 million |
| Cash and cash equivalents at year-end | $131.5 million | $115.7 million |
| Working capital at year-end | $130.5 million | $130.6 million |
Revenue rose 10.0%. Power discrete revenue increased 18.5% to $342.1 million, while power IC revenue fell 18.6% to $67.1 million; packaging and testing services generated $12.3 million. Management attributed revenue growth mainly to higher discrete sales, a 2.1% increase in unit shipments and an 8.1% increase in average selling price from product mix. Gross margin improved on product mix, utilization and release of approximately $2.0 million in specific reserves. Operating income nevertheless declined as operating expenses grew faster than gross profit.
FY2018 operating cash flow fell substantially, with working-capital changes including increases in other assets, inventory and receivables weighing on cash generation. Investing cash outflow was $194.1 million, principally property and equipment purchases, including $128.4 million for the JV, and $16.4 million of intangible assets for the digital power business. Financing provided $207.0 million, including Chongqing Fund contributions, borrowings and JV financing-lease proceeds.
At June 30, 2018, current assets were $285.2 million and current liabilities were $154.7 million. Bank borrowings totaled $30.6 million net of debt issuance costs, and capital lease liabilities totaled $61.3 million, including $60.4 million for the JV equipment financing. Total assets were $667.0 million and total liabilities were $240.9 million. The company said cash and operating cash flows should cover anticipated needs for at least 12 months, while noting that much of its China net assets are restricted from transfer: $279.6 million, or 65.6% of consolidated net assets.
For the June 2018 quarter, revenue was $109.9 million, gross profit was $29.2 million, operating loss was $0.1 million and net income attributable to AOS was $1.0 million. The quarter included a $4.0 million loss attributable to noncontrolling interest.
Material changes and unusual items
- Gross margin rose 2.6 percentage points year over year, while operating expenses increased 31.5% to $103.5 million. SG&A rose 35.5%, including JV pre-production costs, added headcount and higher share-based compensation; R&D rose 25.2%.
- Power IC revenue reversed its prior-year growth and declined by $15.3 million. PC-related products represented 41.6% of FY2018 revenue, up from 39.1%.
- Consolidated net income including noncontrolling interest declined, partly reflecting the JV’s $9.3 million net loss attributable to noncontrolling interests. AOS-attributable net income increased modestly.
- Income tax expense was $0.7 million, including a $2.5 million benefit from remeasuring deferred taxes after U.S. tax reform. The reported effective tax rate was 12.5%; excluding discrete tax items, management reported a 61.7% effective rate.
- The Chongqing JV substantially completed assembly/test and 12-inch fab facilities in the June quarter. Management expected limited assembly/test mass production in the second half of calendar 2018 and wafer-fab trial production toward year-end; ramp costs were expected to weigh on near-term results. In August 2018, AOS contributed another $25 million, increasing its reported JV ownership from 51% to 54%.
- On adoption of ASC 606 beginning July 1, 2018, AOS expected to recognize revenue earlier for sales to two U.S.-based distributors and record a $1.3 million pre-tax cumulative adjustment to retained earnings.
Outlook, risks and contingencies
No quantified revenue or earnings guidance is provided. Management expects future results to be affected by product mix, declining selling prices, factory utilization, raw-material costs, PC-market conditions, and startup expenses for the JV and digital power business. It expects the U.S. Tax Cuts and Jobs Act to benefit future net income, diluted EPS and cash flows, principally through the lower federal corporate tax rate.
Key risks include the JV’s execution, utilization and cost ramp; successful development and customer adoption of digital power products; continued exposure to PCs; dependence on distributors; and concentration of revenue with WPG and Promate, which together represented 63.5% of FY2018 revenue. Other material risks include China-U.S. tariff uncertainty, China-related restrictions on moving funds, foreign-exchange exposure, foundry and materials supply, semiconductor price erosion, product quality and IP claims. No material legal proceedings or material off-balance-sheet arrangements were reported. The filing lists $213.6 million of contractual obligations, including $58.3 million in capital commitments and $38.0 million in purchase commitments.
Important facts for investors to verify
- Confirm the reporting-period basis: this is FY2018, with Q4 ended June 30, 2018, rather than a standalone 2017 Q4 filing.
- Track cash conversion and working capital: operating cash flow dropped to $3.5 million despite reported net income.
- Assess the Chongqing JV’s production start, utilization, funding obligations and effect on margins; distinguish the June 30 ownership (51%) from the August 2018 subsequent change (54%).
- Monitor the durability of gross-margin improvement and the sharp increase in operating expenses, alongside the decline in power IC revenue.
- Evaluate distributor/customer concentration and the availability of China-restricted cash for parent-company needs.