Business context and reporting period
Alpha and Omega Semiconductor Limited designs, develops and supplies power semiconductors for computing, consumer electronics, communications and industrial applications. This is the company’s fiscal third-quarter 2020 Form 10-Q, for the quarter and nine months ended March 31, 2020—not 2019 Q3 as indicated in the request metadata. Amounts below are in U.S. dollars; financial statements are unaudited.
The company owns 51% of a Chongqing joint venture (JV), which it consolidates. The JV is ramping assembly, testing and a 12-inch wafer fabrication facility; its operations and results are affected by its 49% noncontrolling interest.
Key financial metrics
| Metric | Three months ended March 31, 2020 | Year over year | Nine months ended March 31, 2020 | Year over year |
|---|---|---|---|---|
| Revenue | $106.9 million | Down 2.0% | $342.5 million | Up 1.0% |
| Gross profit / margin | $22.5 million / 21.0% | Down from $25.6 million / 23.5% | $73.8 million / 21.5% | Down from $87.7 million / 25.9% |
| Operating loss | $8.6 million | Prior-year loss: $3.7 million | $12.6 million | Prior-year loss: $6.1 million |
| Net loss attributable to AOS | $6.5 million; $0.26 per diluted share | Prior-year loss: $1.6 million; $0.06 per share | $6.5 million; $0.26 per diluted share | Prior-year loss: $0.7 million; $0.03 per share |
Quarterly power-discrete revenue was essentially flat at $89.9 million; power IC revenue declined 11.0% to $15.7 million and packaging and testing services revenue declined 18.6% to $1.2 million. For the nine-month period, power discretes rose 6.0%, while power ICs fell 18.3% and packaging and testing services fell 37.4%.
- Cash flow: Nine-month operating cash flow was $22.0 million versus $23.2 million a year earlier. Investing cash outflow was $47.7 million, primarily for property and equipment; financing cash inflow was $16.5 million. Cash, cash equivalents and restricted cash declined $9.8 million to $114.5 million.
- Liquidity: March 31 cash and cash equivalents were $110.2 million, with $4.3 million restricted cash. Current assets were $291.9 million and current liabilities $190.8 million.
- Debt and leases: Debt, net of issuance costs, was $107.0 million ($32.8 million short-term and $74.2 million long-term). Finance lease liabilities were $45.8 million; operating lease liabilities were $34.1 million. Management said the company was compliant with applicable financial covenants.
- Balance sheet: Total assets were $767.3 million and total liabilities $337.6 million. Inventories increased to $127.4 million from $111.6 million at June 30, 2019.
Material changes versus prior comparable periods
Quarterly revenue declined modestly, but profitability deteriorated more sharply: gross margin fell 2.5 percentage points, and AOS-attributable net loss widened. Management attributed the margin pressure principally to low capacity utilization as the Chongqing JV began limited production. Nine-month gross margin fell 4.4 percentage points, with gross profit down 15.9% despite slightly higher revenue.
Quarterly unit shipments of power discrete and power IC products fell 8.5% year over year, partly offset by a 7.4% increase in average selling price from product mix. For the nine months, unit shipments declined 8.9%, partly offset by an 11.8% increase in average selling price. R&D expense rose 18.8% for the quarter; nine-month SG&A declined 18.3%, largely as JV pre-production costs decreased.
Outlook, risks, contingencies and unusual items
- COVID-19: The company reported lower demand as customers reduced orders amid the global downturn, particularly in smartphones, power supplies and industrial markets. Notebooks, PCs and gaming devices showed stronger demand, which management said might partly offset declines. The company warned that the pandemic’s duration and effects on demand, operations and supply chains were highly uncertain.
- Near-term outlook: Management expected the JV to increase 12-inch wafer-fab and assembly-and-test production sequentially in the quarter ending June 30, 2020, responding to computing demand. It could not estimate when the JV would reach full Phase 1 production or the additional expenses required. No numerical revenue or earnings guidance was provided.
- Huawei/export-control investigation: The DOJ investigation into export-control compliance remained ongoing; the company was cooperating with authorities. At DOC’s request, shipments to Huawei had stopped after December 31, 2019. The company could not estimate potential losses, penalties or investigation costs and warned that shipment restrictions could affect revenue and profitability. A putative securities class action filed March 19, 2020 alleges misstatements related to the company’s Huawei business; the company disputes the claims and intends to defend itself.
- Other risks: Key exposures include reliance on major customers and the PC market, customer concentration (two customers represented about 64% of quarterly revenue), pricing pressure, production utilization and ramp-up costs, supply-chain constraints, China/U.S. trade and export rules, and possible difficulty obtaining financing or meeting covenants if conditions worsen.
- Unusual items/accounting: The company recorded a $0.6 million impairment of a privately held investment. A $1.3 million discrete tax benefit included $1.1 million related to CARES Act carryback treatment. Adoption of lease accounting added about $21 million each of operating lease right-of-use assets and liabilities; a headquarters lease accounting correction was described as immaterial to previously issued statements.
- Commitments and subsequent financing: At March 31, purchase commitments were about $57.2 million and capital commitments about $23.1 million. After quarter-end, the JV entered into a loan facility of up to RMB 100 million and borrowed RMB 20 million; it also entered into a RMB 250 million loan agreement.
- Management liquidity view: Management believed cash and operating cash flows would be sufficient for anticipated needs, including working capital and capital expenditures, for at least 12 months. This is subject to substantial uncertainty from the pandemic and other risks.
Important facts for investors to verify
- Confirm that the intended filing is fiscal Q3 2020, ended March 31, 2020; the request metadata says 2019 Q3.
- Track COVID-19 demand, the June-quarter computing-demand outlook, and whether the Chongqing JV’s output and utilization improve as expected.
- Monitor the DOJ/DOC export-control matter, any change in Huawei shipment restrictions, and the securities class action; potential financial exposure is not quantified.
- Assess gross-margin recovery, inventory growth, customer concentration, and the company’s ability to fund capital spending and service debt and lease obligations.
- Reconcile cash-flow wording: the cash-flow statement reports $22.0 million of operating cash provided, while an MD&A sentence calls the same amount “net cash used”; the statement and surrounding discussion indicate cash provided.