Aehr Test Systems — Q3 FY2018 Form 10-Q Summary
Reporting period: Quarter and nine months ended February 28, 2018; filed April 12, 2018. Unaudited results. Aehr designs, manufactures and markets semiconductor test and burn-in equipment and related products, including TDBI and wafer-level systems. The company reports one operating segment.
Financial results
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $7.393m | $2.681m | $22.286m | $12.215m |
| Gross profit / margin | $3.176m / 43.0% | $0.503m / 18.8% | $9.225m / 41.4% | $4.172m / 34.2% |
| Operating income (loss) | $0.307m | $(2.469)m | $0.666m | $(4.323)m |
| Net income (loss) | $0.267m | $(2.651)m | $0.337m | $(4.858)m |
| Diluted EPS | $0.01 | $(0.16) | $0.01 | $(0.32) |
- Quarterly sales rose 175.8%; nine-month sales rose 82.4%. Management attributed the growth to TDBI and wafer-level products. Q3 sales were $4.5m TDBI and $2.9m wafer-level; nine-month sales were $12.4m and $9.9m, respectively.
- Gross margin improved substantially. Management attributed the quarterly improvement mainly to manufacturing efficiencies from higher volume and a lower warranty provision; the nine-month improvement was attributed mainly to manufacturing efficiencies.
- Operating expenses were $2.869m in Q3, versus $2.972m a year earlier, and $8.559m for nine months, versus $8.495m. SG&A increased, primarily with employment costs; R&D decreased, primarily with lower project expenses.
- Cash used in operating activities was $3.096m for nine months, compared with $4.468m a year earlier. Working-capital use included a $2.392m inventory increase, $0.603m increase in prepaid and other current assets, $0.527m increase in receivables, and $0.764m reduction in customer deposits and deferred revenue.
- Cash and cash equivalents were $9.077m at February 28, 2018, with $5.986m of short-term investments. Working capital was $23.9m, up from $21.5m at May 31, 2017. Cash declined $8.726m over the nine-month period; the $6.0m securities purchase shifted funds into investments and did not, according to management, reduce liquidity.
- Long-term debt was $6.110m, unchanged from May 31, 2017. Convertible secured notes bear 9% interest and mature April 10, 2019; conversion price is $2.30 per share. The notes are secured by substantially all company assets. The $2.0m revolving facility had no remaining availability. Potential conversion shares were excluded from diluted EPS as anti-dilutive.
Changes, outlook and risks
- Sales growth was concentrated geographically and among customers: Asia generated $16.543m of nine-month sales, versus $6.183m in the prior-year period. The five largest customers represented approximately 93% of sales for both the quarter and nine-month period. Four customers accounted for 31%, 25%, 16% and 12% of quarterly sales.
- Management said existing cash, operating income, receivable collections, backlog revenue, inventory sales and customer deposits/down payments should meet liquidity needs for the next 12 months. The filing gives no specific revenue, earnings or margin guidance.
- The $0.081m nine-month income tax benefit included the impact of the Tax Cuts and Jobs Act, including a $0.090m refundable alternative minimum tax credit benefit. The company estimated no transition tax, subject to completing its analysis; a $6.2m reduction in deferred tax assets was offset by a valuation allowance.
- Currency movements produced $0.100m of other expense for the nine months, compared with $0.038m of other income a year earlier. The company does not hedge currency risk; management stated a 10% decline in subsidiaries’ local currencies was not expected to significantly affect net income or loss.
- Inventory increased to $9.368m from $6.604m, including higher raw materials and work in process; management said the increase supported expected shipments for customer orders. This makes shipment timing and inventory conversion important to monitor.
- The company renewed its U.S. facilities lease through July 2023; disclosed future minimum operating lease payments total $4.325m. It reported no legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material change in internal controls reported.
Investor verification priorities
- Confirm whether the quarter’s sharp sales and margin gains continued, and how much depended on specific products, customers or shipments.
- Track customer concentration, backlog conversion, customer deposits and receivable collections.
- Assess whether elevated inventory supports firm orders and can be converted to sales without write-downs.
- Review cash generation and liquidity after operating cash use, and the company’s plan for the secured 9% notes due April 2019, including possible dilution from conversion.
- Verify completion of the Tax Act accounting and monitor the effect of the one-time tax benefit on reported earnings.