Aehr Test Systems — Fiscal 2018 Second Quarter 10-Q
Reporting period: Three and six months ended November 30, 2017; comparative periods ended November 30, 2016. The filing was signed January 12, 2018. Aehr designs, manufactures and markets semiconductor test and burn-in equipment and related products.
Financial performance
| Metric | Three months ended Nov. 30, 2017 | Three months ended Nov. 30, 2016 | Six months ended Nov. 30, 2017 | Six months ended Nov. 30, 2016 |
|---|---|---|---|---|
| Net sales | $7.923 million | $4.216 million | $14.893 million | $9.534 million |
| Gross profit | $3.131 million | $1.463 million | $6.049 million | $3.669 million |
| Gross margin | 39.5% | 34.7% | 40.6% | 38.5% |
| Operating income (loss) | $187,000 | $(1.284) million | $359,000 | $(1.854) million |
| Net income (loss) | $60,000 | $(1.452) million | $70,000 | $(2.207) million |
| Net income (loss) per diluted share | $0.00 | $(0.09) | $0.00 | $(0.15) |
Amounts are rounded as presented in the filing. Reported $0.00 per share reflects rounding, not necessarily zero earnings per share.
Liquidity, cash flow and debt
- At November 30, 2017, cash and cash equivalents were $9.959 million and short-term investments were $5.969 million; combined cash and investments totaled approximately $15.928 million. Cash and cash equivalents were $17.803 million at May 31, 2017.
- Working capital was $23.2 million, up from $21.5 million at May 31, 2017. Current assets were $29.741 million and current liabilities $6.538 million.
- For the six months, operating cash use was $2.153 million, investing cash use was $6.285 million and financing provided $601,000. Investing outflows mainly reflected purchases of short-term securities ($5.972 million) and property and equipment ($313,000); the securities purchase shifted funds from cash into investments.
- Long-term debt was $6.110 million, unchanged from May 31, 2017. The secured convertible notes bear 9% interest, mature April 10, 2019, and have a $2.30 conversion price. The revolving facility had no remaining availability; substantially all company assets secure the obligations.
Material changes and operating drivers
- Second-quarter sales rose 87.9% year over year; six-month sales increased 56.2%. Management attributed growth to Test During Burn-in and wafer-level products. Second-quarter sales were $5.1 million from TDBI and $2.8 million from wafer-level products; six-month sales were $7.9 million and $7.0 million, respectively.
- Gross margin improved 4.8 percentage points in the quarter and 2.1 points for the six-month period. Management cited improved manufacturing efficiencies from higher sales, partly offset by higher warranty provisions; six-month margin was also affected by shipping and direct material costs.
- Operating results moved from losses to modest profits, while operating expenses rose 7.2% in the quarter and 3.0% for the six months. Lower interest expense reflected full amortization of convertible-note issuance costs at the end of fiscal 2017.
- International exposure and customer concentration were substantial: Asia accounted for $5.909 million of quarterly sales and $11.569 million of six-month sales. The five largest customers represented approximately 94% of quarterly and 96% of six-month sales; two customers represented 43% of sales in each period.
- Inventory rose to $8.225 million from $6.604 million at May 31, 2017. Management said the increase supported future shipments against customer orders.
Outlook, risks and other matters
- Management said existing cash, operating income, collections, backlog shipments, inventory sales and customer deposits/down payments were expected to meet liquidity needs for the next 12 months. The filing provides no quantified revenue or earnings guidance.
- Key exposures include dependence on a small number of customers, foreign-currency fluctuations, product warranty costs, and estimates in revenue recognition and inventory valuation. Management reported no material change in previously disclosed risk factors and no derivative or commodity-instrument holdings.
- The Tax Cuts and Jobs Act was signed December 22, 2017; the company was still assessing its effect, and no estimate of the tax impact was available in the filing.
- No legal proceedings, defaults on senior securities, or material changes to contractual obligations were reported. Management concluded disclosure controls were effective and reported no material change in internal controls over financial reporting.
Investor verification priorities
- Confirm the timing and sustainability of customer orders underlying the sales increase and inventory build, particularly given customer concentration.
- Review subsequent cash generation, working-capital needs and conversion of customer deposits, backlog and receivables into cash.
- Verify the terms, payment schedule, security and potential dilution associated with the 9% convertible notes due in April 2019.
- Assess whether gross-margin gains persist after warranty, material and shipping costs, and clarify the eventual tax impact of the Tax Cuts and Jobs Act.