Aehr Test Systems — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 30, 2013; comparisons are to the corresponding 2012 periods. Amounts are in U.S. dollars. Financial statements are unaudited.
Business context
Aehr designs, manufactures and markets semiconductor test and burn-in equipment, including ABTS and FOX systems, wafer-level products, contactors, carriers and related services. It reports one operating segment. The quarter’s revenue mix shifted from Test During Burn-in (TDBI) products toward wafer-level products.
Financial performance
| Metric | Three months ended Nov. 30, 2013 | Three months ended Nov. 30, 2012 | Six months ended Nov. 30, 2013 | Six months ended Nov. 30, 2012 |
|---|---|---|---|---|
| Net sales | $4.950m | $5.054m | $8.702m | $9.886m |
| Gross profit / margin | $2.494m / 50.4% | $2.263m / 44.8% | $4.438m / 51.0% | $4.719m / 47.7% |
| Operating income (loss) | $179k | ($767k) | $22k | ($1.030m) |
| Net income (loss) | $137k | ($811k) | ($29k) | ($1.107m) |
| Basic and diluted EPS, as reported | $0.01 | ($0.09) | ($0.00) | ($0.12) |
Quarterly sales fell 2.1%; six-month sales fell 12.0%. For the quarter, TDBI sales declined about $2.1m year over year to $2.3m, while wafer-level sales rose about $2.0m to $2.6m. For the six months, TDBI sales declined about $2.3m to $4.9m and wafer-level sales increased about $1.2m to $3.7m.
Quarterly gross profit rose 10.2% despite slightly lower sales. Management attributed improved gross margins in both comparison periods primarily to sales of systems containing previously reserved inventory. Operating expenses declined: quarterly SG&A was $1.517m versus $2.068m and R&D was $798k versus $962k; six-month SG&A was $2.937m versus $3.857m and R&D was $1.479m versus $1.892m. Some non-recurring engineering costs were transferred to cost of sales and prepaid expenses.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was positive $435k, versus cash use of $1.229m in the prior-year period. Investing activities used $52k; financing activities used $202k.
- Cash and equivalents were $2.494m at November 30, 2013, up from $2.324m at May 31, 2013. Working capital was $5.6m.
- Current assets were $11.299m and current liabilities $5.651m. Inventory was $5.650m, up from $5.369m at May 31, with work in process increasing to $2.765m from $2.187m.
- Line-of-credit borrowings were $476k, down from $1.101m at May 31; $2.024m remained available under the $2.5m facility. The facility is secured by company assets, including intellectual property under the amendment, and extended through August 22, 2014. The company reported covenant compliance and a 4.375% weighted-average rate on the outstanding balance.
- Six-month cash from operations benefited from a $711k increase in accounts payable and $390k of noncash stock-based compensation; inventory growth of $281k and a $183k decrease in accrued expenses were offsets. The company issued common stock and received option-exercise proceeds of $423k during the period.
Changes, outlook and key risks
- Customer concentration increased materially: the five largest customers represented approximately 96% of quarterly sales and 95% of six-month sales, compared with 85% and 81%, respectively, in the 2012 periods. Two customers each represented about 43% of quarterly sales; two represented about 52% and 36% of six-month sales.
- Geographic sales for the six months were $4.219m in the United States, $3.924m in Asia and $559k in Europe. The filing notes that customer concentration and sales can vary significantly between periods.
- Management said existing cash, operating cash flow and available credit were expected to cover working-capital and capital-equipment needs through calendar 2014. It cautioned that additional debt or equity financing may be needed thereafter depending on growth and profitability, and that financing may not be available on acceptable terms. No specific revenue or earnings guidance was provided.
- Unusual or notable items included a $27k six-month income-tax benefit from reversal of previously established tax liabilities; foreign-exchange losses contributed to other expense of $30k for the quarter and $64k for six months. Stock-based compensation increased to $390k for six months from $226k.
- Principal risks include dependence on a small number of customers and large, cancellable or reschedulable orders; semiconductor capital-spending cycles; adoption and qualification of FOX wafer-level systems; supplier concentration and delivery delays; product reliability and warranty costs; foreign-currency exposure; and potential need for future financing. The filing reports no pending legal proceedings, no off-balance-sheet financing arrangements, and no material change in internal controls; management deemed disclosure controls effective.
Important facts for investors to verify
- Whether the sharp customer concentration and large contribution from two customers persist, and whether their orders are recurring or subject to cancellation or deferral.
- Whether wafer-level product growth can offset continued declines in TDBI sales, and whether FOX systems progress through customer qualification into broader adoption.
- Whether higher gross margins are sustainable, given management’s attribution to sales of previously reserved inventory.
- Whether operating cash generation continues without relying on increased supplier payables, and whether inventory growth converts into shipments and collections.
- The company’s financing position beyond calendar 2014, including renewal or replacement of the credit facility that expires in August 2014 and the availability and terms of any additional funding.
- The effect of equity issuance and stock options on dilution; shares outstanding were 10.934m at November 30, 2013, and 10.975m at December 31, 2013.