Alpha and Omega Semiconductor Limited — Form 10-Q
Reporting period: Quarter and six months ended December 31, 2016 (fiscal second quarter and first half of fiscal 2017). Amounts are in U.S. dollars; financial statement figures are unaudited. The company designs and supplies power semiconductors.
Financial results
| Metric | Quarter ended Dec. 31, 2016 | Year-over-year | Six months ended Dec. 31, 2016 | Year-over-year |
|---|---|---|---|---|
| Revenue | $94.7 million | +18.6% | $192.0 million | +19.1% |
| Gross profit / margin | $22.1 million / 23.3% | +$7.1 million / +4.5 percentage points | $44.0 million / 22.9% | +$14.0 million / +4.3 percentage points |
| Operating income (loss) | $2.8 million | Prior-year loss of $0.3 million | $6.6 million | Prior-year loss of $0.9 million |
| Net income (loss) attributable to AOS | $2.8 million; diluted EPS $0.11 | Prior-year loss of $1.6 million; diluted EPS -$0.07 | $6.2 million; diluted EPS $0.25 | Prior-year loss of $3.6 million; diluted EPS -$0.16 |
| Operating cash flow | Not separately presented | — | $18.1 million | Down from $24.6 million |
| Capital expenditures | Not separately presented | — | $23.7 million | Up from $10.8 million |
Quarterly product revenue growth reflected 30.3% higher unit shipments, partly offset by a 7.1% decline in average selling prices. For the six-month period, shipments rose 24.1% while average selling prices declined 2.4%. Gross margin improved mainly on higher factory utilization; selling-price erosion remained a partial offset. Power discrete and power IC revenue increased, while packaging and testing services revenue declined.
Balance sheet, liquidity and cash flow
- Cash and cash equivalents were $122.8 million at December 31, 2016, versus $87.8 million at June 30, 2016; $112.4 million was held by foreign subsidiaries. Current assets were $223.6 million and current liabilities $67.5 million.
- Total liabilities were $73.9 million. Reported capital lease obligations totaled approximately $2.1 million; the filing reports no material off-balance-sheet arrangements.
- Six-month operating cash flow was $18.1 million. Investing activities used $23.5 million, mainly for property and equipment; financing activities provided $41.0 million, including $33.0 million from the joint venture’s noncontrolling investors and $8.7 million from stock option and employee share-plan issuances. Cash increased by $35.0 million.
- Management said existing cash and operating cash flows should cover anticipated needs, including working capital and capital expenditures, for at least the next 12 months.
Material changes, outlook and risks
- Chongqing joint venture: AOS owns 51% and consolidates the venture; Chongqing Funds own 49%. The funds contributed $33.0 million during the period. AOS expects to contribute $10.0 million in cash and certain intangible assets under the agreement. The venture recorded losses attributable to noncontrolling interest of $1.2 million for the quarter and $2.1 million for six months.
- The venture’s January 2017 construction contract is approximately $78.0 million, payable against milestones; about $58.3 million is expected to be paid in calendar 2017 and $19.7 million in 2018. Payments are exposed to RMB exchange-rate movements. Initial packaging production is expected in the first half of fiscal 2018; a 12-inch wafer fabrication facility is planned longer term. Management anticipates eventual cost savings, stronger positioning in China and improved working capital and capital expenditures, but cautions that timing and benefits are uncertain.
- Purchase commitments were approximately $25.9 million and capital commitments $10.3 million at December 31, 2016. AOS also disclosed the joint venture’s construction obligations. No material pending legal proceedings were reported; no material changes to previously disclosed risk factors or market risks were identified.
- Key risks cited include PC-market exposure (38.4% of quarterly revenue and 37.2% of six-month revenue), customer concentration (two customers represented 35.8% and 27.0% of quarterly revenue), distributor ordering fluctuations, seasonal demand, selling-price erosion, manufacturing utilization and costs, and execution and customer-acquisition risks for the joint venture. The construction and equipment transfer may add near-term costs.
- AOS filed a shelf registration statement allowing offerings of up to $250 million in securities, but reported no specific plan to use it. The company reported no share repurchases during the six months; $6.4 million remained under its repurchase program. No specific revenue or earnings guidance was provided.
Investor verification points
- Verify customer concentration, distributor inventories and receivable exposure; Customer A and Customer C represented 35.8% and 24.7% of receivables, respectively, at quarter-end.
- Track whether unit growth offsets continued average-selling-price declines and whether improved factory utilization sustains gross-margin gains.
- Verify joint-venture funding, construction milestones, RMB exposure, production timing and the extent of AOS’s future cash and asset contributions.
- Reconcile cash-flow conversion with reported earnings, elevated capital spending and growth in other assets, including vendor advances and prepaid taxes.
- Review tax uncertainty: unrecognized tax benefits were approximately $6.9 million, and U.S. tax years 2001–2016 and foreign tax years 2009–2016 remained open to examination.