AOS(AOSL) - 2019 Q4 - Annual Report

Part I Item 1. Business AOS designs and supplies a broad portfolio of power semiconductors for high-volume applications globally - AOS is a global supplier of power semiconductors with a portfolio of approximately 2,100 products, targeting high-volume applications like PCs, TVs, LED lighting, and smartphones[6] - The company holds a significant intellectual property portfolio, with 781 U.S. patents and 816 foreign patents as of June 30, 2019[6] - AOS is expanding its manufacturing capabilities through a joint venture in Chongqing, China, which includes a 12-inch wafer fabrication facility that commenced limited mass production in July 2019[9][10] Revenue Concentration from Major Distributors (FY2017-2019) | Distributor | FY2019 Revenue % | FY2018 Revenue % | FY2017 Revenue % | | :--- | :--- | :--- | :--- | | WPG Holdings Limited | 36.4% | 35.2% | 35.8% | | Promate Electronic Co. Ltd. | 28.8% | 28.3% | 26.9% | Research and Development Expenditures (FY2017-2019) | Fiscal Year | R&D Expense (USD millions) | | :--- | :--- | | 2019 | $46.4 | | 2018 | $37.3 | | 2017 | $29.8 | Item 1A. Risk Factors The company faces risks from its Chongqing JV, US-China trade tariffs, PC market cyclicality, and competition - The joint venture with the Chongqing government faces risks such as high initial costs negatively impacting short-term results, potential under-utilization of the new facility, and difficulties in integrating operations[79][81] - A significant portion of revenue is derived from the PC market (45.9% in FY2019), making the company vulnerable to its continued decline[87] - Proposed U.S. tariffs on goods from China could reduce demand for the company's products or lead to pricing adjustments that lower gross margins[84] - The company faces intense competition from larger, more established competitors with greater financial and technical resources, such as Infineon, ON Semiconductor, and Texas Instruments[45][116][117] - Reliance on two major distributors, WPG and Promate, accounted for 65.2% of revenue in FY2019, posing a concentration risk[132] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[226] Item 2. Properties The company operates key owned and leased facilities in the US and Asia for R&D, manufacturing, and sales - The company's main U.S. office is a 57,000 sq. ft. facility in Sunnyvale, CA, used for R&D, marketing, sales, and administration[227] - AOS owns a 245,000 sq. ft. wafer fabrication facility in Hillsboro, Oregon[227] - The company operates two significant packaging and testing facilities in Shanghai, China, with a combined floor space of over 455,000 sq. ft.[227] - The new joint venture facility in Chongqing, China, is a large-scale property for wafer fabrication and assembly/testing, with a land size of approximately 2.46 million sq. ft.[227] Item 3. Legal Proceedings The company is not currently a party to any material legal proceedings - As of the report date, the company is not a party to any material legal proceedings[230] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[231] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on NASDAQ; it retains earnings and has an active share repurchase program - The company's common shares are traded on the NASDAQ Global Select Market under the symbol AOSL[233] - No cash dividends have ever been declared or paid, and the company intends to retain future earnings for business operations[234] - During fiscal year 2019, the company repurchased 111,509 shares for approximately $1.5 million at an average price of $13.43 per share[239] - As of June 30, 2019, $13.4 million was still available for future repurchases under the approved program[239] Item 6. Selected Financial Data The company presents five-year financial data showing revenue growth but a decline in net income for FY2019 Selected Consolidated Statements of Operations Data (in thousands, except per share data) | Fiscal Year Ended June 30, | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $450,920 | $421,553 | $383,337 | $335,661 | $327,935 | | Gross Profit | $115,378 | $111,928 | $91,821 | $65,822 | $60,482 | | Operating Income (Loss) | $(7,020) | $8,420 | $13,144 | $1,510 | $(4,218) | | Net Income (Loss) attributable to AOS | $1,861 | $14,263 | $13,829 | $(2,928) | $(7,763) | | Diluted EPS | $0.08 | $0.57 | $0.56 | $(0.13) | $(0.29) | Selected Consolidated Balance Sheet Data (in thousands) | As of June 30, | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $121,893 | $131,535 | $115,708 | $87,774 | $106,085 | | Working capital | $117,334 | $130,532 | $130,566 | $118,450 | $147,351 | | Total assets | $739,394 | $667,049 | $398,408 | $318,505 | $347,904 | | Total AOS shareholders' equity | $291,024 | $278,594 | $270,770 | $242,142 | $276,639 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Revenue grew in FY2019, but gross margin and operating income declined due to JV ramp-up costs Results of Operations FY2019 revenue grew 7.0%, but higher operating expenses led to an operating loss of $7.0 million Revenue by Product Type (FY2019 vs FY2018) | Product Type | FY2019 Revenue (M) | FY2018 Revenue (M) | Change (%) | | :--- | :--- | :--- | :--- | | Power discrete | $371.8 | $342.1 | +8.7% | | Power IC | $70.2 | $67.1 | +4.7% | | Packaging and testing services | $8.9 | $12.3 | -28.0% | | Total | $450.9 | $421.6 | +7.0% | - Gross margin decreased from 26.6% in FY2018 to 25.6% in FY2019, primarily due to production ramp-up costs related to the Chongqing joint venture[285] - Research and development expenses increased by 24.3% to $46.4 million in FY2019, mainly due to increased headcount to ramp up the digital power business and higher product prototyping expenses[287][288] - Selling, general and administrative expenses increased by 14.8% to $76.0 million in FY2019, largely due to costs for the new 12-inch fab facility in the JV Company and increased headcount[290] Liquidity and Capital Resources The company maintains adequate liquidity despite significant capital expenditures for its JV Company Cash Flow Summary (in thousands) | Fiscal Year Ended June 30, | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $31,421 | $3,480 | $42,648 | | Net cash used in investing activities | $(112,435) | $(194,127) | $(55,585) | | Net cash provided by financing activities | $75,099 | $206,953 | $40,809 | - Cash and cash equivalents decreased to $121.9 million at the end of FY2019 from $131.5 million at the end of FY2018[315] - Capital expenditures for property and equipment in FY2019 totaled $112.1 million, with a significant portion ($76.0 million) allocated to the JV Company in Chongqing[321] - As of June 30, 2019, net assets of China subsidiaries restricted from transfer amounted to approximately $209.5 million, or 64.4% of total consolidated net assets[313] Critical Accounting Policies and Estimates Key accounting policies involve revenue recognition, inventory reserves, and income tax valuation - The company adopted ASC 606 on July 1, 2018, which changed the timing of revenue recognition for two U.S.-based distributors from point-of-sale by the distributor to point-of-shipment to the distributor[333][335] - Inventory reserves are established based on periodic reviews of inventory levels against sales forecasts, historical usage, and aging, which involves significant estimation[337] - The company maintains a valuation allowance against certain deferred tax assets, particularly for state R&D credits and net operating losses of the JV Company, if it is more likely than not they will not be realized[341][563] - Share-based compensation expense is calculated using models like Black-Scholes and Monte Carlo, which require subjective assumptions about stock price volatility and expected term[345] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign currency, interest rate, and commodity price risks - The company's primary market risks are foreign currency exchange rates (especially USD vs. RMB), interest rate fluctuations on its debt, and commodity price changes (e.g., gold)[350][351][352] - A hypothetical 10% increase in interest rates could result in an additional $0.6 million in annual interest expense[351] - A hypothetical 10% change in the cost of raw materials like gold would impact net earnings by approximately $0.4 million[352] Item 8. Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and supplementary data for FY2019 - This section includes the full audited consolidated financial statements and supplementary data, including reports from independent registered public accounting firms BDO USA, LLP and Grant Thornton LLP[354][365][388] Selected Quarterly Data for Fiscal Year 2019 (in thousands, except per share data) | Quarter Ended | Sep 30, 2018 | Dec 31, 2018 | Mar 31, 2019 | Jun 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $115,072 | $114,925 | $109,067 | $111,856 | | Gross Profit | $32,611 | $29,502 | $25,629 | $27,636 | | Net Income (Loss) attributable to AOS | $2,416 | $(1,545) | $(1,555) | $2,545 | | Diluted EPS | $0.10 | $(0.06) | $(0.06) | $0.10 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None reported[357] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective - Management concluded that disclosure controls and procedures were effective as of June 30, 2019[358] - Management's assessment concluded that internal control over financial reporting was effective as of June 30, 2019, based on the COSO framework[360] - The independent auditor, BDO USA, LLP, provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting[361][365] Item 9B. Other Information The company reports no other information for this item - None[371] Part III Items 10-14 Details on governance and compensation are incorporated by reference from the 2019 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the forthcoming 2019 Proxy Statement[371][372][373] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the annual report - This part includes the consolidated financial statements, financial statement schedules, and a list of exhibits filed with the Form 10-K[378][379] - Key exhibits include the company's bye-laws, equity incentive plans, material contracts with foundries and distributors, and certifications from the CEO and CFO[609][610][611]