AOS(AOSL) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Condensed Consolidated Financial Statements Unaudited condensed consolidated financial statements are presented, significantly impacted by the Chongqing Joint Venture deconsolidation Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | June 30, 2021 | | :--- | :--- | :--- | | Total Assets | $1,209,169 | $918,573 | | Cash and cash equivalents | $323,134 | $202,412 | | Equity method investment | $379,824 | $0 | | Total Liabilities | $382,268 | $402,248 | | Total Equity | $826,901 | $516,325 | Condensed Consolidated Statement of Income Highlights (in thousands) | Metric | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $203,239 | $169,212 | $583,593 | $479,593 | | Gross Profit | $72,402 | $52,691 | $205,334 | $143,963 | | Operating Income | $31,232 | $17,796 | $83,898 | $41,713 | | Gain on deconsolidation of the JV Company | $0 | $0 | $399,093 | $0 | | Net Income Attributable to AOS | $31,650 | $16,100 | $438,072 | $38,577 | | Diluted EPS | $1.11 | $0.58 | $15.58 | $1.42 | - Net cash provided by operating activities for the nine months ended March 31, 2022, was $193.2 million, a significant increase from $84.5 million in the prior-year period. This was driven by higher net income, although adjusted for a large non-cash gain on the JV Company deconsolidation[24] Notes to Condensed Consolidated Financial Statements Detailed explanations of accounting policies and financial results are provided, highlighting the JV deconsolidation gain, customer concentrations, COVID-19 impacts, and a cybersecurity incident loss Note 1: The Company and Significant Accounting Policies This note outlines the company's business and accounting policies, focusing on the Chongqing JV deconsolidation and significant COVID-19 impacts, including the Shanghai lockdown - Effective December 1, 2021, the Company sold a 2.1% equity interest in its JV Company, reducing its stake from 50.9% to 48.8% and losing its controlling financial interest. Consequently, the JV Company was deconsolidated and is now accounted for using the equity method[31] - In April 2022, operations at two Shanghai packaging and testing facilities were suspended due to a government-imposed COVID-19 lockdown. This is expected to adversely affect revenue and results for the quarter ending June 30, 2022, due to production halts and logistical challenges[36] Note 2: Equity Method Investment in Equity Investee This note details the financial impact of the JV Company deconsolidation, including a $399.1 million gain and subsequent ownership reduction to 42.2% Gain on Deconsolidation of the JV Company (in thousands) | Item | Amount | | :--- | :--- | | Cash received for sales of shares | $16,924 | | Fair value of retained equity method investment | $393,124 | | Carrying amount of non-controlling interest | $143,889 | | Cumulative translation adjustment removal | $1,793 | | Carrying amount of net assets of the JV Company | ($156,637) | | Gain on deconsolidation of the JV Company | $399,093 | - Following the initial sale, further transactions reduced the Company's ownership in the JV to 42.2% as of March 31, 2022. These changes resulted in a net loss of $3.1 million for the nine-month period[68][69][72] Note 5: Concentration of Credit Risk and Significant Customers The company exhibits significant customer concentration, with two distributors accounting for 63.5% of revenue and five customers representing 83.1% of accounts receivable Revenue Concentration | Customer | % of Revenue (Nine Months Ended Mar 31, 2022) | % of Revenue (Nine Months Ended Mar 31, 2021) | | :--- | :--- | :--- | | Customer A | 24.8% | 29.1% | | Customer B | 38.7% | 34.9% | Accounts Receivable Concentration | Customer | % of A/R (March 31, 2022) | % of A/R (June 30, 2021) | | :--- | :--- | :--- | | Customer A | 21.2% | 12.4% | | Customer B | 20.4% | 22.1% | | Customer C | 13.7% | 21.9% | | Customer D | 12.8% | * | | Customer E | 15.0% | * | Note 9: Shareholders' Equity and Share-based Compensation This note details equity activities, including the share repurchase program and increased share-based compensation expense of $21.5 million for the nine-month period - The company did not repurchase any shares during the nine months ended March 31, 2022. Approximately $13.4 million remains available under the existing repurchase program[132] Share-Based Compensation Expense (in thousands) | Expense Category | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Cost of goods sold | $1,282 | $427 | $3,560 | $1,195 | | Research and development | $1,814 | $1,316 | $4,769 | $3,639 | | Selling, general and administrative | $5,177 | $2,082 | $13,125 | $5,091 | | Total | $8,273 | $3,825 | $21,454 | $9,925 | - As of March 31, 2022, total unrecognized compensation cost was $86.2 million, expected to be recognized over a weighted-average period of 3.5 years[147] Note 11: Segment and Geographic Information The company operates as a single segment, with Hong Kong as the largest revenue region and Power Discretes as the primary product type Revenue by Geographical Location (Nine Months Ended Mar 31, in thousands) | Region | 2022 | 2021 | | :--- | :--- | :--- | | Hong Kong | $472,399 | $396,879 | | China | $91,958 | $74,250 | | South Korea | $8,862 | $4,069 | | United States | $9,004 | $3,683 | | Other countries | $1,370 | $712 | | Total | $583,593 | $479,593 | Revenue by Product Type (Nine Months Ended Mar 31, in thousands) | Product Type | 2022 | 2021 | | :--- | :--- | :--- | | Power discrete | $406,235 | $355,487 | | Power IC | $167,782 | $115,224 | | Packaging and testing services | $9,576 | $8,882 | | Total | $583,593 | $479,593 | Note 12: Commitments and Contingencies The company has significant purchase and capital commitments, and is under an ongoing DOJ investigation regarding Huawei export control compliance - As of March 31, 2022, the company had purchase commitments of $106.6 million for materials/services and $102.7 million for property and equipment[165] - The company is under an ongoing investigation by the U.S. Department of Justice (DOJ) regarding compliance with export control regulations related to business with Huawei. The company has suspended shipments to Huawei since December 31, 2019, and the outcome and potential loss from the investigation are currently unknown[168] Note 13: Cybersecurity Incident A cybersecurity incident in April 2022 resulted in a $1.5 million loss due to unauthorized payments, prompting an investigation and security enhancements - The company recorded a loss of $1.5 million for the three months ended March 31, 2022, due to a cybersecurity incident where payments were misdirected to unauthorized bank accounts[173] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses record quarterly revenue, the Chongqing JV deconsolidation, and significant operational challenges including the Shanghai COVID-19 lockdown Results of Operations Q3 FY2022 revenue increased 20.1% to $203.2 million with improved gross margin, while operating expenses rose due to share-based compensation and a cybersecurity incident Revenue by Product Type (Three Months Ended March 31) | Product Type | 2022 (in thousands) | 2021 (in thousands) | Change (in percentage) | | :--- | :--- | :--- | :--- | | Power discrete | $140,572 | $122,615 | 14.6% | | Power IC | $60,359 | $43,385 | 39.1% | | Packaging and testing services | $2,308 | $3,212 | (28.1)% | | Total | $203,239 | $169,212 | 20.1% | - Gross margin for the three months ended March 31, 2022, increased to 35.6% from 31.1% year-over-year, primarily due to a better product mix[219][221] - Selling, general and administrative expenses for Q3 FY2022 increased by $5.3 million (27.3%) YoY, driven by a $3.1 million increase in share-based compensation and a $1.5 million loss from a cybersecurity incident[225] Liquidity and Capital Resources The company's liquidity improved with $323.4 million in cash and strong operating cash flow, supported by a new $45.0 million term loan for facility expansion Cash Flow Summary (Nine Months Ended March 31, in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $193,196 | $84,524 | | Net cash used in investing activities | ($91,142) | ($40,412) | | Net cash provided by (used in) financing activities | $16,351 | ($16,323) | - In February 2022, the company's subsidiary Jireh drew down $45.0 million from a new term loan agreement to fund the expansion and upgrade of its Oregon fabrication facility[240] - Net cash from operating activities was $193.2 million for the nine months ended March 31, 2022, primarily resulting from net income of $438.1 million, adjusted for non-cash items like the $399.1 million gain on JV deconsolidation and a $42.9 million increase in inventories[253] Quantitative and Qualitative Disclosures About Market Risk No material changes in market risks have occurred since the last annual report - There have been no material changes in market risks since the last annual report filed on August 30, 2021[261] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal control over financial reporting - Management concluded that as of March 31, 2022, the company's disclosure controls and procedures were effective[262] - No material changes to the internal control over financial reporting occurred during the quarter[263] PART II. OTHER INFORMATION Legal Proceedings The company provides an update on the ongoing DOJ investigation regarding Huawei export control compliance, with shipments suspended since December 31, 2019 - The company is cooperating with an ongoing DOJ investigation into its compliance with export control regulations concerning business with Huawei[266] - At the request of the Department of Commerce, the company has suspended all product shipments to Huawei since December 31, 2019[266] Risk Factors Key business risks include significant COVID-19 impacts, particularly the Shanghai lockdown affecting Q2 FY2022 revenue, and potential cybersecurity incident disruptions - The COVID-19 pandemic continues to pose a significant risk. A strict lockdown in Shanghai in April 2022 forced the shutdown of the company's two packaging and testing facilities, which is expected to adversely affect revenue and results for the quarter ending June 30, 2022[273][274][278] - The company's operations are dependent on its information technology systems, which are vulnerable to cyberattacks. A recent cybersecurity incident in April 2022 resulted in a $1.5 million loss[284] Unregistered Sales of Equity Securities and Use of Proceeds The company reports no share repurchases during the quarter, with $13.4 million remaining available under the program - No shares were repurchased during the three months ended March 31, 2022[286] - As of March 31, 2022, approximately $13.4 million remained available under the company's share repurchase program[286]