# AEHR TEST SYSTEMS (AEHR) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AEHR TEST SYSTEMS's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1040470/000165495424009642/aehr_10k.htm
Accession: 0001654954-24-009642
Filing date: 2024-07-30
Report date: 2024-05-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/AEHR/
All MD&A years: /company/AEHR/mda/
Previous year: /company/AEHR/mda/fy2023/ (FY 2023)
Next year: /company/AEHR/mda/fy2025/ (FY 2025)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Overview

Aehr Test Systems (“Aehr Test”, “Aehr”, the “Company” or “We”) is a leading provider of test solutions for testing, burning-in, and stabilizing semiconductor devices in wafer level, singulated die, and package part form, and has installed thousands of systems worldwide. Increasing quality, reliability, safety, and security needs of semiconductors used across multiple applications, including electric vehicles, electric vehicle charging infrastructure, solar and wind power, computing, data and telecommunications infrastructure, and solid-state memory and storage, are driving additional test requirements, incremental capacity needs, and new opportunities for Aehr Test products and solutions.

We have developed and introduced several innovative products including the FOX-P family of test and burn-in systems and FOX WaferPak Aligner, FOX WaferPak Contactor, FOX DiePak Carrier and FOX DiePak Loader. The FOX-XP and FOX-NP systems are full wafer contact and singulated die/module test and burn-in systems that can test, burn-in, and stabilize a wide range of devices such as leading-edge silicon carbide-based and other power semiconductors, 2D and 3D sensors used in mobile phones, tablets, and other computing devices, memory semiconductors, processors, microcontrollers, systems-on-a-chip, and photonics and integrated optical devices. The FOX-CP system is a low-cost single-wafer compact test solution for logic, memory and photonic devices and the newest addition to the FOX-P product family. The FOX WaferPak Contactor contains a unique full wafer contactor capable of testing wafers up to 300mm that enables Integrated Circuit manufacturers to perform test, burn-in, and stabilization of full wafers on the FOX-P systems. The FOX DiePak Carrier allows testing, burning in, and stabilization of singulated bare die and modules up to 1,024 devices in parallel per DiePak on the FOX-NP and FOX-XP systems up to nine DiePaks at a time.

Our revenue consists primarily of sales of FOX-P systems, WaferPak Aligners and DiePak Loaders, WaferPak Contactors, DiePak Carriers, test fixtures, upgrades and spare parts, service contracts revenues, and non-recurring engineering charges. Our selling arrangements may include contractual customer acceptance provisions, which are mostly deemed perfunctory or inconsequential, and installation of the product occurs after shipment, transfer of title and risk of loss.

Critical Accounting Policies and Estimates 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenues, inventories,

and income taxes, among others. Our estimates are derived from historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Those results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

The Company recognizes revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services by following a five-step process: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price, and (5) recognize revenue when or as the Company satisfies a performance obligation, as further described below.

Performance obligations include sales of systems, contactors, spare parts, and services, as well as installation and training services included in customer contracts. A contract’s transaction price is allocated to each distinct performance obligation. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. The Company generally does not grant return privileges, except for defective products during the warranty period.

[[GREPCENT_TABLE]]
[["22"],["Table of Contents"]]
[[/GREPCENT_TABLE]]

For contracts that contain multiple performance obligations, the Company allocates the transaction price to the performance obligations on a relative standalone selling price basis. Standalone selling prices are based on multiple factors including, but not limited to, historical discounting trends for products and services and pricing practices in different geographies. Revenue for systems and spares is recognized at a point in time, which is generally upon shipment or delivery and evidenced by transfer of title and risk of loss to the customer. Revenue from services is recognized over time as the customer receives the benefit over the contractual period of generally one year or less.

The Company has elected the practical expedient to not assess whether a contract has a significant financing component as the Company’s standard payment terms are less than one year.

The Company sells its products primarily through a direct sales force. In certain international markets, the Company sells its products through independent distributors.

Inventory Valuation

We write down the carrying value of our inventory to net realizable value for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and its estimated realizable value based upon assumptions about future demand and market conditions. We assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts on a periodic basis.

Obsolete inventory or inventory in excess of our estimated usage is written down to its estimated market value less costs to sell, if less than its cost. The inventory write-downs are established on the basis of obsolete inventory or specifically identified inventory in excess of established usage. Inherent in our estimates of demand and market value in determining inventory valuation are estimates related to economic trends, market conditions, and future demand for our products. If actual demand and market conditions are less favorable than our projections, additional inventory write-downs may be required. If the inventory value is written down to its net realizable value, and subsequently there is an increased demand for the inventory at a higher value, the increased value of the inventory is not realized until the inventory is sold either as a component of a system or as separate inventory.

Income Taxes

The determination of our tax provision is highly dependent upon the geographic composition of worldwide earnings and tax regulations governing each region and is subject to judgments and estimates. Management carefully monitors the changes in many factors and adjusts the effective tax rate as required.

In the past, we assessed the likelihood that we would be able to recover our deferred tax assets. If recovery was not more likely than not, we increased our provision for taxes by recording a valuation allowance to reduce our deferred tax assets to the amount that was more likely than not to be recoverable. In determining whether the realization of these deferred tax assets would be impaired, we made judgments with respect to whether we were likely to generate sufficient future taxable income to realize these assets. In order to reverse the valuation allowance, management considered both positive and negative evidence and determined that there was sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized. As a result, we released the entire valuation allowance in fiscal 2024 which contributed to the tax benefit of approximately $20.7 million for the year ended May 31, 2024.   

Results of Operations

Fiscal Year

Our fiscal year ended on May 31 for each of our fiscal years in 2024, 2023 and 2022. Beginning on June 1, 2024, we have changed our fiscal year to the 52- or 53-week period ending on the Friday nearest May 31. Our first fiscal quarter in fiscal 2025 will end on August 30 and our fiscal year 2025 will end on May 30, 2025.

[[GREPCENT_TABLE]]
[["23"],["Table of Contents"]]
[[/GREPCENT_TABLE]]

Discussion of Results of Operations

Revenues

[[GREPCENT_TABLE]]
[["Revenue by Category","","Year Ended May 31,"],["(Dollars in thousands)","","2024","","","2023","","","2022","","","FY 2024 vs FY 2023","","","FY 2023 vs FY 2022"],["Products","","$","61,729","","","$","60,717","","","$","47,871","","","$","1,012","","","","1.7","%","","$","12,846","","","","26.8","%"],["Services","","","4,489","","","","4,244","","","","2,958","","","","245","","","","5.8","%","","","1,286","","","","43.5","%"],["Total revenues","","$","66,218","","","$","64,961","","","$","50,829","","","$","1,257","","","","1.9","%","","$","14,132","","","","27.8","%"],["Products as a percentage of total revenues","","","93.2","%","","","93.5","%","","","94.2","%"],["Services as a percentage of total revenues","","","6.8","%","","","6.5","%","","","5.8","%"]]
[[/GREPCENT_TABLE]]

Revenue increased by $1.3 million in fiscal year 2024 over fiscal year 2023, primarily driven by higher sales in our contactors.  Our contactors revenue increased by $15.7 million, and our services revenue increased by $0.3 million. The increase was partially offset by a decrease in systems revenue of $14.7 million.

Revenue increased by $14.1 million in fiscal year 2023 over fiscal year 2022, primarily due to the increases in revenue of our wafer-level test products. Revenue of our wafer-level test products and services for fiscal 2023 were $63.5 million and increased by $14.6 million from fiscal year 2022 due to strong demand for our FOX-P systems.

[[GREPCENT_TABLE]]
[["Revenue by Geography","","Year Ended May 31,"],["(Dollars in thousands)","","2024","","","2023","","","2022","","","FY 2024 vs FY 2023","","","FY 2023 vs FY 2022"],["Asia","","$","58,076","","","$","55,609","","","$","45,700","","","$","2,467","","","","4.4","%","","$","9,909","","","","21.7","%"],["United States","","","3,532","","","","9,289","","","","5,110","","","","(5,757",")","","(62.0","%)","","","4,179","","","","81.8","%"],["Europe","","","4,610","","","","63","","","","19","","","","4,547","","","N.M.","","","","44","","","","231.6","%"],["Total revenues","","$","66,218","","","$","64,961","","","$","50,829","","","$","1,257","","","","1.9","%","","$","14,132","","","","27.8","%"],["Asia as a percentage of total revenues","","","87.7","%","","","85.6","%","","","89.9","%"],["United States as a percentage of total revenues","","","5.3","%","","","14.3","%","","","10.1","%"],["Europe as a percentage of total revenues","","","7.0","%","","","0.1","%","","","0.0","%"]]
[[/GREPCENT_TABLE]]

N.M.-Not meaningful

On a geographic basis, revenues represent products that were shipped to or services that were performed at our customer locations. For fiscal year 2024, total revenues increased compared to the same period in the prior year due to an increase in international revenues as a result of more shipments to our customers in Asia and Europe, partially offset by the decline in revenue from a customer in the United states.

For fiscal year 2023, both international revenue and domestic revenue increased, compared to the same period in the prior year.

Gross Margin

[[GREPCENT_TABLE]]
[["Gross Profit by Category","","Year Ended May 31,"],["(Dollars in thousands)","","2024","","","2023","","","2022","","","FY 2024 vs FY 2023","","","FY 2023 vs FY 2022"],["Products","","$","30,636","","","$","30,958","","","$","22,207","","","$","(322",")","","(1.0","%)","","$","8,751","","","","39.4","%"],["Services","","","1,907","","","","1,788","","","","1,458","","","","119","","","","6.7","%","","","330","","","","22.6","%"],["Gross profit","","$","32,543","","","$","32,746","","","$","23,665","","","$","(203",")","","(0.6","%)","","$","9,081","","","","38.4","%"],["Gross Margin by Category"],["Product","","","49.6","%","","","51.0","%","","","46.4","%"],["Services","","","42.5","%","","","42.1","%","","","49.3","%"],["Gross margin","","","49.1","%","","","50.4","%","","","46.6","%"]]
[[/GREPCENT_TABLE]]

Gross profit decreased slightly for fiscal year 2024, compared to fiscal year 2023. Gross margin decreased to 49.1% in fiscal year 2024 from 50.4% in fiscal year 2023. The decrease in gross margin of 1.3% was primarily due to an increase in inventory reserves, as well as an increase in costs from design changes.

[[GREPCENT_TABLE]]
[["24"],["Table of Contents"]]
[[/GREPCENT_TABLE]]

Gross profit increased to $32.7 million for fiscal year 2023 from $23.7 million for fiscal year 2022. Gross margin increased to 50.4% in fiscal year 2023 from 46.6% in fiscal year 2022. The increase in gross margin of 3.8% was primarily the result of a decrease in inventory reserve provisions, an increase in manufacturing efficiencies as a result of higher sales volume, and a decrease in direct material costs.

Research and Development

[[GREPCENT_TABLE]]
[["","","Year Ended May 31,"],["(Dollars in thousands)","","2024","","","2023","","","2022","","","FY 2024 vs FY 2023","","","FY 2023 vs FY 2022"],["Research and development","","$","8,719","","","$","7,134","","","$","5,818","","","$","1,585","","","","22.2","%","","$","1,316","","","","22.6","%"],["As a percentage of total revenues","","","13.2","%","","","11.0","%","","","11.4","%"]]
[[/GREPCENT_TABLE]]

Research and development expenses consist primarily of compensation and benefits for product development personnel, outside development service costs, travel expenses, facilities cost allocations, and stock-based compensation charges. Research and development expenses increased by $1.6 million in fiscal year 2024 over fiscal year 2023 primarily due to higher employment-related costs of $0.5 million because of an increase in headcount, higher non-recurring engineering services charges of $0.3 million, an increase in allocated facility cost of $0.3 million and an increase in recruiting expenses of $0.2 million.

Research and development expenses increased by $1.3 million in fiscal year 2023 over fiscal year 2022, primarily due to increases in project expenses of $0.6 million and employment-related costs of $0.5 million related to research and development initiatives during fiscal 2023.

Selling, General and Administrative

[[GREPCENT_TABLE]]
[["","","Year Ended May 31,"],["(Dollars in thousands)","","2024","","","2023","","","2022","","","FY 2024 vs FY 2023","","","FY 2023 vs FY 2022"],["Selling, general and administrative","","$","13,746","","","$","12,237","","","$","10,047","","","$","1,509","","","","12.3","%","","$","2,190","","","","21.8","%"],["As a percentage of total revenues","","","20.8","%","","","18.8","%","","","19.8","%"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative expenses consist primarily of compensation and benefits for sales, marketing and general and administrative personnel, legal and accounting service costs, marketing communications costs, travel expenses, facilities cost allocations, and stock-based compensation charges. Selling, general and administrative expenses increased by $1.5 million in fiscal year 2024 over fiscal year 2023, primarily due to higher employment-related cost of $1.3 million because of an increase in headcount, and an increase in audit and legal service fees of $0.3 million.

Selling, general and administrative expenses increased by $2.2 million in fiscal year 2023 over fiscal year 2022, primarily due to increased shareholder related costs of $0.5 million, recruiting and relocation expenses of $0.3 million, employment-related costs of $0.6 million because of an increase in headcount to support our growing business, audit and legal service fees of $0.3 million, and travel expenses of $0.2 million.

Interest and Other Income, Net

[[GREPCENT_TABLE]]
[["","","Year Ended May 31,"],["(Dollars in thousands)","","2024","","","2023","","","2022","","","FY 2024 vs FY 2023","","","FY 2023 vs FY 2022"],["Interest income","","$","2,388","","","$","1,245","","","$","13","","","$","1,143","","","","91.8","%","","$","1,232","","","N.M."],["Gain from forgiveness of PPP loan","","","-","","","","-","","","","1,698","","","","-","","","","-","","","","(1,698",")","","(100.0%)"],["Other income (expense), net","","","(8",")","","","(3",")","","","30","","","","(5",")","","","166.7","%","","","(33",")","","(110.0%)"],["Interest and other income, net","","$","2,380","","","$","1,242","","","$","1,741","","","$","1,138","","","","91.6","%","","$","(499",")","","(28.7%)"]]
[[/GREPCENT_TABLE]]

N.M.-Not meaningful

Interest and other income, net, primarily consists of interest income, foreign currency transaction exchange gains and losses and other income (expense). Interest and other income, net, increased by $1.1 million in fiscal year 2024 over fiscal year 2023, primarily driven by higher interest income earned due to higher average cash and investment balances and higher yields from our investments in money market funds.

[[GREPCENT_TABLE]]
[["25"],["Table of Contents"]]
[[/GREPCENT_TABLE]]

Interest and other income, net, decreased by $0.5 million in fiscal year 2023 over fiscal year 2022, primarily due to the one-time gain from forgiveness of Payroll Protection Program loan (“PPP Loan”) of $1.7 million in fiscal 2022. The decrease was partially offset by higher interest income for the fiscal year 2023, driven by higher cash deposits and higher interest rates.

Provision for Income Taxes 

[[GREPCENT_TABLE]]
[["","","Year Ended May 31,"],["(Dollars in thousands)","","2024","","","2023","","","2022","","","FY 2024 vs FY 2023","","FY 2023 vs FY 2022"],["Income tax expense (benefit)","","$","(20,698",")","","$","60","","","$","91","","","$","(20,758",")","","N.M","","$","(31",")","","(34.1","%)"]]
[[/GREPCENT_TABLE]]

N.M.-Not meaningful

Income tax benefit was $20.7 million in  fiscal year 2024, compared to income tax expense of $60 thousand in fiscal year 2023 and $91 thousand in fiscal year 2022. A significant income tax benefit in fiscal year 2024 was recognized primarily due to release of a valuation allowance of $21.9 million, as management determined that there was sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized, which was partially offset by income tax expense of $1.2 million in fiscal year 2024.

Liquidity and Capital Resources

Cash, cash equivalents, and restricted cash were $49.3 million as of May 31, 2024, compared to $30.2 million as of May 31, 2023. Short term investments were $0 as of May 31, 2024, compared to $17.9 million as of May 31, 2023. We believe that our existing cash resources and anticipated funds generated from operations will satisfy our cash requirements to fund our operating activities, capital expenditures and other obligations for the next twelve months.

[[GREPCENT_TABLE]]
[["","","Year Ended May 31,"],["(In thousands)","","2024","","","2023","","","2022"],["Operating activities","","$","1,756","","","$","10,011","","","$","1,508"],["Investing activities","","","17,251","","","","(18,656",")","","","(416",")"],["Financing activities","","","139","","","","7,322","","","","25,761"],["Effect of exchange rate changes on cash, cash equivalents and restricted cash","","","(41",")","","","(37",")","","","49"],["Net increase (decrease) in cash, cash equivalents and restricted cash","","$","19,105","","","$","(1,360",")","","$","26,902"]]
[[/GREPCENT_TABLE]]

Net Cash Flows Provided by Operating Activities

Cash flow from operating activities during fiscal year 2024 mostly consisted of net income, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, share-based compensation expense and amortization of operating lease right-of-use assets. The $8.3 million decrease in cash flows from operating activities for fiscal year 2024, compared to fiscal year 2023, was driven primarily by an increase in cash used in inventory production and vendor payments due to anticipated customer demand, lower net income after non-cash adjustments and a decrease in cash provided by deferred revenue due to timing of customer deposits and revenue recognition, partially offset by an increase in cash provided by collection of accounts receivable. The $8.5 million increase in cash flows from operating activities for fiscal year 2023, compared to fiscal year 2022, was driven primarily by higher net income after non-cash adjustments, improved cash flow from collection of accounts receivable and increase in accounts payable due to higher inventory purchases, partially offset by an increase in cash used in inventory production and a decrease in cash provided by deferred revenue due to timing of customer deposits and revenue recognition.

Net Cash Flows Provided by (Used in) Investing Activities

Net cash provided by investing activities was $17.3 million for fiscal year 2024, compared to net cash used in investing activities of $18.7 million for fiscal year 2023. The increase was primarily due to the maturity of our short-term investments of $18.0 million during fiscal year 2024, while there was a net purchase of short-term investments of $17.3 million during fiscal year 2023, compared to no purchase or sale of short-term investments during fiscal year 2022. Capital expenditure in fiscal 2024, 2023 and 2022 was $0.7 million, $1.4 million and $0.4 million, respectively. Capital expenditure was primarily for acquisition of testing equipment and manufacturing equipment.

[[GREPCENT_TABLE]]
[["26"],["Table of Contents"]]
[[/GREPCENT_TABLE]]

Net Cash Flows Provided by Financing Activities

Net cash provided by financing activities decreased to $0.1 million for fiscal year 2024, compared to $7.3 million and $25.8 million for fiscal years 2023 and 2022, respectively. For the fiscal years 2023 and 2022, net proceeds from the sale of our common stock under our “At-the-Market” offering program were $6.8 million and $24.0 million, respectively, compared to no such sales during fiscal year 2024. The proceeds from the issuance of common stock under employee stock plans in fiscal 2024, 2023 and 2022 were $1.8 million, $2.6 million and $3.6 million, respectively. Cash used in shares repurchased for tax withholdings on vesting of restricted stock units in fiscal 2024, 2023 and 2022 were $1.6 million, $2.0 million and $0.4 million, respectively. In fiscal 2022, the Company also repaid the line of credit of $1.4 million.

Off-Balance Sheet Financing

We have not entered into any off-balance sheet financing arrangements and have not established any special purpose or variable interest entities.

Contractual Obligations  

As of May 31, 2024, the Company’s unconditional purchase obligations, which have a remaining term in excess of 12 months, are not material.

Recent Accounting Pronouncements 

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Note 1, “Organization and Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements.