Kulicke and Soffa Industries, Inc. — Fiscal 2021 Q3 Form 10-Q Summary
Reporting period: Quarter and nine months ended July 3, 2021, compared with June 27, 2020. The request metadata identifies “2020 Q3,” but the filing is for fiscal 2021 third quarter. Financial statements are unaudited and presented in thousands, except per-share data.
Business Context
The Company designs, manufactures and sells semiconductor and electronics assembly equipment, tools, spare parts, repair, maintenance and upgrade services. Reportable segments are Capital Equipment and Aftermarket Products and Services (APS). Operations are highly exposed to semiconductor industry cycles, customer capital spending, seasonality, supply-chain conditions and macroeconomic factors.
Key Financial Metrics
| Metric | Q3 FY2021 | Q3 FY2020 | Change |
|---|---|---|---|
| Revenue | $424.3 million | $150.5 million | Up 182.0% |
| Gross profit | $195.7 million | $69.4 million | Up 181.9% |
| Gross margin | 46.1% | 46.1% | Flat |
| Operating income | $120.5 million | $11.0 million | Up 997.9% |
| Operating margin | 28.4% | 7.3% | Up 21.1 points |
| Net income | $113.8 million | $11.2 million | Up 920.3% |
| Diluted EPS | $1.79 | $0.18 | Up $1.61 |
| Metric | Nine months FY2021 | Nine months FY2020 |
|---|---|---|
| Revenue | $1.032 billion | $445.5 million |
| Gross profit | $465.7 million | $209.1 million |
| Gross margin | 45.1% | 46.9% |
| Operating income | $257.6 million | $35.5 million |
| Operating margin | 25.0% | 8.0% |
| Net income | $233.5 million | $36.5 million |
| Diluted EPS | $3.68 | $0.57 |
Revenue and Segment Trends
- Q3 Capital Equipment revenue increased 232.2% to $370.2 million, driven primarily by general semiconductor demand related to consumer applications and 5G, and automotive demand. Favorable product mix improved the segment gross margin to 44.6% from 41.8%.
- Q3 APS revenue increased 38.7% to $54.1 million. APS gross margin declined to 56.3% from 58.6% because of less favorable mix in spares and services.
- Nine-month Capital Equipment revenue increased 169.7% to $881.7 million, while APS revenue increased 27.1% to $150.6 million.
- Approximately 95.8% of Q3 revenue and 96.6% of nine-month revenue was shipped to locations outside the United States, primarily in Asia-Pacific. China represented approximately 57.2% of Q3 revenue and 53.9% of nine-month revenue.
Cash Flow, Liquidity and Capital Structure
- Cash provided by operating activities was $176.7 million for the nine months, compared with $62.7 million in the prior-year period. Accounts receivable increased $170.4 million and inventory increased $40.8 million, partly offset by a $144.7 million increase in accounts payable, accrued expenses and other current liabilities.
- Cash and cash equivalents were $388.0 million at July 3, 2021, compared with $188.1 million at October 3, 2020. Short-term investments were $247.0 million, resulting in total cash, cash equivalents and short-term investments of approximately $635.0 million.
- Investing cash flow was positive $54.2 million, including $95.0 million of net short-term investment maturities, partly offset by $26.3 million for the Uniqarta acquisition and $16.7 million of capital expenditures.
- Financing cash flow was negative $32.0 million, primarily reflecting $24.8 million of dividends and $7.0 million of share repurchases.
- No amounts were outstanding under the $150.0 million unsecured MUFG overdraft facility at July 3, 2021. A separate bank-guarantee facility had $3.8 million outstanding. Lease liabilities totaled $21.5 million.
- Management expects fiscal 2021 capital expenditures of approximately $26 million to $30 million; approximately $15.3 million had been incurred through the third quarter.
Material Changes and Unusual Items
- Revenue and profitability increased sharply year over year, principally from higher volume in both reportable segments. The nine-month gross margin declined 180 basis points because of mix and other factors, although Q3 gross margin was unchanged.
- Uniqarta was acquired on January 19, 2021 for approximately $26.5 million in cash. The acquisition added laser-transfer technology and expanded the LED business. It contributed a net loss of approximately $0.2 million for the nine months.
- The Company recognized a $1.0 million gain from selling an equity-method investment and received a $2.0 million COVID-19-related Singapore government grant for fiscal 2021.
- The effective tax rate was 6.0% in Q3 and 9.9% for the nine months, benefiting from lower-tax foreign jurisdictions, tax incentives, credits and a partial release of valuation allowances.
- The Company repurchased approximately 82,000 shares for $4.1 million in Q3 and 153,000 shares for $6.4 million year to date. Approximately $135.7 million remained under the repurchase authorization, which expires August 1, 2022.
Outlook, Risks and Contingencies
- Management stated that Q3 demand was consistent with or exceeded expectations and that manufacturing locations were operating at full capacity. However, visibility into future demand remains limited and semiconductor industry cyclicality and seasonality may cause significant fluctuations.
- Electronic-component shortages and constrained materials, logistics and freight availability were straining the supply chain, although the Company had not experienced significant customer-delivery delays.
- Management believed available cash, investments, existing facilities and operating cash flows were sufficient for at least the next twelve months. Approximately $614.8 million of total cash, cash equivalents and short-term investments was held by foreign subsidiaries.
- Material commitments included $671.9 million of inventory purchase obligations, substantially due within one year, and total contractual and statutory obligations of $734.7 million, including $60.7 million of U.S. transition tax payable.
- Customer and geographic concentration, China-related trade and regulatory risks, foreign-exchange exposure, sole-source suppliers, inventory obsolescence, COVID-19 developments and semiconductor demand volatility remain significant risks. A 10% foreign-currency fluctuation could affect financial position, results or cash flows by approximately $2 million to $3 million.
- The Company reported no material changes to previously disclosed risk factors, no material adverse pending litigation exposure, no goodwill impairment trigger and effective disclosure controls as of July 3, 2021.
Important Facts for Investors to Verify
- Whether the exceptional revenue growth and operating leverage are sustainable as semiconductor capital-spending cycles normalize.
- Whether supply-chain constraints, component shortages and the $671.9 million inventory commitment create excess inventory, delivery delays or margin pressure.
- The composition, collectability and timing of the substantial increase in accounts receivable and customer-related accrued liabilities.
- Progress and commercial contribution from the Uniqarta acquisition and the carrying value of its goodwill and in-process research and development.
- The sustainability of the unusually low effective tax rate and the potential impact of uncertain tax positions, including $12.5 million of unrecognized tax benefits.
- Future capital allocation among dividends, share repurchases, capital expenditures, acquisitions and potential financing needs.