Kulicke and Soffa Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 28, 2020. The request metadata identifies “2019 Q2,” but the filing is for fiscal 2020 second quarter and compares against March 30, 2019. Financial statements are unaudited and presented in thousands, except per-share data.
Business Context
K&S designs, manufactures and sells semiconductor assembly equipment, tools, spare parts and related services. Its two reportable segments are Capital Equipment and Aftermarket Products and Services (APS). Revenue is highly dependent on semiconductor manufacturers’ capital spending, semiconductor demand, customer concentration and cyclical industry conditions.
Key Financial Metrics
| Metric | Three months ended March 28, 2020 | Year-over-year change | Six months ended March 28, 2020 | Year-over-year change |
|---|---|---|---|---|
| Net revenue | $150.7 million | Up 30.1% | $295.0 million | Up 8.0% |
| Gross profit | $69.3 million | Up 24.7% | $139.7 million | Up 7.1% |
| Gross margin | 46.0% | Down 190 bps | 47.3% | Down 40 bps |
| Operating income | $11.1 million | Compared with $(2.5) million | $24.5 million | Up 102.6% |
| Operating margin | 7.3% | Improved from $(2.1)% | 8.3% | Improved from 4.4% |
| Net income | $11.9 million | Compared with $(3.6) million | $25.4 million | Up from $4.0 million |
| Diluted EPS | $0.19 | Compared with $(0.05) | $0.39 | Up from $0.06 |
- Segment revenue: Second-quarter Capital Equipment revenue increased 40.5% to $113.2 million; APS revenue increased 6.2% to $37.5 million. Six-month revenue increased 9.7% and 3.8%, respectively.
- Segment profitability: Second-quarter Capital Equipment operating income was $4.1 million versus a $9.2 million loss; APS operating income was $7.0 million versus $6.8 million.
- Cash flow: Six-month operating cash flow was $39.1 million, down from $83.3 million. The decrease primarily reflected a $19.0 million inventory increase, an $8.7 million increase in prepaid and other current assets, and a $3.8 million increase in receivables.
- Liquidity: Cash and cash equivalents were $392.3 million and short-term investments were $248.0 million at March 28, 2020. Total cash, cash equivalents and short-term investments were $640.3 million, or 55.2% of total assets.
- Debt: Short-term debt was $115.6 million, consisting of borrowings under a $150.0 million unsecured overdraft facility. Net cash and investments less short-term debt were approximately $524.7 million.
- Capital allocation: Six-month share repurchases totaled $23.9 million, dividends paid totaled $15.2 million, and $14.0 million to $18.0 million of fiscal 2020 capital expenditures were expected, with approximately $5.1 million incurred through the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by higher shipment volume, especially in general semiconductor applications, consumer demand and 5G-related telecommunications infrastructure. Unfavorable customer and product mix reduced pricing and margins.
- Capital Equipment revenue from general semiconductor applications increased substantially, while memory, automotive and certain advanced packaging markets remained weaker.
- Operating expenses declined 2.6% for the six-month period, reflecting lower SG&A and R&D spending, including lower headcount, prototype spending and favorable foreign exchange effects.
- The effective tax rate fell to 8.9% for the quarter and 11.5% for six months, compared with 407.7% and 79.1%, respectively, primarily because fiscal 2019 included U.S. one-time transition-tax adjustments.
- The company adopted ASC 842 lease accounting in fiscal 2020, recognizing approximately $22.2 million of operating right-of-use assets and $23.8 million of operating lease liabilities, while derecognizing the prior financing obligation and related property, plant and equipment.
- Inventory increased to $106.2 million from $89.3 million at fiscal year-end, while shareholders’ equity declined to $762.4 million from $769.1 million, primarily reflecting repurchases, dividends and comprehensive loss effects.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2020 capital expenditures of $14.0 million to $18.0 million, subject to market conditions.
- Management stated that existing cash, investments, credit facilities and anticipated operating cash flow were expected to satisfy liquidity and capital requirements for at least the next twelve months.
- COVID-19 caused temporary facility and office closures, work-from-home arrangements, supply-chain strain, higher logistics challenges and reduced non-manufacturing productivity. Manufacturing locations were operating at nearly full capacity at the filing date, but management could not estimate the ultimate effect on demand, liquidity or financial results.
- Near-term automotive demand was lower, particularly for wedge bonders. Management expected long-term semiconductor industry growth to normalize but anticipated significant short-term volatility.
- Approximately 94.8% of second-quarter revenue and 93.3% of six-month revenue came from shipments outside the United States. China represented approximately 60.1% of second-quarter revenue and 55.3% of six-month revenue.
- Customer and supplier concentration remains material. Xinye represented 10.6% of six-month revenue and 17.3% of accounts receivable; Haoseng represented 12.3% of accounts receivable.
- Inventory purchase obligations totaled $148.9 million, all due within fiscal 2020. The company also disclosed $67.2 million of U.S. transition-tax payable obligations and $13.0 million of unrecognized tax benefits, including accrued interest, with payment timing not reasonably estimable for the latter.
- The company had $3.5 million of outstanding bank guarantees and $115.6 million drawn under the overdraft facility. The facility is payable upon 30 days’ written demand and includes customary covenants and events of default.
- Management identified implementation of a new enterprise resource planning system over the next two years as a risk due to potential delays, cost overruns, operational disruption and effects on financial reporting controls.
Investor Verification Checklist
- Verify whether COVID-19 caused subsequent order cancellations, delivery delays, supply constraints, impairment charges or deterioration in automotive and semiconductor demand after March 28, 2020.
- Assess the sustainability of Capital Equipment volume growth and the effect of unfavorable customer and product mix on gross margins.
- Monitor inventory levels, inventory reserves of $30.6 million and the $148.9 million of inventory purchase commitments.
- Review repayment requirements and covenant exposure for the $115.6 million overdraft borrowing, which is payable on demand.
- Track customer concentration, particularly China-based revenue and receivables exposure.
- Evaluate progress, cost and internal-control implications of the planned ERP implementation.
- Confirm the continuation of share repurchases and dividends given the COVID-19-related uncertainty and the remaining $73.3 million repurchase authorization.