Kulicke and Soffa Industries, Inc. — Fiscal 2019 First-Quarter Form 10-Q
Reporting period: Three months ended December 29, 2018, compared with three months ended December 30, 2017. The interim financial statements are unaudited. K&S designs, manufactures and services semiconductor assembly equipment, tools, spare parts and related products through its Capital Equipment and Aftermarket Products and Services (APS) segments.
Financial performance and position
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net revenue | $157.2 million | $213.7 million | Down 26.4% |
| Gross profit | $74.8 million | $97.2 million | Down 23.0% |
| Gross margin | 47.6% | 45.5% | Up 210 basis points |
| Income from operations | $14.6 million | $39.2 million | Down 62.8% |
| Operating margin | 9.3% | 18.3% | Down approximately 900 basis points |
| Net income/(loss) | $7.5 million | $(69.5) million | Improved by $77.0 million |
| Diluted EPS | $0.11 | $(0.99) | Improved |
| Cash flow from operations | $56.0 million | $50.3 million | Up $5.7 million |
- Capital Equipment revenue declined 32.4% to $115.9 million, primarily from lower volume in consumer, enterprise, automotive and industrial applications and unfavorable pricing in power module, power discrete and battery applications.
- APS revenue decreased 1.9% to $41.3 million. Higher contributions from capillaries, spares and wedge bonder consumables were largely offset by consumables pricing pressure.
- Capital Equipment gross margin increased to 43.9% from 43.5%; APS gross margin increased to 57.8% from 53.7%. Lower manufacturing costs and product mix supported margins, but substantially lower volume reduced operating leverage.
- SG&A increased 9.5% to $30.4 million, while R&D declined 1.5% to $29.8 million. SG&A included higher staff costs and an unfavorable foreign-exchange impact, partially offset by lower severance and improved doubtful-account results.
- Interest income rose to $3.8 million from $2.0 million because of higher interest rates and a larger average investment balance. Interest expense was $0.3 million.
- Income tax expense was $10.6 million versus $110.4 million in the prior-year quarter. The current-quarter effective tax rate was 58.4%, including a $7.7 million expense related primarily to an adjustment of the Tax Cuts and Jobs Act transition tax.
Liquidity, capital allocation and debt
- Cash, cash equivalents, restricted cash and short-term investments totaled $632.9 million at December 29, 2018, up $18.8 million from fiscal year-end. Cash and cash equivalents were $277.4 million and short-term investments were $355.0 million.
- Operating cash flow of $56.0 million benefited principally from a $56.5 million reduction in receivables, a $5.4 million inventory reduction and higher income taxes payable, partly offset by a $32.9 million reduction in accounts payable, accrued expenses and other current liabilities.
- Investing cash use was $65.3 million, including $62.0 million of net purchases of short-term investments and $3.3 million of capital expenditures. Financing cash use was $33.9 million, including $25.7 million of share repurchases and $8.1 million of dividends.
- The company had a $15.8 million financing obligation related to its Singapore headquarters and a $3.0 million outstanding Citibank credit facility for bank guarantees. No significant conventional debt balance is otherwise disclosed.
- During the quarter, K&S repurchased 1.2 million shares for $25.5 million. Approximately $72.2 million remained under the then-current $200 million authorization. A subsequent January 31, 2019 authorization increased the program to $300 million.
- The company declared a quarterly dividend of $0.12 per share. Future dividends remain subject to board discretion.
Material changes versus the prior comparable period
- Revenue fell sharply because of weaker customer demand and semiconductor capital-equipment spending, with the decline concentrated in Capital Equipment.
- Despite lower revenue, consolidated gross margin improved 210 basis points because of lower costs and favorable segment mix; operating margin contracted materially because fixed operating expenses represented a larger percentage of revenue.
- The company returned to profitability, compared with a significant prior-year loss, primarily because the prior-year quarter included unusually high tax expense associated with the Tax Cuts and Jobs Act.
- Customer concentration increased in certain areas: Micron represented 18.5% of current-quarter revenue and 17.7% of accounts receivable. Approximately 93.4% of revenue was shipped outside the United States, and 37.7% was shipped to customers in China.
- The company adopted the new revenue-recognition standard in the first quarter of fiscal 2019 using the modified retrospective method; management reported no material impact on the amount or timing of revenue recognition.
Guidance, outlook, risks and unusual items
- Fiscal 2019 capital expenditures are expected to be $24 million to $28 million, with approximately $5 million incurred through the first quarter. Planned spending includes R&D, Asian manufacturing enhancements, information-technology infrastructure and facility improvements.
- Management believes existing cash, investments and expected operating cash flow will meet liquidity and capital requirements for at least the next twelve months.
- Management characterizes the semiconductor industry as highly cyclical, seasonal and difficult to forecast, with limited visibility into future demand. Current weakness was attributed to lower demand across several end markets and competitive pricing pressure.
- Key risks include semiconductor-cycle volatility, macroeconomic conditions, customer and geographic concentration, reliance on sole-source suppliers, foreign-exchange exposure, inventory obsolescence, warranty obligations and changes in tax laws or examinations.
- A 10% currency fluctuation could affect financial position, results of operations or cash flows by approximately $1 million to $2 million. Foreign-exchange forward contracts with a $32.5 million notional amount were outstanding at quarter-end; a further $13.9 million of contracts was entered into on January 22, 2019.
- Contractual obligations included $109.5 million of inventory purchase commitments and $18.0 million of operating lease obligations. Deferred tax liabilities, long-term tax payable and retirement obligations also remain relevant to liquidity; the timing of certain tax payments is uncertain.
- On January 31, 2019, the company invested $5.0 million in a collaborative partner. The filing does not provide a full forward revenue or earnings forecast.
Investor verification points
- Verify whether the Capital Equipment demand decline and pricing pressure persist, particularly in consumer, enterprise, automotive, industrial, power and battery applications.
- Assess whether APS stability and improved gross margins can offset lower Capital Equipment volume.
- Reconcile future effective tax rates and cash tax payments, including the transition-tax adjustment and foreign tax exposures.
- Monitor customer concentration, China exposure, receivables collection and inventory commitments as semiconductor conditions evolve.
- Confirm planned fiscal 2019 capital expenditures, the pace of share repurchases, dividend sustainability and the effect of the expanded repurchase authorization on liquidity.
- Review the impact of upcoming lease-accounting adoption in fiscal 2020 and credit-loss guidance expected in fiscal 2021; the filing states that the effects were still under evaluation.