Kulicke & Soffa Industries, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended April 2, 2016, compared with March 28, 2015. The request metadata identifies “2015 Q2,” but the filing is the fiscal 2016 second-quarter report. Financial statements are unaudited.
Business context
The Company designs, manufactures, and services semiconductor assembly equipment and expendable tools. Reportable segments are Equipment and Expendable Tools. Demand is highly cyclical and seasonal and depends on semiconductor manufacturers, outsourced semiconductor assembly and test providers, and electronics and automotive customers. Approximately 90.9% of six-month revenue was shipped outside the United States, primarily in Asia/Pacific.
Key financial metrics
| Metric | Three months ended April 2, 2016 | Three months ended March 28, 2015 | Six months ended April 2, 2016 | Six months ended March 28, 2015 |
|---|---|---|---|---|
| Revenue | $156.4 million | $145.2 million | $264.9 million | $252.7 million |
| Gross profit | $69.6 million | $68.6 million | $120.1 million | $123.3 million |
| Gross margin | 44.5% | 47.2% | 45.3% | 48.8% |
| Operating income | $11.7 million | $9.8 million | $10.0 million | $19.5 million |
| Operating margin | 7.5% | 6.7% | 3.8% | 7.7% |
| Net income | $5.1 million | $7.9 million | $5.0 million | $15.8 million |
| Diluted EPS | $0.07 | $0.10 | $0.07 | $0.20 |
Equipment generated $141.1 million of second-quarter revenue and $234.0 million for the six-month period. Expendable Tools generated $15.3 million and $30.9 million, respectively. Six-month operating income was $1.3 million for Equipment and $8.7 million for Expendable Tools.
The six-month effective tax rate rose to 53.6% from 19.6%; the second-quarter rate was 58.1% versus 20.1%. The increase primarily reflected a one-time $4.4 million tax liability from a settlement with a foreign tax authority, along with deferred-tax and foreign-tax effects.
Cash flow, liquidity, and debt
- Cash and cash equivalents were $482.0 million at April 2, 2016, down $16.6 million from October 3, 2015; cash represented 51.6% of total assets.
- Six-month operating cash flow was negative $1.0 million, compared with $48.6 million of operating cash flow in the prior-year period. The primary use was a $52.4 million increase in receivables, partially offset by higher payables and accrued liabilities.
- Investing cash flow was negative $1.8 million, including $2.8 million of capital expenditures. Financing cash flow was negative $14.1 million, primarily due to $14.6 million of share repurchases.
- The Company had a $17.2 million financing obligation related to its Singapore headquarters. A $25 million unsecured revolving credit facility was entered into in March 2016 and had no borrowings at quarter-end. A separate Citibank facility had $2.7 million outstanding in connection with a bank guarantee.
- Approximately $478.2 million of cash and cash equivalents was held by foreign subsidiaries, including approximately $366.8 million not available for U.S. use without additional U.S. income tax.
Material changes versus the prior comparable period
- Second-quarter revenue increased 7.7%, led by Equipment revenue growth of 8.7%; Expendable Tools revenue declined 0.5%.
- Six-month revenue increased 4.9%, largely from APMR and SMT products acquired with Assembléon. Equipment revenue rose 6.0%, while Expendable Tools revenue fell 3.1%.
- Gross margin declined 270 basis points in the second quarter and 350 basis points for the six-month period. Management cited unfavorable customer mix and pricing, lower fixed-cost absorption, and higher wedge-bonder costs.
- Second-quarter operating income increased 19.6% because of lower operating expenses and higher gross profit. Six-month operating income fell 48.7% because gross profit declined and operating expenses increased.
- Six-month SG&A increased 3.9%, while R&D increased 9.1% due primarily to investment in advanced packaging. Restructuring and operational streamlining reduced staff costs, and a $2.0 million stock-compensation reversal related to the former CEO’s retirement benefited the period.
- The Company repurchased 1.4 million shares for $14.6 million during the six months. Approximately $7.0 million remained under the repurchase authorization at April 2, 2016.
Guidance, outlook, risks, and unusual items
- Fiscal 2016 capital expenditures are expected to be $10 million to $11 million, primarily for R&D projects, Asian manufacturing enhancements, and information-technology infrastructure.
- Management stated that existing cash, investments, and anticipated operating cash flow should fund liquidity and capital requirements for at least the next twelve months. The filing does not provide specific revenue or earnings guidance.
- Management expects continued semiconductor industry cyclicality, seasonality, limited demand visibility, and volatility in equipment spending. Growth opportunities include copper wire bonding, memory, advanced packaging, automotive, industrial, and SMT applications.
- Contractual obligations not reflected on the balance sheet totaled $170.3 million, including $141.8 million of inventory purchase obligations and $28.5 million of operating lease obligations. The filing notes that some inventory commitments are non-cancelable or carry cancellation penalties.
- Customer concentration increased: Haoseng Industrial represented 15.8% of six-month revenue and 19.8% of receivables; STATS ChipPAC represented 10.1% of revenue and 14.0% of receivables; Siliconware represented 13.1% of receivables.
- Foreign-exchange exposure was estimated at $3 million to $4 million for a 10% currency fluctuation. No derivatives were outstanding at quarter-end; on April 7, 2016, the Company entered into $18.5 million of foreign-exchange forward contracts.
- The Company revised October 3, 2015 balance-sheet amounts for a $2.6 million prior-period income-tax and deferred-tax error. Management determined that the error was not material to prior annual or interim financial statements.
- The semiconductor industry, international operations, foreign currency, customer concentration, supplier dependence, geopolitical conditions, trade restrictions, and potential tax examinations remain material risks.
Investor verification points
- Verify the filing period, since the provided metadata says 2015 Q2 while the filing covers fiscal 2016 Q2.
- Assess whether the revenue contribution and profitability of the Assembléon acquisition are improving, including APMR and SMT product margins.
- Monitor gross-margin recovery, customer mix, pricing pressure, fixed-cost absorption, and wedge-bonder costs.
- Reconcile operating cash flow with earnings and track receivables, inventory, and payables as demand changes.
- Evaluate the sustainability of share repurchases given negative operating cash flow during the first six months.
- Review the $4.4 million foreign tax settlement, ongoing foreign tax examinations, and the impact of future tax-rate changes.
- Consider the location and repatriation restrictions on foreign cash, contractual purchase commitments, customer concentrations, and international operating risks.