Kulicke & Soffa Industries, Inc. — Fiscal 2014 First Quarter 10-Q
Reporting period: Three months ended December 28, 2013, compared with the three months ended December 29, 2012. The interim financial statements are unaudited. The company designs and sells semiconductor assembly equipment, expendable tools, and related services through its Equipment and Expendable Tools segments.
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net revenue | $79.1 million | $114.0 million | Down 30.6% |
| Gross profit | $38.4 million | $51.5 million | Down 25.5% |
| Gross margin | 48.5% | 45.2% | Up 330 basis points |
| Operating income (loss) | $(2.2) million | $4.2 million | Down $6.4 million |
| Net income (loss) | $(2.0) million | $3.6 million | Declined $5.6 million |
| Diluted EPS | $(0.03) | $0.05 | Declined $0.08 |
| Cash flow from operations | $37.2 million | $58.5 million | Down $21.2 million |
- Equipment revenue declined 36.8% to $63.1 million, primarily because of lower ball-bonder volume, lower customer equipment utilization, and unfavorable customer mix. Equipment operating results shifted to a $6.9 million loss from $1.7 million of income.
- Expendable Tools revenue increased 13.0% to $16.0 million, driven by higher wedge-bonder tool volume and favorable product mix. Segment operating income increased to $4.7 million from $2.5 million.
- SG&A declined 20.5% to $23.1 million, while R&D declined 4.3% to $17.5 million. Operating expenses nevertheless increased as a percentage of revenue to 51.3% from 41.5%.
- Interest income was $0.3 million; interest expense was $0.1 million, primarily related to the Singapore facility financing obligation. The effective tax rate was 4.4%, compared with 17.7% in the prior-year quarter.
- Cash and cash equivalents were $550.6 million at December 28, 2013, up $28.8 million from September 28, 2013. Cash, cash equivalents, and short-term investments totaled $557.2 million.
- Operating cash flow benefited from a $49.2 million reduction in receivables, partly offset by a $26.0 million decrease in accounts payable and accrued liabilities. Investing cash outflows were $8.7 million, including $5.4 million of capital expenditures and $3.3 million of short-term investments.
- Total liabilities were $121.7 million, including a $19.8 million financing obligation related to the Singapore headquarters. Shareholders’ equity was $718.5 million.
Material changes from the prior comparable period
- Revenue contracted sharply because of weaker semiconductor equipment demand and seasonal customer purchasing patterns following capacity additions or replacements near the end of the September quarter.
- Despite lower revenue, total gross margin improved by 330 basis points, reflecting product mix and cost effects, including stronger Expendable Tools performance.
- The company moved from operating and net income to operating and net losses. Management attributed the operating decline principally to lower Equipment revenue and related gross profit.
- SG&A reductions included lower incentive compensation, amortization, severance, staff costs, depreciation, legal fees, and favorable foreign-exchange effects. These reductions were partly offset by a $0.8 million provision for input tax receivables.
- A new Singapore headquarters building was completed December 1, 2013. The company recorded approximately $20.0 million of property and a related financing obligation because continuing involvement prevented sale-leaseback derecognition.
- The company recorded a $0.8 million prior-period adjustment for an input-tax-receivable provision that should have been recognized in the quarter ended September 28, 2013; management deemed the adjustment immaterial to prior and expected full-year results.
Outlook, risks, contingencies, and unusual items
- Management expects fiscal 2014 capital expenditures of approximately $17.0 million to $18.0 million, including approximately $6.4 million for Singapore facility leasehold improvements.
- Management believes existing cash, investments, and expected operating cash flow will satisfy liquidity and capital requirements for at least the next twelve months. Potential acquisitions, joint ventures, alliances, or other strategic opportunities could require substantial additional capital.
- The semiconductor capital-equipment market is cyclical, seasonal, highly competitive, and difficult to forecast. Weaker customer demand, a slower transition from gold to copper wire bonding, macroeconomic deterioration, or lower semiconductor capital spending could further reduce revenue and profitability.
- Approximately 94.1% of revenue was shipped to locations outside the United States, primarily in Asia/Pacific. Customer and receivable concentrations are significant; one customer represented 13.2% of revenue, and two customers represented 38.2% of accounts receivable at quarter-end.
- Unfunded or off-balance-sheet commitments included $56.8 million of inventory purchase obligations and $29.7 million of operating lease obligations. The Singapore lease has a ten-year initial term, with options for two additional ten-year terms, and annual rent and service charges of approximately S$4 million to S$5 million.
- The company had a $5.0 million Citibank credit facility supporting a S$3.4 million bank guarantee for the Singapore lease. No foreign-exchange forward contracts were outstanding; management estimated that a 10% currency fluctuation could affect financial position, results, or cash flow by approximately $3 million to $4 million.
- No goodwill or long-lived-asset impairment triggering events were identified during the quarter. Management stated that disclosure controls were effective and that no material changes to internal control over financial reporting occurred.
Important facts for investors to verify
- Whether the sharp Equipment revenue decline was temporary seasonality or reflected a sustained reduction in customer equipment utilization and semiconductor capital spending.
- Whether the improved gross margin can be sustained if Equipment volume remains weak.
- Progress toward management’s fiscal 2014 capital-expenditure plan and the ongoing cost savings from manufacturing consolidation and operating reductions.
- Customer concentration, receivable collectability, inventory reserves, and the $56.8 million of inventory purchase commitments.
- The accounting, cash-service requirements, and long-term obligations associated with the $19.8 million Singapore financing obligation and ten-year lease.
- The effect of foreign-exchange movements, tax-rate changes, and the $0.8 million prior-period tax-receivable adjustment on future results.