Kulicke & Soffa Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended June 30, 2012, compared with July 2, 2011. The request metadata identifies “2011 Q3,” but the filing is a fiscal 2012 third-quarter report. The financial statements are unaudited.
Business Context
K&S designs, manufactures, sells, services and upgrades semiconductor assembly equipment and expendable tools. Its two segments are Equipment and Expendable Tools. Results depend heavily on semiconductor manufacturers’ and outsourced semiconductor assembly and test providers’ capital spending, which is cyclical, seasonal and volatile. Approximately 98% of revenue was shipped outside the United States, primarily to Asia-Pacific customers.
Financial Performance and Liquidity
| Metric | Three months ended June 30, 2012 | Three months ended July 2, 2011 | Nine months ended June 30, 2012 | Nine months ended July 2, 2011 |
|---|---|---|---|---|
| Net revenue | $255.5 million | $294.4 million | $521.9 million | $650.0 million |
| Gross profit | $122.4 million | $134.1 million | $244.4 million | $305.2 million |
| Gross margin | 47.9% | 45.5% | 46.8% | 46.9% |
| Operating income | $76.3 million | $81.7 million | $108.9 million | $147.4 million |
| Net income | $68.2 million | $70.7 million | $93.3 million | $125.7 million |
| Diluted EPS | $0.90 | $0.95 | $1.24 | $1.71 |
- Third-quarter revenue declined 13.2%; nine-month revenue declined 19.7%.
- Third-quarter operating income declined 6.6%; nine-month operating income declined 26.1%.
- Third-quarter net margin was approximately 26.7%, compared with 24.0% in the prior-year quarter. Nine-month net margin was approximately 17.9%, compared with 19.3%.
- Equipment represented 92.8% of third-quarter revenue and 90.9% of nine-month revenue. Equipment revenue declined 13.9% and 20.7%, respectively. Expendable Tools revenue declined 3.2% and 8.4%.
- Cash provided by operating activities was $123.2 million for the nine months, compared with $150.5 million in the prior-year period. Capital expenditures were $5.1 million.
- Cash and cash equivalents were $380.7 million at June 30, 2012, versus total cash and investments of $384.6 million at October 1, 2011. Cash represented 50.8% of total assets.
- The $110.0 million principal balance of the 0.875% Convertible Subordinated Notes was repaid in cash at maturity on June 1, 2012, plus $0.5 million of interest. No shares were issued. No debt remained outstanding at June 30, 2012.
- Total assets were $748.7 million and total shareholders’ equity was $572.9 million at June 30, 2012. Accounts receivable increased to $177.9 million from $138.6 million at fiscal year-end, while inventories declined to $65.2 million from $73.1 million.
Material Changes Versus the Prior Comparable Period
- Lower equipment volumes, particularly for wedge bonders and ball bonders, drove most of the revenue and profit decline. Wedge bonder demand weakened as end-market demand reduced customers’ production requirements; ball bonder results were also affected by order timing and seasonality.
- Third-quarter gross margin improved 240 basis points to 47.9%, primarily from product and customer mix and operational cost efficiencies. Nine-month gross margin was broadly stable at 46.8%.
- Operating expenses declined 12.0% in the quarter and 14.1% for the nine months, reflecting lower commissions, doubtful-account expense, severance, depreciation and amortization, and the Switzerland pension-plan curtailment gain. R&D spending also declined following headcount consolidation.
- Despite lower earnings, the company generated substantial operating cash flow. Financing cash flow was negative $107.0 million, primarily because of the note repayment.
- The company paid $14.8 million under the Orthodyne earnout agreement during the first quarter and recorded the amount as an increase to goodwill in fiscal 2011.
Guidance, Outlook, Risks and Unusual Items
- Management expects remaining fiscal 2012 capital expenditures of approximately $3.0 million to $4.0 million, primarily for R&D, Asian manufacturing enhancements and information technology.
- Management believes existing cash and investments, expected operating cash flow and an available credit facility will satisfy liquidity and capital requirements for at least the next twelve months. Specific credit-facility availability was not quantified in the filing.
- Management continues to pursue manufacturing and operational consolidation in Asia, lower-cost suppliers, copper-wire bonding opportunities, LED applications and other semiconductor assembly technologies.
- The company expects continued semiconductor-cycle volatility and seasonal fluctuations. Risks include lower semiconductor capital spending, macroeconomic weakness, customer concentration, foreign-exchange exposure, sole-source suppliers, inventory obsolescence and collectibility of receivables.
- Advanced Semiconductor Engineering accounted for 23.1% of nine-month revenue, and Siliconware Precision Industries accounted for 11.8%. At June 30, 2012, these customers represented 12.7% and 20.4% of accounts receivable, respectively.
- Inventory purchase obligations totaled $148.7 million, substantially due within fiscal 2012. Operating lease obligations totaled $21.9 million. The company also entered into a Singapore facility development and lease arrangement expected to be ready in the second half of 2013, with annual rent and service charges of approximately $4 million to $5 million Singapore dollars during the initial term.
- Foreign-currency sensitivity was estimated at a $3 million to $4 million effect on financial position, results or cash flow from a near-term 10% currency movement. No foreign-exchange hedges were outstanding at June 30, 2012.
- Other unusual items included a $1.8 million pretax Switzerland pension-plan curtailment and settlement gain recognized in the first quarter and a $0.2 million write-down of a Swiss building classified as held for sale.
Important Facts for Investors to Verify
- Confirm the timing and sustainability of semiconductor equipment demand, particularly wedge bonder and ball bonder volumes.
- Assess whether improved third-quarter gross margin can persist despite lower volumes, product-mix changes and potential manufacturing under-absorption.
- Monitor customer concentration and the elevated accounts-receivable balance, including exposure to Advanced Semiconductor Engineering and Siliconware Precision Industries.
- Review the $148.7 million inventory purchase commitment against expected demand and potential excess or obsolete inventory reserves.
- Verify the company’s liquidity outlook after the $110.0 million debt repayment and evaluate the terms and availability of its credit facility.
- Track execution and costs associated with Asian manufacturing consolidation and the planned Singapore facility.
- Consider tax-rate sustainability, foreign tax matters, foreign-exchange exposure and the company’s reliance on foreign operations and tax holidays.