Kulicke and Soffa Industries, Inc. Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended July 1, 2023, compared with the periods ended July 2, 2022. The request references 2022 Q3, but the filing is for fiscal 2023 Q3. Results are unaudited.
Business context
Kulicke and Soffa designs, manufactures and services semiconductor and electronics assembly equipment, tools and solutions. Its customers include integrated device manufacturers, outsourced semiconductor assembly and test providers, foundries and electronics manufacturers. Reportable segments are Ball Bonding Equipment, Wedge Bonding Equipment, Advanced Solutions and Aftermarket Products and Services, with other businesses grouped in “All Others.”
Management described a highly cyclical semiconductor environment characterized by excess industry inventory, lower customer utilization, weaker consumer and industrial demand, geopolitical uncertainty, trade restrictions and supply-chain risks. Approximately 89.7% of third-quarter revenue and 90.4% of nine-month revenue was shipped outside the United States.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | 9M FY2023 | 9M FY2022 |
|---|---|---|---|---|
| Revenue | $190.9 million | $372.1 million | $540.2 million | $1,217.3 million |
| Gross profit | $90.0 million | $190.7 million | $262.8 million | $615.6 million |
| Gross margin | 47.2% | 51.2% | 48.7% | 50.6% |
| Operating income/(loss) | $(4.5) million | $122.1 million | $20.0 million | $402.5 million |
| Net income | $4.2 million | $119.0 million | $33.8 million | $368.6 million |
| Diluted EPS | $0.07 | $1.99 | $0.59 | $5.95 |
Approximate net margin was 2.2% in Q3 FY2023 versus 32.0% in the prior-year quarter, and 6.3% for the first nine months versus 30.3% in the prior-year period. Interest income increased to $8.8 million in the quarter and $23.4 million year to date, primarily from higher cash balances and interest rates.
Revenue and segment changes
- Q3 revenue declined 48.7%; nine-month revenue declined 55.6%.
- Q3 Ball Bonding revenue fell 64.7%, primarily due to lower general semiconductor and memory demand.
- Q3 Wedge Bonding revenue fell 16.2%; nine-month revenue increased 2.5%, supported by automotive and renewable-energy demand.
- Advanced Solutions revenue declined 31.1% in Q3 and 17.7% year to date, partly because of the timing of revenue recognition for customer contracts.
- Aftermarket Products and Services revenue declined 21.0% in Q3 and 21.6% year to date, reflecting lower spares, services and bonding-tool demand.
- “All Others” revenue declined 57.3% in Q3 and 68.2% year to date, mainly due to lower general semiconductor and mini-LED transfer-solution demand.
- Q3 gross margin decreased 400 basis points, primarily because of lower volume and less favorable product mix in Ball Bonding, APS and All Others. Wedge Bonding and Advanced Solutions margins improved on product mix.
Cash flow, liquidity and capital structure
| Balance or cash flow | July 1, 2023 | October 1, 2022 |
|---|---|---|
| Cash and cash equivalents | $401.8 million | $555.5 million |
| Short-term investments | $310.0 million | $220.0 million |
| Total cash, equivalents and investments | $711.8 million | $775.5 million |
| Total liabilities | $338.4 million | $393.9 million |
| Shareholders’ equity | $1,169.7 million | $1,194.7 million |
- Nine-month operating cash flow was $95.9 million, down from $273.6 million, primarily reflecting lower earnings.
- Investing cash flow was $(161.7) million, including $90.0 million of net short-term investment purchases, $36.9 million for the AJA acquisition and $35.1 million of capital expenditures.
- Financing cash flow was $(92.4) million, including $60.6 million of share repurchases and $31.3 million of dividends.
- No borrowings were outstanding under the $150.0 million unsecured overdraft facility. A $3.2 million bank guarantee was outstanding under a separate $5.0 million facility.
- Inventory increased to $228.0 million from $185.0 million at fiscal year-end, reflecting slower utilization and purchases of long-lead-time materials.
Material changes, unusual items and transactions
- The company acquired Advanced Jet Automation Co., Ltd. on February 22, 2023, for $38.1 million in cash, including $4.0 million held in escrow. The advanced dispensing business contributed an approximately $0.9 million Q3 loss and $1.3 million year-to-date loss, with no material consolidated revenue contribution.
- The company recorded $21.5 million of non-cash impairment charges in Q3 and year to date: $9.8 million of goodwill impairment, $6.9 million of developed-technology impairment related to the Lithography reporting unit and $5.0 million on a non-marketable equity investment.
- The company revised prior-period segment presentations after determining that previous conclusions under ASC 280 were erroneous. Management stated that the prior financial statements were not materially misstated.
- The company repurchased approximately 175,000 shares for $8.5 million in Q3 and approximately 1.33 million shares for $58.9 million during the first nine months. Approximately $190.2 million remained available under the repurchase authorization at July 1, 2023.
Outlook, risks and contingencies
- Fiscal 2023 capital expenditures are expected to be approximately $50 million to $54 million; $43.5 million had been incurred through Q3.
- Management expects cash on hand, investments, operating cash flow and available credit facilities to satisfy liquidity and capital requirements for at least the next twelve months and beyond, subject to economic and industry conditions.
- Key risks include semiconductor-cycle weakness, customer inventory corrections, lower equipment utilization, macroeconomic and inflationary pressures, supply-chain disruption, China-related demand and policy risks, Taiwan-China tensions, export restrictions, foreign-exchange exposure and cybersecurity threats.
- Foreign-exchange sensitivity was estimated at $4 million to $5 million for a 10% fluctuation. Forward contracts with a $58.3 million notional amount were outstanding at July 1, 2023.
- Outstanding commitments included $198.6 million of inventory purchase obligations, $9.6 million of unfunded private-equity commitments and $47.7 million of U.S. transition-tax payable.
- Management identified a material weakness in internal control over financial reporting related to the review of segment reporting under ASC 280. Remediation was in progress and the weakness had not been remediated as of July 1, 2023.
- The company disclosed potential intellectual-property misappropriation involving former employees in China and an ongoing investigation into possible unlawful reverse engineering. The filing does not provide a clear estimate of any related financial exposure.
Important facts for investors to verify
- Whether semiconductor inventory normalization and customer utilization improve enough to support revenue recovery, particularly in Ball Bonding and memory-related markets.
- Whether the Lithography reporting unit requires additional goodwill, intangible-asset or other impairment charges as forecasts and discount rates change.
- Progress and testing results for remediation of the material weakness in segment-reporting controls.
- The final purchase-price allocation, earn-out exposure and operating performance of the AJA dispensing business before the February 2024 measurement-period deadline.
- Execution of the $50 million to $54 million capital-expenditure plan and its effect on cash generation.
- Customer concentration, China-related revenue exposure, geopolitical restrictions and supply-chain commitments.
- Future share repurchases and dividends relative to operating cash flow and the company’s cyclical downturn.