Kulicke and Soffa Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 1, 2023, compared with the periods ended April 2, 2022. The supplied metadata identifies “2022 Q2,” but the filing is for fiscal 2023 Q2. Financial statements are unaudited.
Business context
Kulicke and Soffa designs, manufactures and services semiconductor and electronics assembly equipment, tools, consumables and aftermarket solutions. It operates through Capital Equipment and Aftermarket Products and Services (APS). Results are highly dependent on semiconductor manufacturers’ capital spending, utilization rates, inventory levels, customer mix and broader macroeconomic conditions.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Change |
|---|---|---|---|
| Net revenue | $173.0 million | $384.3 million | (55.0%) |
| Gross profit | $84.1 million | $201.7 million | (58.3%) |
| Gross margin | 48.6% | 52.5% | (390) bps |
| Income from operations | $12.6 million | $129.3 million | (90.2%) |
| Net income | $15.0 million | $116.0 million | (87.0%) |
| Diluted EPS | $0.26 | $1.86 | Down $1.60 |
Six-month results: Revenue was $349.3 million, down 58.7%; gross profit was $172.8 million, down 59.3%; operating income was $24.5 million, down 91.3%; net income was $29.6 million, down 88.1%; and diluted EPS was $0.51 versus $3.97.
Segment revenue: Capital Equipment revenue fell 60.0% to $133.7 million in Q2, while APS revenue fell 22.0% to $39.3 million. Capital Equipment operating income declined 97.0% to $3.3 million; APS operating income declined 48.7% to $9.3 million.
Margins: Capital Equipment gross margin was 46.0%, down 520 basis points, and APS gross margin was 57.6%, down 360 basis points. Lower volumes, unfavorable product mix and lower APS bonding-tool selling prices pressured margins.
Interest and taxes: Q2 interest income increased to $8.0 million from $0.5 million, primarily due to higher cash balances and interest rates. The effective tax rate increased to 27.0% from 10.6%, principally because of global intangible low-taxed income and the required capitalization of research and development expenditures.
Cash flow, liquidity and capital structure
- Cash provided by operations was $86.9 million for the six months, compared with $169.0 million in the prior-year period.
- Cash and cash equivalents were $389.1 million at April 1, 2023, versus $555.5 million at fiscal year-end. Short-term investments increased to $345.0 million from $220.0 million.
- Total cash, cash equivalents and short-term investments were $734.1 million, down $41.4 million from October 1, 2022 and equal to 48.2% of total assets.
- Investing activities used $186.2 million, including $125.0 million of net short-term investment purchases, $36.9 million for the AJA acquisition and $24.5 million of capital expenditures.
- Financing activities used $72.9 million, including $52.0 million for share repurchases and $20.5 million for dividends.
- No amounts 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 $224.2 million from $185.0 million, reflecting slower utilization and accumulation of long-lead-time materials.
Material changes versus the prior comparable period
- Revenue declined sharply because customers reduced purchases amid semiconductor supply-chain inventory buildup, lower equipment utilization and weaker consumer and industrial demand.
- Capital Equipment weakness was concentrated in general semiconductor, LED and memory markets. Automotive and Industrial revenue was comparatively more resilient.
- Operating expenses were broadly controlled: Q2 SG&A increased 1.1%, while R&D declined 3.4%. Six-month SG&A increased 5.1% and R&D was essentially flat.
- The company completed its $38.1 million acquisition of Advanced Jet Automation Co., Ltd. on February 22, 2023. AJA adds high-precision dispensing capabilities and opportunities in mini- and micro-LED markets, but contributed an approximately $0.4 million net loss and was not material to consolidated revenue.
- The company repurchased approximately 1.16 million shares for $50.4 million during the six months. Approximately $198.8 million remained available under the $800 million authorization as of April 1, 2023.
- The quarterly dividend was $0.19 per share. Future dividends remain subject to board approval.
Guidance, outlook and risks
- Management expects fiscal 2023 capital expenditures of approximately $53 million to $57 million; approximately $33 million had been incurred through the second quarter.
- Management expects existing cash, investments, operating cash flows and available credit facilities to satisfy liquidity and capital requirements for at least the next twelve months.
- Management described near-term demand visibility as limited and expects continued semiconductor industry cyclicality and seasonality. It expects long-term industry growth projections to normalize but gave no specific revenue or earnings guidance in the provided text.
- Key risks include semiconductor inventory corrections, reduced customer utilization and capital spending, macroeconomic weakness, inflation, interest rates, geopolitical tensions, the Ukraine/Russia conflict, COVID-19 developments, China-related trade restrictions, Taiwan-China tensions, supply-chain disruptions, foreign exchange movements and customer concentration.
- Approximately 92.5% of Q2 revenue was shipped to locations outside the United States, and 32.1% was shipped to customers headquartered in China. A 10% foreign-exchange fluctuation could affect financial position, results or cash flows by approximately $4 million to $5 million.
- Outstanding commitments included $233.7 million of inventory purchase obligations, $9.6 million of uncalled private-equity fund commitments and $47.7 million of U.S. transition-tax payable. Unrecognized tax benefits, including accrued interest, totaled approximately $17.5 million.
- Management reported effective disclosure controls. AJA is expected to be excluded from management’s fiscal 2023 internal-control assessment under applicable SEC guidance for recently acquired businesses.
Important facts for investors to verify
- Whether semiconductor customer inventories and equipment utilization recover, and the timing of any Capital Equipment demand improvement.
- The sustainability of gross margins amid lower volumes, product-mix changes and pricing pressure.
- Progress integrating AJA, the final purchase-price allocation and any earn-out obligations or impairment risks.
- Whether elevated inventory and purchase commitments convert into revenue or create excess and obsolete inventory exposure.
- The pace of share repurchases, dividends and capital expenditures relative to operating cash generation.
- The effects of GILTI, R&D capitalization and tax examinations on future effective tax rates and cash taxes.
- Exposure to China, Taiwan-China geopolitical developments, trade restrictions, foreign exchange and semiconductor industry cyclicality.