Kulicke & Soffa Industries, Inc. — Fiscal 2021 Form 10-K
Reporting period: Fiscal year ended October 2, 2021, compared primarily with fiscal year ended October 3, 2020. The requested “2020 Q4” label does not match the source document, which is an annual Form 10-K for fiscal 2021.
Business context
K&S designs, manufactures and sells semiconductor assembly capital equipment, bonding tools, advanced packaging and electronic assembly equipment, and aftermarket products and services. Its two reportable segments are Capital Equipment and Aftermarket Products and Services (APS). Approximately 96.4% of fiscal 2021 revenue was from shipments outside the United States, and China represented approximately 55.6% of revenue.
The company operates in a cyclical and highly competitive semiconductor equipment industry. Fiscal 2021 demand benefited from consumer semiconductor applications, 5G, automotive, memory and LED markets.
Financial performance
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net revenue | $1.518 billion | $623.2 million | +143.5% |
| Gross profit | $697.0 million | $298.0 million | +133.9% |
| Gross margin | 45.9% | 47.8% | -190 bps |
| Income from operations | $412.4 million | $58.5 million | +604.9% |
| Operating margin | 27.2% | 9.4% | Expanded materially |
| Net income | $367.2 million | $52.3 million | +602.0% |
| Diluted EPS | $5.78 | $0.83 | +596.4% |
| Operating cash flow | $300.0 million | $94.4 million | +217.8% |
Segment revenue: Capital Equipment revenue increased 184.1% to $1.313 billion, while APS revenue increased 27.3% to $205.1 million. Capital Equipment operating income rose to $356.0 million from $22.1 million; APS operating income rose to $56.5 million from $36.4 million.
Margins and expenses: Capital Equipment gross margin decreased to 44.0% from 44.7%, partly because fiscal 2020 benefited from a warranty reserve revision. APS gross margin increased to 58.2% from 56.7% due primarily to favorable product mix. SG&A increased 26.8% to $147.1 million, and R&D increased 11.4% to $137.5 million. Fiscal 2021 included $39.8 million of incentive compensation expense versus $18.5 million in fiscal 2020.
Taxes: Income tax expense was $47.3 million, with an 11.4% effective tax rate versus 18.6% in fiscal 2020. The lower rate reflected Singapore tax incentives, foreign tax rates, tax credits and a net release of valuation allowances.
Liquidity, cash flow and capital allocation
- Cash, cash equivalents and short-term investments totaled $739.8 million at October 2, 2021, up $209.7 million from the prior year.
- Cash and cash equivalents were $362.8 million; short-term investments were $377.0 million.
- Operating cash flow was $300.0 million. Investing cash outflow was $81.7 million, including $26.3 million for the Uniqarta acquisition and $22.8 million of capital expenditures. Financing cash outflow was $44.3 million, primarily dividends and share repurchases.
- The company had no outstanding borrowings under its $150.0 million unsecured overdraft facility at year-end. It had $3.0 million of outstanding bank guarantees.
- Fiscal 2022 capital expenditures were expected to be $38.0 million to $42.0 million, primarily for R&D, manufacturing, information technology security, ERP implementation and leasehold improvements.
- The company declared dividends of $0.56 per share during fiscal 2021 and repurchased approximately 215,000 shares for $10.2 million. Approximately $132.0 million remained available under the repurchase authorization.
Material changes versus the prior comparable period
- Bookings increased to $2.177 billion from $646.4 million, and backlog increased to $787.2 million from $127.9 million. Management cautioned that orders are often cancellable or deferrable and backlog may not predict future revenue.
- Revenue growth was broad-based, with particularly strong Capital Equipment demand in general semiconductor, automotive, memory and LED markets.
- Total assets increased to $1.602 billion from $1.055 billion, while shareholders’ equity increased to $1.095 billion from $758.0 million.
- Accounts receivable increased to $421.2 million from $198.6 million, and inventory increased to $167.3 million from $111.8 million, reflecting higher sales and manufacturing activity.
- K&S acquired Uniqarta, a laser transfer technology developer, for $26.5 million in cash on January 19, 2021. The acquisition expanded the company’s LED market presence and contributed a $0.2 million net loss during fiscal 2021.
- Fiscal 2020 included a $5.4 million favorable warranty reserve estimate revision that increased fiscal 2020 net income; this benefit did not recur in fiscal 2021.
Guidance, outlook, risks and unusual items
Management did not provide a specific fiscal 2022 revenue or earnings forecast in the filing. It expects long-term semiconductor industry growth but emphasized limited demand visibility, seasonality and continuing industry volatility.
- COVID-19 and supply chain: Manufacturing operated at full capacity, but electronic component shortages, logistics constraints, labor availability and freight challenges caused delivery delays. Management stated that COVID-19 had not materially affected fiscal 2021 results but warned that future variants, restrictions and supply disruptions could adversely affect liquidity and results.
- Customer and geographic concentration: ASE Technology Holding represented 17.4% of fiscal 2021 revenue, the top ten customers represented 62.0%, and China represented 55.6% of revenue.
- Backlog execution: The $787.2 million backlog is subject to customer cancellation, reduction or delivery deferral, often with limited penalties.
- Supplier dependence: K&S relies on subcontractors and, for certain components, sole-source suppliers. Global semiconductor shortages affected the company’s ability to obtain some chip requirements.
- Trade and export restrictions: U.S.-China tariffs, export controls and restrictions affecting Huawei and other customers could reduce demand or limit sales of products based on U.S. technology.
- Commitments: Inventory purchase obligations totaled $591.8 million, substantially all due within one year. The company also had $60.9 million of U.S. transition tax payable and $15.0 million of unrecognized tax benefits, including accrued interest, whose payment timing was uncertain.
- Tax exposure: A Singapore tax incentive is scheduled to expire in fiscal 2025. Loss of the incentive could materially increase future tax expense; the filing states the ordinary Singapore statutory rate is 17%.
- ERP implementation: A new enterprise resource planning system was being implemented over two years, creating potential execution, cost, reporting and internal-control risks.
- Unusual items: Fiscal 2021 included $1.7 million of acquisition-related expenses, a $1.0 million gain on disposal of an equity-method investment, and an $11.6 million net release of deferred-tax valuation allowances.
PricewaterhouseCoopers LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The critical audit matter concerned realizability of deferred tax assets.
Investor verification checklist
- Verify whether the unusually high bookings and backlog convert into revenue, particularly given cancellation and deferral rights.
- Monitor component availability, supplier concentration, freight costs and the effect of shortages on delivery performance and margins.
- Assess customer concentration, especially ASE Technology Holding and China exposure, along with U.S.-China trade and export-control developments.
- Reconcile cash generation with the substantial increase in receivables, inventory and inventory purchase commitments.
- Evaluate the sustainability of the 45.9% gross margin and the 11.4% effective tax rate, including the fiscal 2025 Singapore tax incentive expiration.
- Track fiscal 2022 capital spending, ERP implementation progress and any related control or operational disruptions.
- Review the Uniqarta purchase-price allocation, goodwill and intangible assets for subsequent impairment or changes in valuation estimates.