Kulicke and Soffa Industries, Inc. — Form 10-Q Summary
Reporting period: The provided filing is for the quarter ended June 27, 2020, the third quarter of fiscal 2020, with comparisons to June 29, 2019. The request metadata identifies “2019 Q3,” but the filing text clearly reports fiscal 2020 third-quarter results. The financial statements are unaudited.
Business context
K&S designs, manufactures and sells semiconductor assembly capital equipment, tools, aftermarket products and services. It reports two segments: Capital Equipment and Aftermarket Products and Services (APS). Operations are highly exposed to semiconductor capital spending, industry cyclicality, customer concentration, foreign exchange, China-related trade restrictions and COVID-19 disruptions.
Key financial metrics
| Metric | Three months ended June 27, 2020 | Three months ended June 29, 2019 | Nine months ended June 27, 2020 | Nine months ended June 29, 2019 |
|---|---|---|---|---|
| Net revenue | $150.5 million | $127.1 million | $445.5 million | $400.2 million |
| Gross profit | $69.4 million | $58.8 million | $209.1 million | $189.2 million |
| Gross margin | 46.1% | 46.2% | 46.9% | 47.3% |
| Income from operations | $11.0 million | $1.8 million | $35.5 million | $13.9 million |
| Net income | $11.2 million | $1.3 million | $36.5 million | $5.2 million |
| Diluted EPS | $0.18 | $0.02 | $0.57 | $0.08 |
| Operating cash flow | Not separately provided | Not separately provided | $62.7 million | $83.2 million |
Capital Equipment revenue increased 24.0% year over year to $111.4 million in the quarter and increased 14.2% to $327.0 million for the nine-month period. APS revenue increased 4.7% to $39.0 million in the quarter and 4.1% to $118.5 million for the nine-month period.
Quarterly operating income benefited from higher volume and improved APS performance. Capital Equipment operating income was $1.0 million versus a $6.4 million loss in the prior-year quarter; APS operating income was $9.9 million versus $8.3 million. Research and development expense increased 8.2% in the quarter, while SG&A declined 2.9%, partly due to a $3.2 million Singapore COVID-19-related government grant.
Liquidity, debt and cash flow
- Cash and cash equivalents were $321.8 million at June 27, 2020, compared with $364.2 million at September 28, 2019.
- Short-term investments were $194.0 million, resulting in total cash, cash equivalents and short-term investments of $515.8 million, or 50.1% of total assets.
- The company had no outstanding borrowings under its $150.0 million unsecured MUFG overdraft facility at quarter-end. Short-term debt was zero versus $60.9 million at fiscal year-end.
- Nine-month operating cash flow was $62.7 million, down from $83.2 million, primarily because inventory increased by $28.0 million and income tax payments reduced cash flow.
- Investing activities provided $25.9 million, mainly reflecting a net $35.0 million redemption of short-term investments.
- Financing activities used $130.6 million, including $46.9 million for share repurchases, $22.8 million for dividends and net repayment of short-term debt.
- Capital expenditures were $8.6 million through nine months; full-year fiscal 2020 guidance was $12.0 million to $14.0 million.
Material changes versus the prior comparable period
- Quarterly revenue increased 18.4% and nine-month revenue increased 11.3%, driven by higher volume in both segments.
- Quarterly and nine-month operating income increased 500.5% and 154.8%, respectively, with the largest improvement in Capital Equipment.
- Gross margin was broadly stable but declined 10 basis points for the quarter and 40 basis points for nine months. Capital Equipment margin declined in the quarter due to an unfavorable product mix, including higher-margin pressure from LED bonders; APS margin improved due to better production absorption.
- Net income and diluted EPS increased substantially, supported by higher operating income and much lower effective tax rates. The effective tax rate declined to 5.8% from 75.0% for the quarter and to 9.8% from 78.2% for nine months, primarily due to reversals of valuation allowances and the absence of the prior-year $10.2 million TCJA transition-tax adjustment.
- Inventory increased to $114.2 million from $89.3 million at fiscal year-end, reflecting higher manufacturing activity in anticipation of subsequent demand.
- The company adopted ASC 842 leases in fiscal 2020, recording $22.2 million of operating right-of-use assets and $23.6 million of operating lease liabilities at June 27, 2020, and derecognizing the prior financing obligation related to its Singapore headquarters.
- The company repurchased 1.0 million shares for $22.4 million during the quarter and 2.1 million shares for $46.2 million during nine months. On July 3, 2020, the board increased total authorization to $400 million and extended the program through August 1, 2022.
Guidance, outlook, risks and unusual items
Management expects fiscal 2020 capital expenditures of $12.0 million to $14.0 million and believes available cash, short-term investments, credit facilities and anticipated operating cash flow will satisfy liquidity and capital requirements for at least the next twelve months. No formal revenue or earnings guidance is provided in the filing.
Management reported that manufacturing locations were operating near full capacity and that customer deliveries had not experienced significant delays, although supply-chain availability, logistics and freight remained challenging. Demand was generally consistent with expectations, but automotive demand was lower and particularly affected near-term wedge-bonder demand. Management expects significant short-term semiconductor-industry volatility despite continued long-term growth expectations.
- COVID-19 could cause renewed facility closures, supply-chain disruption, lower demand, customer credit deterioration, reduced productivity and future impairment charges. Management stated that COVID-19 had not materially affected fiscal 2020 results through the filing date.
- Approximately 54.6% of nine-month revenue was shipped to customers in China, and 93.5% was shipped outside the United States, increasing exposure to trade policy and geopolitical developments.
- New U.S. export rules affect certain advanced-packaging products and restrict sales to Huawei. Management did not expect a material direct impact but noted potential indirect effects.
- The company had $125.8 million of inventory purchase obligations due within less than one year, including some non-cancellable commitments.
- Deferred tax liabilities were $34.5 million and unrecognized tax benefits were $12.8 million, including accrued interest. The timing and ultimate resolution of tax examinations remain uncertain.
- Warranty reserves were $14.5 million at quarter-end, and a $3.2 million Singapore COVID-19-related grant reduced SG&A.
- There were no material pending legal proceedings beyond routine litigation, and management concluded that disclosure controls were effective.
Important facts for investors to verify
- Confirm that the applicable period is fiscal third quarter 2020, not 2019 Q3, based on the June 27, 2020 quarter-end date.
- Assess whether the revenue increase, particularly in LED, consumer, 5G-related and general semiconductor applications, is sustainable or reflects temporary customer and product mix.
- Monitor automotive and memory demand, China exposure, export restrictions and any further U.S.-China trade measures.
- Evaluate inventory growth, the $125.8 million purchase commitment and whether demand supports current production levels.
- Reconcile cash generation after share repurchases and dividends with the stated liquidity outlook.
- Review the unusually low effective tax rate and determine whether related tax benefits and valuation-allowance reversals are recurring.
- Track COVID-19 effects on supply chains, customer credit, operations, goodwill valuation and future semiconductor capital spending.