Kulicke and Soffa Industries, Inc. — Fiscal 2018 First Quarter 10-Q
Reporting period: Three months ended December 30, 2017, compared with the three months ended December 31, 2016. The interim financial statements are unaudited. K&S designs, manufactures, sells and services semiconductor assembly equipment, expendable tools and related products. Reportable segments are Capital Equipment and Aftermarket Products and Services (APS).
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $213.7 million | $149.6 million | Up 42.8% |
| Gross profit | $99.0 million | $68.3 million | Up 45.0% |
| Gross margin | 46.3% | 45.7% | Up 60 basis points |
| Operating income | $38.6 million | $17.3 million | Up 123.2% |
| Operating margin | 18.0% | 11.5% | Improved |
| Income before taxes | $40.3 million | $18.2 million | Up 121.4% |
| Income tax expense | $109.6 million | $2.6 million | Primarily tax reform-related |
| Net income/(loss) | $(69.3) million | $15.6 million | Declined materially |
| Diluted EPS | $(0.98) | $0.22 | Declined |
| Operating cash flow | $50.3 million | $30.0 million | Up $20.3 million |
Capital Equipment revenue increased 50.2% to $171.6 million, representing 80.3% of total revenue. APS revenue increased 19.0% to $42.1 million. Management attributed the growth primarily to higher customer demand in consumer, enterprise, automotive and industrial applications. Capital Equipment gross margin improved to 44.5% from 41.9%, while APS gross margin declined to 53.7% from 57.7%.
SG&A increased 2.3% to $30.2 million, while R&D increased 40.7% to $30.3 million. Operating expenses declined to 28.3% of revenue from 34.1%, reflecting operating leverage despite higher R&D investment.
At December 30, 2017, cash and cash equivalents were $390.7 million, restricted cash was $0.5 million and short-term investments were $259.0 million. Total cash, cash equivalents, restricted cash and short-term investments were $650.2 million, or 56.1% of total assets, up $41.2 million from September 30, 2017. Accounts receivable were $173.8 million and inventories were $106.7 million.
Operating cash flow was supported by an $84.6 million increase in income taxes payable, primarily related to the Tax Cuts and Jobs Act, as well as lower receivables and inventories. Investing cash flow used $48.2 million, including $133.0 million of short-term investment purchases, partly offset by $90.0 million of maturities and $5.2 million of capital expenditures. Financing cash flow used $3.4 million, including $3.3 million for share repurchases.
Total liabilities were $308.2 million. The principal financing obligation was $16.9 million related to the Singapore headquarters lease. The Company had $3.5 million outstanding under a Citibank facility supporting bank guarantees and no borrowings under its $25 million UOB revolving credit facility.
Material changes and unusual items
- Tax Cuts and Jobs Act: The Company recorded a provisional discrete tax provision of $105.0 million, including approximately $102.5 million of transition tax on deemed repatriation of foreign earnings and approximately $2.6 million from remeasurement of U.S. deferred tax balances. This produced a 272.1% effective tax rate and converted strong pre-tax profitability into a net loss.
- Liteq acquisition: The Company acquired Liteq, a lithography solutions provider for advanced packaging, in July 2017 for approximately $28.6 million in cash at closing, with potential earn-out payments. The acquisition added approximately $18.1 million of identifiable intangible assets and $10.3 million of goodwill based on preliminary purchase accounting.
- Share repurchases: K&S repurchased approximately 149,000 shares for $3.3 million during the quarter. Approximately $85.5 million remained available under the $100 million authorization.
- Restructuring: Accrued restructuring obligations declined to $3.5 million at quarter-end after $1.1 million of payments. The programs relate to international operations and the EA/APMR business unit.
- Management transition: The filing reflects $1.2 million of severance related to the November 2017 departure of the CFO; Lester Wong served as interim CFO at filing.
- Customer and geographic concentration: Approximately 85.7% of revenue came from customers outside the United States, and approximately 40.3% came from customers in China. Haoseng Industrial and Tesla each represented 10.9% of quarterly revenue; Haoseng represented 29.6% of accounts receivable at quarter-end.
Outlook, risks and contingencies
Management expects fiscal 2018 capital expenditures of $26.0 million to $28.0 million, with approximately $5.2 million incurred through the first quarter. Management believes existing cash, investments and expected operating cash flow will be sufficient for liquidity and capital requirements for at least the next twelve months.
The business remains exposed to semiconductor industry cyclicality, seasonality, limited demand visibility, customer concentration, competitive pricing, macroeconomic conditions and fluctuations in semiconductor capital spending. Management noted that Capital Equipment is more cyclical than APS and that price competition in the LED market adversely affected Capital Equipment pricing.
The Company estimates that a 10% foreign currency fluctuation could affect financial position, results of operations or cash flows by approximately $2.0 million to $3.0 million. Foreign exchange forward contracts with a $28.5 million notional amount were outstanding at quarter-end; an additional $21.5 million of contracts was entered into on January 23, 2018.
Contractual obligations included $193.6 million of inventory purchase commitments, $18.9 million of operating lease obligations and $77.4 million of long-term tax payable associated primarily with the transition tax. The Company remains subject to income tax examinations and indicated that the final impact of the Tax Cuts and Jobs Act may differ from provisional estimates. Future BEAT, GILTI, state tax and other tax-law effects could affect the effective tax rate.
Important facts for investors to verify
- Reconcile the $105.0 million provisional tax provision, including the $102.5 million transition tax, as additional tax guidance becomes available.
- Assess whether revenue growth and Capital Equipment demand are sustainable given semiconductor cyclicality, seasonality and customer concentration.
- Monitor Capital Equipment pricing pressure, particularly in the LED market, and the decline in APS gross margin.
- Evaluate the cash-flow benefit from the $84.6 million increase in income taxes payable and its future cash settlement requirements.
- Review Liteq’s operating contribution, earn-out exposure and final purchase-price allocation.
- Track inventory purchase commitments, long-term tax payments, foreign exchange exposure and the $85.5 million remaining share-repurchase authorization.