Kulicke & Soffa Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 29, 2013, compared with the periods ended June 30, 2012. The supplied metadata identifies “2012 Q3,” but the filing itself is for fiscal 2013 Q3. Results are unaudited and presented under U.S. GAAP.
Business context
The company designs, manufactures and services semiconductor assembly equipment and expendable tools. Its two reportable segments are Equipment and Expendable Tools. Results are highly dependent on semiconductor manufacturers’ and outsourced semiconductor assembly and test providers’ capital spending, which is cyclical, seasonal and sensitive to technology migration and macroeconomic conditions. Approximately 98.5% of third-quarter revenue and 97.2% of nine-month revenue came from customers outside the United States, primarily in Asia-Pacific.
Financial performance and liquidity
| Metric | Q3 FY2013 | Q3 FY2012 | 9M FY2013 | 9M FY2012 |
|---|---|---|---|---|
| Net revenue | $141.2 million | $255.5 million | $361.3 million | $521.9 million |
| Gross profit | $65.9 million | $122.4 million | $166.3 million | $244.4 million |
| Gross margin | 46.7% | 47.9% | 46.0% | 46.8% |
| Operating income | $18.9 million | $76.3 million | $31.3 million | $108.9 million |
| Operating margin | 13.4% | 29.9% | 8.7% | 20.9% |
| Net income | $18.9 million | $68.2 million | $29.8 million | $93.3 million |
| Diluted EPS | $0.25 | $0.90 | $0.39 | $1.24 |
- Equipment revenue declined 47.2% in the quarter and 33.4% year to date, primarily due to lower ball bonder and heavy-wire wedge bonder volumes, customer conservatism regarding technology migration and weakness in the discrete market. Equipment pricing also declined because of customer and product mix.
- Expendable Tools revenue declined 12.8% in the quarter and 4.9% year to date, reflecting lower wire-bonding and wedge-bonder tool volumes.
- Third-quarter gross margin fell 120 basis points; Equipment margin declined 100 basis points to 45.9%, and Expendable Tools margin declined 850 basis points to 52.5%. Lower volume reduced fixed-cost absorption in Expendable Tools.
- Operating expenses were relatively stable in absolute dollars, but increased materially as a percentage of revenue. Third-quarter SG&A was $31.3 million and R&D was $15.8 million.
- The effective tax rate for the first nine months was 6.5%, compared with 10.1% in the prior-year period. The current period included a $1.7 million benefit from reversing a foreign uncertain-tax-position reserve and $0.9 million of tax expense from a foreign tax-return estimate change.
- Cash and cash equivalents were $508.5 million at June 29, 2013, up $68.2 million from September 29, 2012, and equal to 61.5% of total assets. The filing reports no available-for-sale investments at quarter-end.
- Net cash provided by operating activities was $68.2 million for the nine months, compared with $123.2 million in the prior-year period. Investing activities used $0.6 million, while financing activities provided $0.9 million.
- The company had no outstanding convertible debt at quarter-end. Its $110.0 million of 0.875% convertible subordinated notes were repaid in cash at maturity in fiscal 2012.
Material changes and unusual items
- Revenue and operating income decreased sharply because of the semiconductor equipment downturn and lower equipment volumes. Nine-month revenue declined 30.8% and operating income declined 71.3% year over year.
- Operating results benefited from lower manufacturing costs associated with facility consolidation and certain sales of previously reserved die bonders, but these benefits were outweighed by volume declines.
- A $1.1 million prior-period adjustment related to government grants was recorded during the first quarter of fiscal 2013. Management considered it immaterial to prior-year and expected full-year results.
- Intangible assets declined to $13.5 million from $20.4 million at fiscal 2012 year-end, primarily because of amortization. No goodwill impairment trigger occurred during the quarter or nine-month period.
- The company recorded $14.1 million of financing obligation related to construction of its Singapore facility and expected to record an additional $14.4 million over the remaining construction term.
Outlook, risks and contingencies
- Management expects fiscal 2013 capital expenditures of approximately $19 million to $20 million, including approximately $9 million for Singapore facility leasehold improvements.
- Management believes existing cash and anticipated operating cash flow will satisfy liquidity and capital requirements for at least the next twelve months, although it may seek additional debt or equity financing if appropriate.
- The Singapore facility was expected to be ready for occupancy in the second half of calendar 2013 or the first quarter of fiscal 2014. The anticipated initial lease term is ten years, with two additional ten-year renewal options; annual rent and service charges are expected to range from approximately $4.0 million to $5.0 million Singapore dollars.
- Contractual and contingent obligations included $101.1 million of inventory purchase commitments, $31.4 million of operating lease obligations and $10.9 million of obligations reflected on the financial statements. The Singapore construction financing obligation was excluded from the contractual-obligations table.
- Customer concentration remains significant. For the nine months, Siliconware Precision Industries represented 11.1% of revenue and STATS ChipPAC represented 10.5%; individual customers also represented substantial portions of accounts receivable.
- Key risks include semiconductor-industry cyclicality and seasonality, uncertain technology migration, customer concentration, reliance on certain suppliers, foreign-exchange exposure, inventory obsolescence, and potential changes in tax rates or deferred-tax valuation allowances. A 10% foreign-currency fluctuation could affect financial position, results or cash flows by approximately $2 million to $3 million.
- The company reported effective disclosure controls and procedures and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Confirm that the relevant comparison is fiscal 2013 Q3, ending June 29, 2013, rather than “2012 Q3” in the supplied metadata.
- Assess whether semiconductor equipment demand, technology migration and discrete-market weakness are improving or continuing to pressure Equipment volumes and margins.
- Review customer concentration, receivable collectability and the effect of large customer orders on quarterly revenue volatility.
- Track completion costs, the additional $14.4 million expected Singapore construction financing obligation and the timing and economics of the new lease.
- Evaluate the sustainability of the unusually low 6.5% effective tax rate, including foreign tax adjustments and valuation allowances.
- Reconcile operating cash flow with reported earnings and monitor inventory commitments, fixed-cost absorption and cash deployment.