Kulicke & Soffa Industries, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the fiscal quarter and six months ended April 3, 2021, compared with March 28, 2020. The company designs, manufactures and sells semiconductor and LED assembly equipment, tools, spare parts and services through its Capital Equipment and Aftermarket Products and Services (APS) segments. Approximately 96.8% of quarterly revenue was shipped outside the United States, primarily to Asia-Pacific, and approximately 53.8% was shipped to customers in China.
Financial performance and liquidity
| Metric | Three months ended April 3, 2021 | Year-over-year change | Six months ended April 3, 2021 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $340.2 million | Up 125.7% | $608.0 million | Up 106.1% |
| Gross profit | $148.5 million | Up 114.3% | $270.0 million | Up 93.3% |
| Gross margin | 43.7% | Down 230 bps | 44.4% | Down 290 bps |
| Operating income | $83.1 million | Up 650.4% | $137.2 million | Up 460.0% |
| Operating margin | 24.4% | Versus 7.3% | 22.6% | Versus 8.3% |
| Net income | $71.3 million | Versus $11.9 million | $119.7 million | Versus $25.4 million |
| Diluted EPS | $1.13 | Versus $0.19 | $1.90 | Versus $0.39 |
Capital Equipment revenue increased 154.8% in the quarter and 137.3% for the six-month period, driven by general semiconductor, automotive, industrial and LED demand. APS revenue increased 37.8% and 21.4%, respectively, due to higher volumes in spares, services and wire-bonding tools.
Capital Equipment gross margin declined to 40.6% in the quarter and 41.7% for the six-month period, primarily because of product mix and $4.9 million and $6.3 million, respectively, of spot-purchase and expediting costs. APS gross margin improved to 60.5% and 58.9%, respectively, due to favorable product mix.
Six-month net cash provided by operating activities was $85.7 million, compared with $39.1 million in the prior-year period. Cash generation benefited from higher net income but was reduced by increases in receivables of $109.3 million and inventory of $29.3 million. Investing cash flow was $2.0 million, including $26.3 million paid for the Uniqarta acquisition, $8.9 million of capital expenditures and a $35.0 million net redemption of short-term investments. Financing cash flow was negative $19.1 million, reflecting $16.1 million of dividends and $2.9 million of share repurchases.
Cash, cash equivalents and short-term investments totaled $564.3 million at April 3, 2021, up $34.2 million from October 3, 2020. Cash and cash equivalents were $257.3 million and short-term investments were $307.0 million. No amounts were outstanding under the $150.0 million unsecured overdraft facility; $3.8 million was outstanding under a bank-guarantee facility. Total liabilities were $390.1 million and shareholders’ equity was $866.9 million.
Material changes versus the prior comparable period
- Revenue more than doubled, with the largest increase in Capital Equipment.
- Operating income increased substantially as revenue growth more than offset higher operating expenses.
- Gross margin declined because of unfavorable Capital Equipment mix and supply-chain-related expediting costs.
- SG&A increased 4.6% in the quarter and 14.9% year to date; R&D increased 20.0% and 15.8%, respectively, primarily due to higher staff costs, incentive compensation and headcount.
- Interest income declined because of lower average interest rates, while interest expense declined because of lower average short-term debt.
- The company acquired Uniqarta on January 19, 2021, for approximately $26.5 million in cash. Uniqarta develops laser-transfer technology and contributed a $0.1 million net loss during the reported periods. The preliminary purchase accounting included $16.8 million of goodwill and $11.2 million of intangible assets.
- The company declared a quarterly dividend of $0.14 per share and repurchased approximately 23,000 shares during the quarter. Approximately $139.8 million remained available under the $400 million repurchase authorization.
Guidance, outlook, risks and unusual items
Management expects fiscal 2021 capital expenditures of approximately $30 million to $34 million, with $8.8 million incurred through the second quarter. Planned spending includes R&D, manufacturing enhancements, information-technology security, enterprise-resource-planning implementation and facility improvements.
Management stated that second-quarter demand was consistent with or exceeded expectations and that the company was operating at full manufacturing capacity. However, supply-chain conditions remain strained because of electronic-component shortages and difficult materials, logistics and freight availability. Management expects semiconductor industry growth to continue over the long term but cautions that short-term volatility may persist.
COVID-19 had not materially affected fiscal 2021 results or liquidity through April 3, 2021. The company received approximately $2.0 million of Singapore COVID-19-related grants and subsidies. Management believes existing liquidity, available facilities and operating cash flow are sufficient for at least the next twelve months, but notes that new variants, supply disruptions, economic deterioration or industry weakness could adversely affect results and liquidity.
Key exposures include semiconductor industry cyclicality, customer and geographic concentration, China-related trade and policy risks, sole-source suppliers, inventory obsolescence, foreign-exchange volatility and customer credit risk. A 10% foreign-currency fluctuation could affect financial position, results of operations or cash flows by approximately $2 million to $3 million. The company had $549.0 million of inventory purchase obligations, substantially due within one year, and $12.9 million of unrecognized tax benefits. No material changes were reported to the risk factors in the 2020 Form 10-K, and management concluded that disclosure controls were effective.
Important facts for investors to verify
- Whether elevated Capital Equipment demand and revenue growth are sustainable after customer mix, seasonality and semiconductor-cycle effects.
- Whether component shortages, spot purchases and expediting fees continue to pressure gross margins.
- The final purchase-price allocation and operating contribution of Uniqarta, including the valuation of its in-process research and development.
- Receivables, inventory levels and working-capital conversion as sales growth continues.
- Customer concentration, particularly ASE Technology Holding and major distributors, and the approximately 51.5% six-month revenue exposure to customers in China.
- Execution against the $30 million to $34 million fiscal 2021 capital-expenditure plan and the $549.0 million of inventory purchase commitments.
- The effect of COVID-19, supply-chain disruptions, tariffs, trade restrictions and foreign-exchange movements on future results.
- Future dividend and share-repurchase decisions, which remain subject to board discretion and business conditions.