Kulicke & Soffa Industries, Inc. — Fiscal 2020 Q1 10-Q Summary
Reporting period: Three months ended December 28, 2019; filed January 31, 2020. The interim financial statements are unaudited. Comparisons are with the three months ended December 29, 2018.
Business Context
The Company designs, manufactures, sells, services and upgrades semiconductor assembly equipment, tools and related products. Its two reportable segments are Capital Equipment and Aftermarket Products and Services (APS). Results depend heavily on semiconductor manufacturers’ capital spending, utilization, industry cycles, seasonality and macroeconomic conditions.
Financial Performance and Liquidity
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net revenue | $144.3 million | $157.2 million | Down 8.2% |
| Gross profit | $70.4 million | $74.8 million | Down 5.9% |
| Gross margin | 48.8% | 47.6% | Up 120 basis points |
| Income from operations | $13.4 million | $14.6 million | Down 7.8% |
| Net income | $13.5 million | $7.5 million | Up 79.3% |
| Diluted EPS | $0.21 | $0.11 | Up $0.10 |
| Operating cash flow | $25.0 million | $56.0 million | Down $31.0 million |
- Capital Equipment revenue declined 11.7% to $102.3 million, primarily from lower volume in power discrete and battery applications and unfavorable customer and product mix.
- APS revenue increased 1.7% to $42.0 million, supported by higher product utilization, partially offset by lower pricing in wedge-bonding tools.
- Operating margin was approximately 9.3%, compared with 9.3% in the prior-year quarter. Lower revenue and gross profit were substantially offset by lower SG&A and R&D expenses.
- The effective tax rate fell to 13.6% from 58.4%. The prior-year rate included a $7.7 million adjustment related to the U.S. one-time transition tax.
- Cash, cash equivalents and short-term investments totaled $616.4 million at quarter-end, including $497.4 million of cash and cash equivalents. Net of $76.0 million of short-term borrowings, management reported liquidity of approximately $540.4 million.
- Net cash increased $133.2 million during the quarter, primarily because of a $110.0 million net redemption of short-term investments and operating cash generation.
- Debt consisted primarily of $76.0 million outstanding under an unsecured $150.0 million MUFG overdraft facility. Amounts are payable upon 30 days’ written demand and bear interest at overnight U.S. dollar LIBOR plus 1.5%.
Material Changes Versus Prior Comparable Period
- Revenue decreased $12.9 million, driven by Capital Equipment; APS provided modest growth.
- Gross margin improved despite lower gross profit, primarily because of more favorable Capital Equipment product mix and lower manufacturing costs.
- SG&A declined 5.9%, mainly due to favorable foreign exchange effects and lower staffing costs, partially offset by higher severance.
- R&D declined 5.1%, principally because of lower staffing costs.
- Operating cash flow fell substantially because the prior-year period benefited from a $56.5 million reduction in receivables. Current-period working capital included a $7.0 million inventory increase and a $3.0 million receivables increase.
- The Company repurchased approximately 224,000 shares for $5.4 million and paid $7.6 million of dividends. Approximately $91.8 million remained under the $300 million repurchase authorization.
- Adoption of ASC 842 lease accounting added approximately $22.2 million of operating right-of-use assets and $23.8 million of operating lease liabilities, while removing approximately $14.5 million of financing obligation and $15.3 million of property, plant and equipment.
Outlook, Commentary and Risks
- Management expects fiscal 2020 capital expenditures of $18 million to $22 million, with approximately $2.3 million incurred through Q1. Planned spending includes R&D, Asian manufacturing enhancements, information technology and facility leasehold improvements.
- Management expects existing cash and investments, the MUFG facility and operating cash flow to fund liquidity and capital requirements for at least the next twelve months.
- The Company expects long-term semiconductor consumption growth but stated that demand softness beginning in the fourth quarter of fiscal 2018 may continue through fiscal 2020.
- Key risks include semiconductor industry cyclicality and seasonality, limited demand visibility, tariffs and trade restrictions, customer and geographic concentration, foreign-exchange exposure, reliance on certain suppliers, inventory obsolescence and customer credit risk.
- Approximately 91.7% of quarterly revenue came from shipments outside the United States, and approximately 50.3% came from customers in China. Micron represented 18.5% of revenue.
- 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 $29.9 million of foreign-exchange forward contracts outstanding at quarter-end.
- The Company had $115.8 million of inventory purchase obligations, substantially all due within fiscal 2020, and $72.4 million of U.S. one-time transition tax payable with payments extending beyond five years.
- No material changes were reported to the risk factors included in the fiscal 2019 Form 10-K. No goodwill or long-lived-asset impairment triggering event was identified during the quarter.
Important Facts for Investors to Verify
- Whether Capital Equipment demand, especially in power discrete and battery applications, recovers during fiscal 2020.
- Whether APS growth and improved product mix can offset continued Capital Equipment weakness.
- The sustainability of the 13.6% effective tax rate, which benefited from jurisdictional mix, incentives and credits and is not necessarily indicative of future periods.
- Customer and China concentration, including Micron’s 18.5% revenue contribution and the concentration of accounts receivable among several distributors.
- Execution against the $18 million–$22 million fiscal 2020 capital expenditure plan and the Company’s ability to maintain operating cash generation while inventory remains elevated.
- Repayment requirements and interest-rate exposure associated with the $76.0 million MUFG overdraft balance and the facility’s 30-day demand feature.
- Potential effects of tariffs, trade restrictions, foreign-exchange movements, inventory commitments, warranty obligations and uncertain tax positions.