Kulicke and Soffa Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended July 1, 2017, compared with July 2, 2016. The supplied metadata identifies “2016 Q3,” but the filing itself is the fiscal 2017 third-quarter Form 10-Q, filed August 3, 2017.
Business Context
K&S designs, manufactures and sells semiconductor assembly equipment and expendable tools, and provides equipment servicing, maintenance, repairs and upgrades. Reportable segments are Equipment and Expendable Tools. Results are highly dependent on semiconductor industry capital spending, customer demand, seasonality and industry cycles.
Key Financial Metrics
| Metric | Three months ended July 1, 2017 | Three months ended July 2, 2016 | Nine months ended July 1, 2017 | Nine months ended July 2, 2016 |
|---|---|---|---|---|
| Net revenue | $243.9 million | $216.4 million | $593.1 million | $481.3 million |
| Gross profit | $111.7 million | $100.0 million | $270.3 million | $220.1 million |
| Gross margin | 45.8% | 46.2% | 45.6% | 45.7% |
| Income from operations | $11.5 million | $38.6 million | $61.4 million | $48.6 million |
| Operating margin | 4.7% | 17.8% | 10.3% | 10.1% |
| Net income | $30.8 million | $31.8 million | $75.4 million | $36.8 million |
| Diluted EPS | $0.43 | $0.45 | $1.05 | $0.52 |
- Revenue growth: Quarterly revenue increased 12.7%; nine-month revenue increased 23.2%. Equipment revenue rose 11.2% for the quarter and 23.6% for the nine-month period. Expendable Tools revenue rose 31.6% and 20.2%, respectively.
- Profitability: Gross profit increased, but quarterly operating income declined 70.3% because of a $35.2 million non-cash goodwill impairment charge. Excluding the impairment charge, quarterly operating income would have been approximately $46.7 million, although this is a non-GAAP analytical measure not presented by the company.
- Taxes: The company recorded a $17.9 million tax benefit in the quarter and a $10.4 million benefit for the nine-month period, including a $20.9 million favorable foreign tax credit related to amended U.S. tax filings for 2007 through 2015 and the 2016 return. Quarterly effective tax rate was negative 138.0%; nine-month effective tax rate was negative 15.9%.
- Cash flow: Nine-month operating cash flow was $68.2 million versus $34.5 million in the prior-year period. Investing cash outflow was $36.6 million, including $22.1 million of capital expenditures, $28.6 million placed in restricted cash and net purchases of short-term investments. Financing cash outflow was $0.8 million.
- Liquidity: Cash, cash equivalents, restricted cash and short-term investments totaled $593.9 million at July 1, 2017, up $46.0 million from October 1, 2016. Cash and cash equivalents were $455.4 million, restricted cash was $28.6 million and short-term investments were $110.0 million.
- Debt and facilities: The balance-sheet financing obligation related to the Singapore headquarters was $16.7 million. A Citibank facility had $3.3 million outstanding for bank guarantees. The $25.0 million unsecured UOB revolving credit facility had no borrowings outstanding and was extended through March 20, 2018.
- Balance sheet: Total assets were $1.149 billion and shareholders’ equity was $887.8 million at July 1, 2017. Accounts receivable were $214.1 million and inventories were $126.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by higher equipment volume from consumer, enterprise, automotive and industrial applications. Advanced Packaging revenue was pressured by lower demand for Hybrid products in the system-in-package market.
- Quarterly operating margin fell sharply because of the $35.2 million goodwill impairment charge related to the Electronics Assembly/Hybrid reporting unit, formerly Assembléon.
- The impairment followed an updated outlook indicating softer near-term system-in-package demand and lower projected cash flows. Goodwill for the affected reporting unit declined from $39.7 million to $4.5 million.
- Expendable Tools gross margin declined to 53.0% from 55.6% for the quarter and to 53.9% from 57.1% for the nine-month period, primarily reflecting price reductions.
- The company implemented a restructuring program for the Electronics Assembly/Hybrid business line and recorded $2.8 million of related costs, principally severance.
- Accounts receivable and inventory increased substantially with higher sales activity, contributing to working-capital usage of approximately $56.5 million during the nine months.
Guidance, Outlook, Risks and Unusual Items
- Capital expenditures: Fiscal 2017 capital expenditures were expected to total approximately $27.0 million; $21.9 million had been incurred through the third quarter.
- Liquidity outlook: Management stated that existing cash, investments and anticipated operating cash flow should satisfy liquidity and capital requirements for at least the next twelve months.
- Acquisition: On July 2, 2017, the company acquired Liteq B.V., a lithography solutions provider for advanced packaging, for €25.0 million, approximately $28.6 million, plus potential earn-out payments. Purchase accounting was still in process.
- Industry risks: Semiconductor equipment demand is cyclical, seasonal and difficult to forecast. Customer concentration, geographic concentration in Asia and China, macroeconomic conditions, inventory commitments and reliance on certain suppliers may affect results.
- Customer concentration: One distributor represented 14.1% of nine-month revenue. At July 1, 2017, three customers or distributors represented 21.8%, 13.4% and 10.3% of accounts receivable, respectively.
- Contractual commitments: Inventory purchase obligations totaled $138.5 million, and operating lease obligations totaled $20.6 million. Warranty reserves were $9.2 million at July 1, 2017, compared with $4.1 million a year earlier.
- Foreign exchange: Management estimated that a 10% currency fluctuation could affect financial position, results or cash flows by approximately $2.0 million to $3.0 million. Foreign exchange forward contracts had $34.7 million of notional value at quarter-end.
- Controls and risks: Management concluded disclosure controls were effective, and reported no material changes affecting internal control over financial reporting. The filing stated that there were no material changes to the risk factors in the 2016 Form 10-K.
Investor Verification Checklist
- Verify the sustainability of equipment demand and whether weaker system-in-package demand could cause additional impairment charges.
- Separate recurring operating performance from the $35.2 million non-cash goodwill impairment and the $20.9 million favorable tax credit.
- Assess the effect of customer and geographic concentration, particularly exposure to China and major distributors.
- Monitor accounts receivable, inventory growth and the company’s ability to convert higher revenue into operating cash flow.
- Review the Liteq acquisition purchase-price allocation, earn-out exposure and subsequent contribution to results.
- Confirm the status of the expiring $100 million stock-repurchase authorization, of which approximately $6.8 million remained at July 1, 2017.