Kulicke and Soffa Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter ended April 1, 2017, including three- and six-month comparisons with April 2, 2016. The request metadata identifies “2016 Q2,” but the filing is for fiscal 2017 second quarter. The interim financial statements are unaudited.
Business Context
K&S designs, manufactures and sells semiconductor assembly equipment and expendable tools, and provides equipment service, maintenance, repair and upgrade services. Reportable segments are Equipment and Expendable Tools. Results are highly dependent on semiconductor manufacturers’ capital spending and are subject to cyclical, seasonal and macroeconomic volatility.
Key Financial Metrics
| Metric | Three months ended Apr. 1, 2017 | Three months ended Apr. 2, 2016 | Six months ended Apr. 1, 2017 | Six months ended Apr. 2, 2016 |
|---|---|---|---|---|
| Revenue | $199.6 million | $156.4 million | $349.3 million | $264.9 million |
| Gross profit | $90.3 million | $69.6 million | $158.6 million | $120.1 million |
| Gross margin | 45.2% | 44.5% | 45.4% | 45.3% |
| Operating income | $32.6 million | $11.7 million | $49.9 million | $10.0 million |
| Net income | $29.0 million | $5.1 million | $44.6 million | $5.0 million |
| Diluted EPS | $0.40 | $0.07 | $0.62 | $0.07 |
| Operating cash flow | Not separately provided | Not separately provided | $43.0 million | $(1.0) million |
- Revenue drivers: Equipment revenue rose 28.3% in the quarter and 34.1% year to date, primarily from higher volume in consumer, enterprise, automotive and industrial applications. Expendable Tools revenue increased 21.5% and 14.2%, respectively, primarily from higher volume.
- Profitability: Operating margin increased to 16.3% in the quarter from 7.5%, and to 14.3% year to date from 3.8%. SG&A and R&D declined as a percentage of revenue. Equipment gross margin improved, while Expendable Tools gross margin declined due mainly to price reductions.
- Taxes: The effective tax rate was 14.4% for both the quarter and six months, versus 58.1% and 53.6%, respectively, in the prior-year periods. The prior year included a foreign tax authority settlement; the current rate benefited from lower-tax foreign earnings, domestic research benefits and tax holidays.
- Liquidity: Cash, cash equivalents and short-term investments totaled $574.2 million at April 1, 2017, up $26.3 million from fiscal year-end and equal to 53.5% of total assets.
- Debt and facilities: The balance sheet included a $16.0 million financing obligation, principally related to the Singapore headquarters. A $25 million unsecured revolving facility had no borrowings; a separate Citibank facility had $3.2 million outstanding in connection with bank guarantees.
- Capital expenditures: Six-month capital expenditures were $18.1 million, compared with $2.9 million in the prior-year period. Management expects approximately $29 million of fiscal 2017 capital expenditures.
Material Changes Versus Prior Comparable Period
- Revenue increased 27.6% in the quarter and 31.8% year to date, led by the Equipment segment.
- Operating income increased 178.5% in the quarter and 398.7% year to date, reflecting stronger volume, favorable Equipment mix, better manufacturing absorption and disciplined operating expenses.
- Net income increased more than fivefold in the quarter and approximately ninefold year to date, aided by higher operating income and a substantially lower effective tax rate.
- Operating cash flow improved to $43.0 million from an outflow of $1.0 million, although receivables and inventories increased by $39.1 million and $17.6 million, respectively.
- The company made a $1.3 million equity-method investment in a strategic supplier and purchased $139.0 million of short-term investments while $124.0 million matured.
- No share repurchases occurred during the quarter or six-month period. Approximately $7.0 million remained available under the repurchase authorization as of April 1, 2017.
Outlook, Commentary and Risks
Management expects fiscal 2017 capital expenditures of approximately $29 million and believes existing cash, investments and expected operating cash flow are sufficient for liquidity and capital requirements for at least the next twelve months. Management also stated that cash may be used for working capital, product development, general corporate purposes and potential acquisitions.
Future visibility remains limited because semiconductor capital spending is cyclical, seasonal and difficult to forecast. Advanced Packaging volume was lower due to weaker SiP demand. Approximately 91.5% of six-month revenue came from customers outside the United States and approximately 42.9% from China, increasing geographic exposure.
- Customer and receivable concentrations remain material; certain distributors represented more than 10% of accounts receivable, although no customer exceeded 10% of six-month revenue in the current period.
- The company had $178.2 million of inventory purchase obligations and $21.2 million of operating lease obligations not reflected as balance-sheet liabilities.
- Warranty reserves increased to $6.4 million from $1.9 million a year earlier.
- A strategic review of businesses associated with goodwill was underway. No impairment trigger was identified, but adverse operating or market developments could result in a material future impairment.
- Foreign currency exposure is hedged with forward contracts. Management estimated that a 10% currency fluctuation could affect financial position, results or cash flows by approximately $3 million to $4 million.
- Foreign subsidiaries held approximately $522.8 million of cash, cash equivalents and short-term investments, of which approximately $466.6 million was not available for U.S. use without additional U.S. income tax.
Investor Verification Items
- Verify whether the strong revenue growth and Equipment demand persisted beyond the April 1, 2017 quarter, particularly in China, consumer and automotive applications.
- Monitor gross-margin trends, including continued Equipment mix benefits and pricing pressure in Expendable Tools.
- Assess the quality and conversion of earnings into cash as receivables, inventories and customer obligations expand.
- Review the status and outcome of the strategic review and any potential goodwill or intangible-asset impairment.
- Track the $29 million fiscal 2017 capital-expenditure plan, inventory purchase commitments and remaining share-repurchase authorization.
- Evaluate tax-rate sustainability, foreign earnings reinvestment, tax examinations and potential repatriation costs.
- Review customer concentration, geographic exposure, semiconductor-cycle conditions and foreign-currency hedging effectiveness.