Kulicke & Soffa Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the 13 weeks ended December 31, 2016, compared with the three months ended January 2, 2016. K&S designs, manufactures and services semiconductor assembly equipment and expendable tools. Reportable segments are Equipment and Expendable Tools. The business is highly cyclical and exposed to semiconductor manufacturers, IDMs, OSATs and electronics customers worldwide.
Key financial metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net revenue | $149.6 million | $108.5 million | +37.9% |
| Gross profit | $68.3 million | $50.4 million | +35.5% |
| Gross margin | 45.7% | 46.5% | -80 basis points |
| Operating income | $17.3 million | $(1.7) million | Improved $19.0 million |
| Operating margin | 11.5% | (1.6)% | Improved |
| Net income | $15.6 million | $(0.1) million | Improved $15.7 million |
| Diluted EPS | $0.22 | Not meaningful due to loss | Improved |
| Operating cash flow | $30.0 million | $7.7 million | +290.6% |
| Capital expenditures | $2.7 million | $1.7 million | Increased |
Equipment revenue was $133.0 million, up 43.0%, and represented 88.9% of total revenue. Expendable Tools revenue was $16.7 million, up 7.1%. Equipment operating income was $12.7 million versus a $6.4 million loss, while Expendable Tools operating income was $4.6 million versus $4.7 million.
Cash and cash equivalents totaled $577.4 million at December 31, 2016, up $29.5 million from October 1, 2016, and equal to 58.2% of total assets. Total liabilities were $172.3 million and shareholders’ equity was $820.5 million. The balance sheet included a $15.6 million financing obligation related to the Singapore headquarters lease. The Company also had $3.4 million outstanding under a bank-guarantee facility and no borrowings under its $25 million unsecured revolving credit facility.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher equipment volume, particularly from memory, LED, power semiconductor discrete-package and hybrid-package customers.
- Gross profit increased, although consolidated gross margin declined modestly because Expendable Tools margin fell to 55.1% from 58.0%; Equipment margin was unchanged at 44.5%.
- Operating expenses declined 2.1% despite higher revenue. SG&A increased 5.7%, principally from higher incentive compensation and executive staff costs; R&D declined 11.1%, primarily due to lower Advanced Packaging development spending.
- Q1 FY2016 included a $2.0 million reversal of equity-based compensation following the former CEO’s retirement. Q1 FY2017 included $3.6 million of equity-based compensation expense, making the year-over-year SG&A comparison less favorable.
- Operating cash flow benefited from net income and working-capital improvements, including a $12.5 million reduction in receivables and a $2.3 million reduction in inventories.
- No stock was repurchased during the quarter. Approximately $7.0 million remained available under the repurchase authorization, which expires August 14, 2017.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2017 capital expenditures of approximately $29.0 million, primarily for R&D, Asian manufacturing enhancements, information technology and facility improvements.
- Management believes existing cash and anticipated operating cash flow are sufficient for liquidity and capital requirements for at least the next twelve months.
- Approximately $512.4 million of cash and cash equivalents were held by foreign subsidiaries, including approximately $454.5 million not available for U.S. use without additional U.S. income tax. Management did not expect to repatriate indefinitely reinvested foreign funds.
- Visibility into demand remains limited. Results are subject to semiconductor industry cyclicality, seasonality, macroeconomic conditions, customer concentration, product mix, pricing pressure and changes in capital spending.
- Approximately 92.9% of revenue was from shipments outside the United States and 41.4% was from shipments to customers in China. Samsung represented 10.2% of revenue. Three distributors collectively represented significant portions of accounts receivable, including 13.3%, 12.5% and 10.8% individually.
- Foreign-exchange forward contracts had a $25.3 million notional amount at quarter-end. Management estimated that a 10% currency fluctuation could affect financial position, results or cash flow by approximately $2.0 million to $3.0 million.
- Unrecorded contractual commitments totaled $183.1 million, including $157.0 million of inventory purchase obligations and $26.1 million of operating lease obligations. Warranty reserves were $4.1 million at quarter-end.
- The Company had a $13.0 million agreement to purchase its currently leased Pennsylvania property, subject to customary closing conditions, with expected closing in February 2017. It also entered into $15.3 million of additional foreign-exchange forwards on January 11, 2017.
- No goodwill or long-lived asset impairment triggering events were identified during the quarter. The filing states that there were no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the strong equipment-driven revenue growth is sustainable or reflects a temporary semiconductor-cycle and customer-order peak.
- The effect of customer and geographic concentration, particularly China exposure and distributor receivables.
- Future gross-margin performance, including Expendable Tools pricing pressure and Equipment product mix.
- Availability and tax implications of foreign-held cash, including the approximately $454.5 million subject to potential additional U.S. tax upon use in the United States.
- Execution of the planned $29.0 million fiscal 2017 capital-spending program and the Pennsylvania property acquisition.
- Outstanding inventory purchase commitments, restructuring payments, warranty obligations and foreign-exchange exposures.
- The timing and amount of any remaining share repurchases before the authorization expires.