Kulicke & Soffa Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended July 2, 2016, compared with periods ended June 27, 2015. The request metadata identifies “2015 Q3,” but the filing is the fiscal 2016 Q3 Form 10-Q, filed August 4, 2016. Financial statements are unaudited.
Business context
Kulicke & Soffa designs, manufactures, sells and services semiconductor assembly equipment and expendable tools. Its reportable segments are Equipment and Expendable Tools. Results are highly dependent on semiconductor capital spending, customer demand, industry cycles, seasonality and macroeconomic conditions, particularly in Asia/Pacific.
Financial performance and position
| Metric | Q3 FY2016 | Q3 FY2015 | 9M FY2016 | 9M FY2015 |
|---|---|---|---|---|
| Revenue | $216.4 million | $164.6 million | $481.3 million | $417.3 million |
| Gross profit | $100.0 million | $77.6 million | $220.1 million | $200.9 million |
| Gross margin | 46.2% | 47.1% | 45.7% | 48.1% |
| Operating income | $38.6 million | $16.1 million | $48.6 million | $35.6 million |
| Operating margin | 17.8% | 9.8% | 10.1% | 8.5% |
| Net income | $31.8 million | $25.0 million | $36.8 million | $40.8 million |
| Diluted EPS | $0.45 | $0.33 | $0.52 | $0.53 |
- Q3 revenue increased 31.5% year over year; nine-month revenue increased 15.3%.
- Equipment revenue increased 34.3% in Q3 and 17.4% for nine months. Expendable Tools revenue increased 4.1% in Q3 but declined 0.7% for nine months.
- Q3 operating income increased 140.1%; nine-month operating income increased 36.6%.
- Net income for nine months declined despite higher operating income, primarily because the prior-year period included a $13.7 million tax benefit related to a change in the permanent-reinvestment assertion. Fiscal 2016 also included a $4.4 million tax liability from a foreign tax authority settlement.
- Cash and cash equivalents were $516.1 million at July 2, 2016, up $17.5 million from October 3, 2015. Total assets were $986.7 million and shareholders’ equity was $795.7 million.
- Nine-month operating cash flow was $34.5 million, compared with $48.3 million in the prior-year period. Working capital consumed cash, including a $63.6 million increase in receivables and a $15.4 million increase in inventory.
- Investing cash outflow was $3.6 million, primarily capital expenditures. Financing cash outflow was $14.2 million, including $14.6 million for share repurchases.
Debt, liquidity and capital allocation
- The balance sheet included a $17.1 million financing obligation related to the Singapore headquarters lease and $3.1 million outstanding under a Citibank facility supporting bank guarantees.
- The Company had no borrowings under its new unsecured $25 million UOB revolving credit facility at July 2, 2016 and reported compliance with its covenants.
- Management expects fiscal 2016 capital expenditures of $6.0 million to $7.0 million and believes cash, investments and operating cash flow will meet liquidity and capital needs for at least the next twelve months.
- Approximately $497.0 million of cash, cash equivalents and short-term investments were held by foreign subsidiaries, and approximately $400.1 million was not available for U.S. use without additional U.S. income tax.
- The Company repurchased 1.4 million shares for $14.6 million during the nine months. Approximately $7.0 million remained under the authorized repurchase program at July 2, 2016.
Material changes versus the prior comparable period
- Growth was driven primarily by higher equipment volumes, especially ball bonders, wedge bonders and advanced packaging products, supported by demand from the utility smartphone and alternative energy and storage markets.
- The Assembléon acquisition contributed additional APMR and SMT revenue and expanded exposure to automotive, industrial and advanced packaging markets.
- Gross margin declined 90 basis points in Q3 and 240 basis points for nine months. Management attributed the pressure primarily to unfavorable customer mix and price reductions, partly offset by volume and lower costs.
- Operating expense leverage improved: Q3 operating expenses were 28.4% of revenue versus 37.3% previously; nine-month operating expenses were 35.7% versus 39.6%.
- SG&A increased in Q3 due to higher incentive compensation, sales commissions and foreign exchange effects, but nine-month staff costs declined due to global streamlining. R&D increased for nine months because of investment in advanced packaging.
- The Company revised beginning retained earnings and deferred tax liabilities by $2.6 million for an error related to foreign local taxes. Management concluded the error was not material to previously issued periods.
Outlook, risks and unusual items
- Management expects continued semiconductor industry volatility, limited demand visibility and normal seasonality; customers often add or replace capacity ahead of the September quarter.
- Principal risks include cyclical semiconductor capital spending, customer and geographic concentration, pricing pressure, inventory obsolescence, foreign exchange, reliance on foreign suppliers and manufacturing, political or trade disruptions, and difficulty repatriating foreign cash.
- China represented approximately 34.9% of nine-month revenue. One distributor represented 14.1% of nine-month revenue and 25.7% of accounts receivable at July 2, 2016.
- Foreign exchange exposure was hedged with forward contracts; a 10% currency fluctuation could affect financial position, results or cash flow by approximately $3 million to $4 million, according to the filing.
- Unrecorded contractual obligations included $108.1 million of inventory purchase commitments and $27.3 million of operating lease obligations. Product warranty reserves increased to $4.1 million from $2.0 million a year earlier.
- The filing reports no goodwill or long-lived-asset impairment triggering events during the quarter or nine-month period.
- The effective tax rate was 19.1% in Q3 and 26.6% for nine months, compared with negative rates in the prior-year periods because of the prior-year tax benefit and the current-year foreign tax settlement.
Investor verification checklist
- Verify that the intended period is fiscal Q3 2016, not Q3 2015, and reconcile the filing date and comparable periods.
- Assess whether equipment demand and the Assembléon-related revenue contribution are sustainable after seasonal capacity spending.
- Monitor gross-margin recovery, customer mix, pricing pressure and the effect of advanced packaging and SMT products.
- Review receivables, inventory growth, customer concentration and the $108.1 million inventory commitment for working-capital risk.
- Evaluate the sustainability of cash generation after share repurchases and the limitations on use of foreign-held cash.
- Review tax examinations, uncertain tax positions, the $4.4 million foreign tax settlement and the $2.6 million prior-period tax revision.
- Consider semiconductor-cycle, China, Taiwan-China, foreign exchange, supplier concentration and international trade risks when assessing forward-looking statements.