Kulicke and Soffa Industries, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the fiscal quarter ended March 30, 2013 and the six months then ended. The source metadata identifies “2012 Q2,” but the filing itself is the company’s fiscal 2013 second-quarter report, with comparisons to the quarter and six months ended March 31, 2012.
K&S designs, manufactures and services semiconductor assembly equipment and expendable tools. Its reportable segments are Equipment and Expendable Tools. Results are highly dependent on semiconductor manufacturers’ and OSATs’ capital spending, semiconductor demand, industry cycles and seasonality. Approximately 95.8% of quarterly and 96.5% of year-to-date revenue was from shipments outside the United States, primarily in Asia-Pacific.
Financial performance and liquidity
| Metric | Three months ended March 30, 2013 | Three months ended March 31, 2012 | Six months ended March 30, 2013 | Six months ended March 31, 2012 |
|---|---|---|---|---|
| Net revenue | $106.1 million | $146.3 million | $220.1 million | $266.3 million |
| Gross profit | $48.8 million | $66.7 million | $100.3 million | $122.0 million |
| Gross margin | 46.0% | 45.6% | 45.6% | 45.8% |
| Operating income | $8.2 million | $20.2 million | $12.4 million | $32.6 million |
| Net income | $7.3 million | $16.6 million | $10.9 million | $25.1 million |
| Diluted EPS | $0.10 | $0.22 | $0.14 | $0.33 |
- Quarterly revenue decreased 27.5%, operating income decreased 59.5%, and net income decreased 55.8% year over year.
- Six-month revenue decreased 17.3%, operating income decreased 62.0%, and net income decreased 56.5% year over year.
- Equipment revenue declined 30.5% in the quarter and 19.5% year to date, primarily from lower ball-bonder and heavy-wire-wedge-bonder volumes, softer key markets, and less favorable customer and product mix. Expendable Tools revenue was broadly stable, declining 1.5% quarterly and increasing 0.1% year to date.
- Quarterly gross margin improved modestly because of the greater contribution and improved margins of Expendable Tools; Equipment gross margin declined to 43.9% from 44.4%.
- Operating expenses fell 12.5% in the quarter and 1.6% year to date, but increased substantially as a percentage of revenue because of lower sales. SG&A was 26.8% of quarterly revenue and R&D was 11.5%.
- Six-month effective tax rate was 14.2%, compared with 12.5% in the prior-year period. The current period included a $1.7 million benefit from reversal of an uncertain-tax-position reserve and $1.6 million of expense from a foreign tax-return estimate change.
- Cash provided by operating activities was $56.8 million for the six months, compared with $56.9 million in the prior-year period. Cash increased by $58.4 million to $498.6 million at March 30, 2013.
- Investing activities provided $1.9 million, including $5.3 million from property disposals, offset by $3.4 million of capital expenditures. Financing activities provided $0.5 million from stock-option exercises.
- Total liabilities were $117.2 million and shareholders’ equity was $661.2 million at March 30, 2013. The 0.875% convertible subordinated notes matured in June 2012 and were fully repaid for $110.0 million of principal plus $0.5 million of interest; no debt principal remained on the balance sheet from those notes.
Material changes versus the prior comparable period
- The principal deterioration was concentrated in the Equipment segment, reflecting lower customer demand and unit volumes. Expendable Tools remained comparatively resilient.
- Lower revenue reduced operating leverage despite reductions in SG&A and R&D. The prior-year period also included $0.8 million of quarterly severance expense, a $1.8 million Swiss pension curtailment gain in the six-month period, and $3.9 million of non-cash debt-discount amortization.
- Cash collections and lower inventory generated significant working-capital cash flow: accounts receivable decreased $70.9 million and inventory decreased $12.3 million, partially offset by a $55.3 million reduction in accounts payable and accrued liabilities.
- Net intangible assets declined from $20.4 million at September 29, 2012 to $15.8 million, primarily due to amortization. Intangible amortization for the remainder of fiscal 2013 was estimated at $4.6 million.
- The company corrected a $1.1 million prior-period error during the first quarter relating to recognition of government grants. Management considered the adjustment immaterial to the prior fiscal year and expected full-year results.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2013 capital expenditures of $25.0 million to $26.0 million, including approximately $15.0 million for leasehold improvements at the new Singapore facility.
- Management stated that existing cash and anticipated operating cash flow should satisfy liquidity and capital requirements for at least the next twelve months, while noting that future financing could be pursued for corporate purposes, liquidity or growth.
- The company’s visibility into future demand is limited, and management expects typical semiconductor seasonality may affect the third fiscal quarter. Semiconductor capital-equipment demand remains cyclical and exposed to macroeconomic conditions, customer spending patterns and industry downturns.
- The Singapore facility is expected to be completed and ready for occupancy in the second half of 2013. The company recorded an $8.1 million financing obligation during construction and expects to record an additional $20.4 million. The anticipated lease has a ten-year initial term, with annual rent and service charges of approximately S$4.0 million to S$5.0 million.
- Contractual obligations not reflected on the balance sheet included $63.9 million of inventory purchase commitments and $33.5 million of operating lease obligations. A portion of inventory commitments is non-cancelable or subject to cancellation penalties.
- Other risks include customer concentration, reliance on certain sole-source suppliers, foreign-exchange exposure, product warranty and inventory-reserve estimates, tax uncertainty, and dependence on the continuation of copper-wire conversion and other semiconductor packaging trends.
- A 10% fluctuation in foreign exchange rates could affect financial position, results of operations or cash flows by an estimated $3.0 million to $4.0 million. The company had no foreign-exchange forward contracts at quarter end.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the sharp Equipment revenue decline was temporary and whether customer orders and semiconductor capital spending recovered in subsequent quarters.
- The sustainability of the company’s approximately $498.6 million cash position after Singapore facility construction, capital expenditures and working-capital normalization.
- Execution, total cost and occupancy timing for the Singapore facility, including the additional expected $20.4 million construction-related financing obligation.
- Exposure to customer and geographic concentration, including a distributor representing 21.0% of accounts receivable and another customer representing 14.0% at March 30, 2013.
- Future gross-margin performance, particularly Equipment pricing, product mix, manufacturing-cost improvements and the contribution of Expendable Tools.
- Changes in effective tax rates, uncertain tax positions and valuation allowances on deferred tax assets.
- Potential cash requirements from $63.9 million of inventory commitments, lease obligations, warranties, severance and pension-related obligations.