Kulicke and Soffa Industries, Inc. — Fiscal 2012 First-Quarter Form 10-Q
Business context and reporting period
The filing covers the unaudited three months ended December 31, 2011, compared with the three months ended January 1, 2011. K&S designs, manufactures, sells, services and upgrades semiconductor assembly equipment and expendable tools. Its two segments are Equipment and Expendable Tools. Results are highly sensitive to semiconductor industry cycles, customer capital spending, seasonality and macroeconomic conditions.
Financial performance and position
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net revenue | $120.0 million | $148.9 million | Down 19.4% |
| Gross profit | $55.3 million | $72.1 million | Down 23.3% |
| Gross margin | 46.1% | 48.4% | Down 230 bps |
| Operating income | $12.4 million | $22.1 million | Down 43.9% |
| Operating margin | 10.3% | 14.8% | Down approximately 450 bps |
| Net income | $8.5 million | $15.1 million | Down 43.7% |
| Diluted EPS | $0.11 | $0.21 | Down $0.10 |
| Operating cash flow | $33.8 million | $24.8 million | Up $9.1 million |
Equipment revenue was $106.1 million, down 20.0%, while Expendable Tools revenue was $13.9 million, down 14.2%. Equipment represented 88.4% of total revenue. Approximately 98% of revenue was shipped outside the United States, primarily to Asia/Pacific customers.
Cash and cash equivalents were $403.8 million at December 31, 2011, up from $378.2 million at October 1, 2011. The company held no short-term investments at quarter-end, compared with $6.4 million at fiscal year-end. Total cash and investments increased by $19.2 million to $403.8 million and represented 57.6% of total assets.
The company had $110.0 million principal amount of 0.875% convertible subordinated notes, maturing June 1, 2012, with a carrying value of $107.0 million and estimated fair value of $109.3 million. Management intended to repay the principal with cash. No borrowings were outstanding under the available $12.0 million short-term loan facility and $8.0 million revolving credit facility.
Total assets were $701.5 million and total shareholders’ equity was $482.4 million at December 31, 2011. Accounts receivable declined to $110.0 million from $138.6 million, and net inventory declined to $59.7 million from $73.1 million.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower equipment volume, particularly wedge bonders and AT Premier bonders, as customers reduced production and capital spending after building inventories.
- Equipment gross margin fell to 44.4% from 47.1%, principally because of lower manufacturing volumes and higher costs, partly offset by favorable pricing and product mix for IConn PS ProCu and large-bondable-area products.
- Operating expenses declined 14.3% to $42.9 million, but increased as a percentage of revenue to 35.8% from 33.6% because revenue contracted faster than expenses.
- SG&A benefited from lower commissions and incentives, lower incentive compensation and a $1.8 million Switzerland pension-plan curtailment gain. R&D declined $1.0 million due primarily to staffing reductions and consolidation of technology centers.
- Operating cash flow improved despite lower earnings, driven by reductions in receivables and inventory. Investing cash flow included the $14.8 million Orthodyne earnout payment and $1.5 million of capital expenditures.
- The company paid the $14.8 million Orthodyne acquisition earnout during the quarter; the amount had been accrued at the prior fiscal year-end and increased goodwill.
Outlook, risks and unusual items
Management expected remaining fiscal 2012 capital expenditures of approximately $10.0 million to $11.0 million, primarily for R&D, Asian manufacturing enhancements and information technology. Management stated that existing cash, expected operating cash flow and available credit facilities should satisfy liquidity and capital requirements for at least the next twelve months, including repayment of the convertible notes.
Management continued to cite the semiconductor industry’s volatility, cyclical and seasonal demand, customer inventory adjustments, macroeconomic conditions and dependence on semiconductor manufacturers and OSATs. The company expects continued industry migration from gold to copper wire bonding, which could support replacement demand, but the timing and magnitude remain uncertain.
Customer and supplier concentration remains material. Advanced Semiconductor Engineering represented 15.3% of quarterly revenue and 17.7% of accounts receivable; Haoseng Industrial Company Limited represented 10.0% of revenue and 15.0% of accounts receivable. The company relies on subcontractors and certain sole-source suppliers for important components.
Additional exposures include $68.8 million of inventory purchase obligations, $28.4 million of operating lease obligations, $5.6 million of pension obligations, $2.5 million of severance obligations and $1.1 million related to discontinued operations. The company disclosed no off-balance-sheet arrangements and no foreign-exchange hedging instruments. A 10% movement in its foreign-currency portfolio could affect financial position, results or cash flows by approximately $4 million to $5 million.
The filing also reports a $1.8 million pretax Switzerland pension-plan curtailment and settlement gain, ongoing restructuring and workforce reductions, and a foreign tax matter for which a $7.5 million liability, including penalties, had been recorded in fiscal 2011. Disclosure controls and procedures were deemed effective as of December 31, 2011.
Important facts for investors to verify
- Verify the June 2012 repayment or conversion treatment of the $110.0 million convertible notes and the resulting effect on cash, debt and share count.
- Assess whether lower wedge-bonder and AT Premier demand reflects temporary inventory correction or a more sustained semiconductor capital-spending slowdown.
- Monitor gross-margin recovery, manufacturing utilization and the effect of product and customer mix.
- Review customer concentration, receivable collectibility and the company’s exposure to major Asian customers and distributors.
- Reconcile the stated $10.0 million to $11.0 million remaining capital-expenditure plan with operating cash flow and cash requirements.
- Evaluate inventory reserves, supplier commitments and potential additional restructuring or severance costs.
- Follow the foreign tax appeal and the impact of tax holidays, foreign earnings mix and unremitted earnings on the effective tax rate.
- Consider the sensitivity of results to foreign-currency movements, semiconductor cycles and the continuing gold-to-copper bonding transition.