Kulicke & Soffa Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended January 2, 2016, representing fiscal 2016 first quarter; comparative period ended December 27, 2014. The filing was dated February 4, 2016. The company designs, manufactures and services semiconductor assembly equipment and expendable tools, operating through Equipment and Expendable Tools segments.
Financial performance and position
| Metric | Q1 FY2016 | Comparable period | Change |
|---|---|---|---|
| Net revenue | $108.5 million | $107.4 million | +1.0% |
| Gross profit | $50.4 million | $54.7 million | -7.9% |
| Gross margin | 46.5% | 50.9% | -440 basis points |
| Operating income/(loss) | $(1.7) million | $9.7 million | Down $11.4 million |
| Net income/(loss) | $(0.1) million | $7.8 million | Down $7.9 million |
| Basic and diluted EPS | Less than $0.01 | $0.10 | Declined |
| Operating cash flow | $7.7 million | $46.4 million | Down $38.7 million |
- Revenue mix: Equipment revenue was $93.0 million, up 2.2%; Expendable Tools revenue was $15.6 million, down 5.6%.
- Operating expenses: SG&A increased 9.9% to $27.9 million and R&D increased 23.6% to $24.2 million. Operating expenses were 48.0% of revenue versus 41.9% in the prior period.
- Liquidity: Cash and cash equivalents were $492.9 million at January 2, 2016, compared with $498.6 million at October 3, 2015, representing 55.8% of total assets.
- Debt and obligations: The balance sheet included a $16.5 million financing obligation related to the Singapore headquarters lease. The company also had a $5.0 million credit facility supporting a $3.5 million Singapore-dollar bank guarantee.
- Capital allocation: The company repurchased 1.2 million shares for $12.8 million during the quarter. Approximately $8.7 million remained under the authorized repurchase program.
- Balance sheet: Total assets were $884.1 million and shareholders’ equity was $755.0 million. Inventory declined to $69.6 million from $79.1 million at fiscal year-end.
Material changes versus the prior comparable period
- Revenue was broadly stable, but profitability deteriorated substantially because gross margin declined and operating expenses increased.
- Equipment revenue benefited from the inclusion of advanced packaging and surface-mount technology products, including products associated with the Assembléon acquisition. This benefit was partly offset by lower ball-bonder volume and unfavorable customer mix and pricing.
- Expendable Tools revenue and gross profit declined because of lower volume and price reductions in the wire-bonding tools business.
- R&D increased primarily because of greater investment in advanced packaging products. SG&A reflected additional costs from the new APMR and SMT products, partly offset by lower staffing, incentive compensation and amortization.
- The current period included a $1.3 million income tax benefit, including a discrete benefit from the extension of U.S. federal research tax credits, compared with $1.8 million of tax expense in the prior period.
- Operating cash flow was lower largely because the prior-year period benefited from a $49.3 million accounts-receivable reduction, while the current period primarily benefited from an $8.1 million inventory decrease.
Outlook, commentary, risks and unusual items
- Management expects fiscal 2016 capital expenditures of approximately $10 million to $11 million, primarily for R&D projects, Asian manufacturing enhancements and information technology infrastructure.
- Management stated that existing cash, investments and anticipated operating cash flow should be sufficient for liquidity and capital requirements for at least the next twelve months.
- The semiconductor equipment market remains cyclical, seasonal and difficult to forecast. Management noted weaker customer equipment utilization and limited visibility into future demand.
- The company completed the valuation of the Assembléon acquisition with no further adjustment recorded. The acquisition expanded exposure to automotive, industrial, advanced packaging and SMT markets.
- The company implemented a restructuring plan that reduced its workforce by 45 employees. It recorded $0.6 million of severance provision during the quarter and had $0.7 million of related accrued severance at quarter-end.
- A prior-period income-tax and deferred-tax error was corrected through a $2.6 million reduction to beginning retained earnings and increase to deferred tax liabilities as of October 3, 2015. Management concluded prior filings did not require amendment.
- Non-balance-sheet commitments included $104.8 million of inventory purchase obligations and $30.5 million of operating lease obligations. A portion of inventory commitments may be non-cancellable or subject to termination penalties.
- Foreign currency exposure is material; management estimated that a 10% currency fluctuation could affect financial position, results or cash flows by approximately $3 million to $4 million. Foreign-exchange forwards with $7.9 million of notional value were outstanding at quarter-end.
- Approximately 88.4% of revenue was shipped to customers outside the United States, and approximately 39.5% was shipped to customers in China. Customer and geographic concentration, trade restrictions, political instability, currency movements and supply-chain disruptions are significant risks.
- One customer represented 16.5% of quarterly revenue and 21.7% of accounts receivable at January 2, 2016.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the sharp decline in gross margin and operating income is temporary or reflects sustained pricing, mix, utilization or cost pressure.
- The demand trajectory for ball bonders, advanced packaging, SMT products and Expendable Tools amid semiconductor industry cyclicality.
- Integration results and profitability contribution from the Assembléon acquisition.
- Remaining capacity and future use of the stock repurchase authorization, particularly given the quarter’s net loss and cash outflow from buybacks.
- The timing and potential effect of the disclosed tax examinations, uncertain tax positions and deferred-tax balances.
- Exposure to the major customer, China and other Asia-Pacific markets, as well as foreign-exchange and supply-chain risks.
- Funding requirements associated with $104.8 million of inventory purchase commitments, lease obligations and the Singapore headquarters financing obligation.