Kulicke and Soffa Industries, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended July 2, 2011, compared with July 3, 2010; the filing metadata identifies the period as 2010 Q3, but the reported fiscal period is fiscal 2011 third quarter. The company designs, manufactures and services semiconductor assembly equipment and expendable tools, primarily for semiconductor manufacturers and outsourced semiconductor assembly and test providers. Results are highly sensitive to semiconductor industry cycles and capital spending.
Financial performance and key metrics
| Metric | Three months ended July 2, 2011 | Three months ended July 3, 2010 | Nine months ended July 2, 2011 | Nine months ended July 3, 2010 |
|---|---|---|---|---|
| Net revenue | $294.4 million | $221.3 million | $650.0 million | $503.5 million |
| Gross profit | $134.1 million | $99.2 million | $305.2 million | $223.3 million |
| Gross margin | 45.5% | 44.8% | 46.9% | 44.4% |
| Income from operations | $81.7 million | $50.1 million | $147.4 million | $91.4 million |
| Operating margin | 27.7% | 22.6% | 22.7% | 18.1% |
| Net income | $70.7 million | $49.1 million | $125.7 million | $86.1 million |
| Diluted EPS | $0.95 | $0.65 | $1.71 | $1.15 |
- Revenue increased 33.1% for the quarter and 29.1% for the nine-month period. Equipment revenue increased 36.2% and 32.9%, respectively, while Expendable Tools revenue was essentially flat for the quarter and declined 2.7% year to date.
- Operating expenses increased 6.7% for the quarter and 19.6% year to date, but declined as a percentage of revenue to 17.8% and 24.3%, respectively, from 22.2% and 26.2%.
- The nine-month effective tax rate was 11.3%, compared with a benefit-driven negative 0.9% in the prior-year period. The filing attributes the current rate primarily to lower foreign tax rates, tax holidays, valuation allowance changes and a negotiated foreign tax rate reduction.
- Net cash provided by operating activities was $150.5 million for the nine months, versus $66.5 million in the prior-year period. Capital expenditures were $5.8 million, and total investing cash use was $9.1 million.
- Cash and cash equivalents were $329.3 million at July 2, 2011, and short-term investments were $6.3 million. Total cash and investments of $335.5 million increased $154.2 million from fiscal year-end.
- Debt consisted primarily of $110.0 million principal amount of 0.875% convertible subordinated notes due June 1, 2012, recorded net of discount at $103.5 million. The company had no borrowings under its new $12.0 million short-term loan facility or $8.0 million revolving facility.
Material changes versus the prior comparable period
- Growth was concentrated in the Equipment segment, driven by higher volume and pricing for ball and wedge bonders, including IConn ProCu and large-bondable-area products. Wedge bonder demand benefited from power semiconductor, hybrid and automotive applications.
- Equipment gross margin improved to 44.6% in the quarter and 45.9% year to date, compared with 43.5% and 42.5%. Expendable Tools gross margin was broadly stable for the quarter but declined year to date.
- Manufacturing is being transferred from Irvine, California, to Malaysia and Singapore. The transition increased costs, required parallel U.S. and Asian production, and resulted in additional wedge bonder inventory reserves.
- Goodwill increased by $12.5 million for the accrued Orthodyne earnout, and an earnout payable of $12.5 million was recorded. The maximum potential earnout payout was $30.0 million.
- Cash increased substantially, reflecting stronger operating cash generation. Fiscal 2010 debt reduction and the retirement of prior 1.0% convertible notes reduced cash interest expense.
Outlook, risks, contingencies and unusual items
- Management expected remaining fiscal 2011 capital expenditures of approximately $7.0 million to $8.0 million, primarily for research and development and Asian manufacturing infrastructure.
- Management believed existing cash, operating cash flow and available credit facilities were sufficient for liquidity and capital needs for at least the next twelve months. The company expected to use cash for working capital, corporate purposes and repayment of the convertible notes.
- Management described visibility beyond the fourth fiscal quarter as limited. The semiconductor equipment market remains cyclical and exposed to macroeconomic conditions, customer capital spending, industry downturns and changing customer mix.
- Customer and geographic concentration is material: approximately 98% of revenue was shipped outside the United States, primarily to Asia. Advanced Semiconductor Engineering represented 23.1% of nine-month revenue.
- The company relies on subcontractors and certain sole-source suppliers. Receivables and inventory are exposed to customer credit, demand volatility, obsolescence and changing market conditions.
- A 10% appreciation or depreciation in the foreign currency portfolio relative to the U.S. dollar could affect financial position, results of operations or cash flows by approximately $4.0 million to $5.0 million.
- Additional obligations included $124.6 million of inventory purchase commitments, $33.3 million of operating lease obligations, $7.8 million of pension obligations and $4.5 million of severance obligations. The company also had $1.7 million of expected payments related to discontinued Test operations.
- The company had $2.6 million accrued for product warranty costs and $2.7 million accrued for restructuring severance at July 2, 2011. Management stated that disclosure controls and procedures were effective.
Important facts for investors to verify
- Confirm the intended reporting period, because the request metadata says 2010 Q3 while the filing covers July 2, 2011.
- Evaluate the sustainability of equipment-driven revenue growth and margin expansion in a cyclical semiconductor capital-equipment market.
- Assess the June 2012 maturity of the $110.0 million convertible notes relative to projected cash flow and cash balances.
- Monitor the manufacturing transfer to Asia, related inventory reserves, restructuring costs and execution risk.
- Review customer concentration, Asian geographic exposure, sole-source suppliers and foreign-currency sensitivity.
- Verify the Orthodyne earnout settlement, the $124.6 million inventory purchase commitments and other obligations not recorded as balance-sheet liabilities.