Kulicke & Soffa Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 30, 2019, compared with March 31, 2018. The request metadata references “2018 Q2,” but the filing is the fiscal 2019 second-quarter report. The unaudited filing covers a semiconductor assembly equipment, tools, aftermarket products and services provider with Capital Equipment and Aftermarket Products and Services (APS) segments.
Financial performance
| Metric | Three months ended Mar. 30, 2019 | Three months ended Mar. 31, 2018 | Six months ended Mar. 30, 2019 | Six months ended Mar. 31, 2018 |
|---|---|---|---|---|
| Net revenue | $115.9 million | $221.8 million | $273.1 million | $435.5 million |
| Gross profit | $55.6 million | $99.4 million | $130.4 million | $196.6 million |
| Gross margin | 47.9% | 44.8% | 47.7% | 45.2% |
| Operating income (loss) | $(2.5) million | $38.4 million | $12.1 million | $77.6 million |
| Net income (loss) | $(3.6) million | $36.3 million | $4.0 million | $(33.2) million |
| Diluted EPS | $(0.05) | $0.51 | $0.06 | $(0.47) |
- Quarterly revenue declined 47.7%; six-month revenue declined 37.3%, primarily from lower customer demand and investment in Capital Equipment.
- Capital Equipment revenue declined 54.5% in the quarter and 43.7% year to date. APS revenue declined 20.8% and 11.7%, respectively.
- Gross margin improved despite lower volume, primarily because of product mix. Operating expenses were $58.0 million in the quarter, including $29.6 million of research and development spending, with increased investment in advanced packaging products.
- Quarterly profitability was adversely affected by the revenue decline and higher operating expenses relative to revenue. The six-month tax provision included transition-tax adjustments and other tax items; the six-month effective tax rate was 79.1%.
Cash flow, liquidity and capital structure
- Six-month operating cash flow was $83.3 million, compared with $57.1 million in the prior-year period. The increase was driven principally by collections and reductions in receivables and inventory related to lower sales activity.
- Investing cash flow was positive $73.7 million, reflecting net maturities of short-term investments, partly offset by $6.3 million of capital expenditures and a $5.0 million equity investment.
- Financing cash flow was negative $59.1 million, primarily due to $52.6 million of share repurchases and $16.1 million of dividends, partly offset by $10.0 million of short-term borrowings.
- Cash, cash equivalents, restricted cash and short-term investments totaled $627.3 million at March 30, 2019, up $13.2 million from September 29, 2018. Cash and cash equivalents were $418.9 million and short-term investments were $208.0 million.
- Total liabilities were $256.9 million, including $10.0 million of short-term debt and a $14.9 million financing obligation. The company also had $3.1 million outstanding under a Citibank credit facility and $10.0 million outstanding under a new unsecured MUFG overdraft facility with capacity of up to $100.0 million.
- The company repurchased 2.5 million shares for $52.4 million during the first six months. Remaining repurchase authorization was approximately $145.3 million at quarter-end. Quarterly dividends were $0.12 per share.
Material changes and outlook
- Management attributed the sharp revenue decline to semiconductor market uncertainty, reduced customer investment and lower utilization of company equipment. APS was less volatile than Capital Equipment but also experienced lower volume, pricing pressure and unfavorable mix.
- Fiscal 2019 capital expenditures are expected to be $20.0 million to $24.0 million; approximately $7.1 million had been incurred through the second quarter.
- Management believes existing cash, investments and expected operating cash flow will satisfy liquidity and capital requirements for at least the next twelve months. No specific revenue or earnings guidance was provided.
- The company adopted the new revenue standard in fiscal 2019 using the modified retrospective method; management reported no material impact on revenue timing or amount.
- Operating lease accounting changes are expected to increase assets and liabilities beginning in fiscal 2020; the ultimate impact was still under evaluation.
Risks, contingencies and unusual items
- The business is highly cyclical and seasonal, with limited demand visibility and significant dependence on semiconductor manufacturers, IDMs and OSATs. Approximately 93.8% of six-month revenue was shipped outside the United States, primarily in Asia-Pacific, and approximately 39.0% was shipped to customers in China.
- Customer concentration is material: Micron represented 15.3% of six-month revenue and 19.4% of accounts receivable at March 30, 2019. Super Power International represented 12.5% of accounts receivable.
- Unrecorded or contractual commitments included $100.6 million of inventory purchase obligations and $17.9 million of operating lease obligations. Long-term tax payable totaled $70.9 million in the contractual-obligations table, with timing subject to tax matters.
- Foreign exchange forward contracts had a $35.5 million notional amount at quarter-end. Management estimated that a 10% currency fluctuation could affect financial position, results of operations or cash flow by approximately $2.0 million to $3.0 million.
- The company reported no material changes to the risk factors in its 2018 Form 10-K, no goodwill or long-lived-asset impairment trigger, and effective disclosure controls. A $2.5 million transition-tax adjustment was recorded in the quarter, and the filing notes ongoing foreign tax examinations and uncertain tax positions.
Investor verification checklist
- Verify the sustainability and timing of semiconductor capital-equipment demand recovery, particularly in Capital Equipment and China-related markets.
- Assess whether improved gross margins can persist despite lower volumes, pricing pressure and unfavorable APS mix.
- Reconcile cash generation with working-capital timing, especially the large receivables reduction and lower accrued liabilities.
- Review the effect of share repurchases and dividends on liquidity, share count and per-share results.
- Evaluate customer concentration, inventory purchase commitments, tax liabilities and the $100.0 million overdraft facility.
- Monitor the fiscal 2020 lease-standard adoption, future tax adjustments, foreign-exchange exposure and potential goodwill or inventory impairment.