Kulicke & Soffa Industries, Inc. — Fiscal 2015 Form 10-K
Reporting period: Fiscal year ended October 3, 2015, with quarterly data for the fourth quarter. The request references 2014 Q4, but the supplied filing is the fiscal 2015 Form 10-K; the comparable fourth quarter ended September 27, 2014.
Business context
K&S designs, manufactures and services semiconductor assembly equipment and expendable tools. Its reportable segments are Equipment and Expendable Tools, serving semiconductor manufacturers, outsourced semiconductor assembly and test providers, electronics manufacturers, and automotive suppliers. Approximately 91.2% of fiscal 2015 revenue was generated from shipments outside the United States, primarily in Asia-Pacific.
Key financial metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Revenue | $536.5 million | $568.6 million | Down 5.6% |
| Gross profit | $259.1 million | $273.6 million | Down 5.3% |
| Gross margin | 48.3% | 48.1% | Up 20 bps |
| Operating income | $37.3 million | $77.0 million | Down 51.6% |
| Operating margin | 6.9% | 13.5% | Down approximately 660 bps |
| Net income | $50.6 million | $63.0 million | Down 19.6% |
| Diluted EPS | $0.67 | $0.81 | Down $0.14 |
| Operating cash flow | $87.9 million | $82.5 million | Up $5.4 million |
| Cash and investments | $498.6 million | $597.1 million | Down $98.5 million |
Segment performance: Equipment revenue was $472.0 million, down 6.2%, primarily from lower ball bonder volume. Expendable Tools revenue was $64.5 million, down 1.6%. Equipment gross margin improved to 47.0% from 46.5%, while Expendable Tools gross margin declined to 57.6% from 60.2%.
Fourth quarter: Revenue was $119.2 million versus $194.7 million in the comparable fiscal 2014 quarter. Gross profit was $58.2 million, operating income was $1.6 million, and net income was $9.8 million, compared with $92.4 million, $37.5 million, and $29.3 million, respectively, in the prior comparable quarter. Fourth-quarter diluted EPS was $0.13 versus $0.38.
Liquidity and debt: Cash and cash equivalents were $498.6 million at year-end. The company reported no conventional long-term debt, but had a $16.5 million financing obligation related to its Singapore headquarters lease. Working capital was $633.4 million, and shareholders’ equity was $771.9 million.
Material changes versus the prior comparable period
- Bookings declined to $491.4 million from $595.6 million, and backlog declined to $52.5 million from $79.1 million.
- Operating expenses increased 12.9% to $221.8 million. SG&A increased primarily because of $24.6 million of expenses associated with the new advanced packaging and SMT products; R&D increased 8.4% to $90.0 million.
- Fiscal 2015 included the January 2015 acquisition of Assembléon for approximately $97.4 million. Assembléon contributed $59.3 million of revenue and a $2.0 million net loss and expanded K&S into automotive, industrial, advanced packaging and SMT markets.
- Cash declined primarily because of the Assembléon acquisition, $75.7 million of share repurchases, and $10.3 million of capital expenditures. The company repurchased 6.4 million shares for $77.9 million, leaving approximately $21.5 million authorized.
- The effective tax rate was a benefit of 34.3%, compared with a 18.3% expense rate in fiscal 2014. The principal driver was a $19.7 million deferred-tax benefit from a change in the permanent reinvestment assertion for foreign earnings, supplemented by approximately $4.0 million of R&D tax benefits.
Outlook, commentary, risks and unusual items
Management expects fiscal 2016 capital expenditures of approximately $10.0 million to $11.0 million and believes existing cash and expected operating cash flow will satisfy liquidity needs for at least the next twelve months. No revenue or earnings guidance was provided.
- Demand visibility remains limited, and the semiconductor equipment market is cyclical and seasonal. Orders and backlog may be cancelled, deferred or rescheduled with limited penalties.
- Management expects continued volatility, pricing pressure, foreign-exchange exposure and dependence on customer capital spending, particularly in Asia-Pacific.
- The transition from gold to copper bonding may be substantially complete; 70% of fiscal 2015 ball bonders sold were copper-capable.
- The company implemented a restructuring plan expected to reduce the workforce by 45 employees. Fiscal 2015 severance provision was $1.9 million, with $1.5 million accrued at year-end.
- Inventory increased to $79.1 million from $49.7 million, including a $19.1 million inventory reserve, partly reflecting anticipated manufacturing reductions and weaker fourth-quarter revenue.
- Assembléon integration, goodwill and intangible-asset valuations present execution and impairment risks. No fiscal 2015 goodwill impairment was recorded.
- Subsequent to year-end, the company entered into foreign-exchange forward contracts with a notional amount of $18.7 million. No such contracts were outstanding at October 3, 2015.
- The former chief executive officer departed on October 5, 2015; Jonathan Chou served as interim chief executive officer and chief financial officer at filing.
Investor verification checklist
- Verify the effect of the Assembléon acquisition on recurring revenue, margins, cash generation and integration costs.
- Assess whether bookings, backlog and ball-bonder demand stabilized after the fiscal 2015 decline.
- Separate the recurring operating performance from the $19.7 million tax benefit and other tax-position changes.
- Review inventory reserves and potential excess inventory following the fourth-quarter demand reduction.
- Monitor the remaining $21.5 million share-repurchase authorization and its effect on liquidity and share count.
- Evaluate exposure to semiconductor cycles, customer concentration, Asia-Pacific operations, foreign exchange, supplier constraints and copper-bonding adoption.
- Confirm the status of the Singapore tax incentive, which was scheduled to provide reduced rates through 2020 subject to continuing conditions.