Kulicke & Soffa Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 28, 2015, compared with the periods ended March 29, 2014. The request metadata identifies “2014 Q2,” but the filing itself is for fiscal 2015 Q2. Results are unaudited.
Business context
Kulicke & Soffa designs, manufactures, sells and services semiconductor assembly equipment and expendable tools. Its reportable segments are Equipment and Expendable Tools. Results are highly dependent on semiconductor manufacturers’ and outsourced semiconductor assembly and test providers’ capital spending, which is cyclical, seasonal and exposed to macroeconomic conditions.
Key financial metrics
| Metric | Three months ended March 28, 2015 | Prior comparable period | Six months ended March 28, 2015 | Prior comparable period |
|---|---|---|---|---|
| Net revenue | $145.2 million | $114.2 million | $252.7 million | $193.3 million |
| Gross profit | $68.6 million | $57.7 million | $123.3 million | $96.0 million |
| Gross margin | 47.2% | 50.5% | 48.8% | 49.7% |
| Operating income | $9.8 million | $10.1 million | $19.5 million | $7.9 million |
| Net income | $7.9 million | $9.1 million | $15.8 million | $7.1 million |
| Diluted EPS | $0.10 | $0.12 | $0.20 | $0.09 |
- Second-quarter revenue increased 27.2%, driven primarily by higher Equipment volume and the Assembléon acquisition. Six-month revenue increased 30.7%.
- Equipment revenue increased 33.0% in the quarter and 37.3% year to date. Expendable Tools revenue declined 7.1% in the quarter and 2.1% year to date.
- Quarterly operating margin was approximately 6.7%, compared with 8.9% in the prior-year quarter. Six-month operating margin was approximately 7.7%, compared with 4.1%.
- Quarterly net margin was approximately 5.5%, compared with 7.9%. Six-month net margin was approximately 6.2%, compared with 3.7%.
- SG&A increased to $35.6 million for the quarter, primarily due to $8.3 million of expenses from Assembléon. R&D increased to $23.2 million, reflecting the acquired business and new-product investment.
- The six-month effective tax rate was 19.6%, up from 12.3%, primarily because of higher local sales subject to higher tax rates and increased foreign deferred-tax valuation allowances.
Cash flow, liquidity and capital structure
- Cash flow from operations was $48.6 million for the six months, compared with $78.3 million in the prior-year period.
- Investing cash flow was negative $90.6 million, including $93.2 million for the Assembléon acquisition and $4.9 million of capital expenditures.
- Financing cash flow was negative $18.6 million, including $10.2 million of share repurchases and net debt repayments related to the acquired business.
- Cash and cash equivalents were $527.1 million at March 28, 2015, down from $588.0 million at September 27, 2014. Cash, cash equivalents and short-term investments totaled $528.8 million.
- Total assets were $977.3 million and shareholders’ equity was $800.2 million. Total liabilities were $177.0 million.
- Debt was limited: short-term debt was $0.8 million, and the financing obligation related to the Singapore headquarters was $17.5 million.
- Fiscal 2015 capital expenditures were expected to be $15.0 million to $17.0 million. Management stated that existing cash, investments and expected operating cash flow should meet liquidity and capital requirements for at least the next twelve months.
Material changes versus the prior comparable period
- Assembléon was acquired on January 9, 2015, for approximately $97.4 million in cash. The acquisition added $16.9 million of revenue and generated a $3.9 million net loss from the acquisition date through March 28, 2015.
- The acquisition added $39.7 million of goodwill and materially increased net intangible assets to $63.3 million from $5.9 million at the prior fiscal year-end.
- Assembléon contributed approximately 11.7% of consolidated quarterly revenue and 6.7% of six-month revenue. Integration of its operations, processes and internal controls was ongoing.
- Inventory increased to $76.5 million from $49.7 million, partly in anticipation of higher third-quarter production. Inventory reserves increased to $20.6 million from $13.9 million.
- Accounts receivable declined to $149.4 million from $171.5 million, while accounts payable increased to $50.7 million from $35.1 million.
- The company repurchased approximately 0.8 million shares for $10.2 million during the six months. Approximately $89.2 million remained available under the $100 million authorization.
- Revenue growth was offset partly by lower pricing and unfavorable customer mix. Expendable Tools profitability declined because of lower volume, lower absorption of fixed manufacturing costs and pricing reductions.
Guidance, outlook, risks and unusual items
- Management continued to describe semiconductor demand as volatile and visibility as limited. No consolidated revenue or earnings guidance was provided in the filing.
- Management cited opportunities in copper wire bonding, advanced packaging, automotive, industrial, medical and surface-mount technology markets. Asterion, a hybrid wedge bonder, was launched in March 2015.
- The primary risks include semiconductor industry cycles and seasonality, customer capital-spending reductions, unfavorable product or customer mix, pricing pressure, foreign-exchange movements, reliance on certain suppliers and customer concentration.
- A 10% foreign-currency fluctuation could affect financial position, results of operations or cash flows by approximately $3.0 million to $4.0 million. No foreign-exchange forwards were outstanding at March 28, 2015; on April 20, 2015, the company entered into forwards with a $22.3 million notional amount.
- Assembléon integration presents risks involving systems, controls, employee and customer retention, management distraction, foreign currency and unknown liabilities. Failure to achieve expected benefits could result in impairment of goodwill or intangible assets.
- Commitments not reflected in the balance sheet included $110.5 million of inventory purchase obligations and $29.5 million of operating lease obligations. The filing also disclosed a $17.5 million financing obligation related to the headquarters lease.
- No goodwill or long-lived asset impairment-triggering events were identified during the quarter or six-month period.
- The company reported effective disclosure controls. Management noted that internal-control integration work for Assembléon was ongoing, but no material changes to internal control over financial reporting were identified.
Investor verification items
- Verify the filing period because the request metadata says 2014 Q2 while the filing covers fiscal 2015 Q2.
- Assess whether Assembléon achieves revenue growth, synergies and profitability sufficient to offset its reported post-acquisition net loss.
- Monitor Equipment demand, customer mix and pricing, as quarterly gross margin declined despite strong revenue growth.
- Track Expendable Tools volume, fixed-cost absorption and pricing pressure.
- Review inventory growth, inventory reserves and the $110.5 million of inventory purchase commitments.
- Evaluate cash deployment for acquisitions and share repurchases against operating cash generation and liquidity needs.
- Monitor foreign-exchange exposure, goodwill and acquired intangible-asset impairment indicators, and the effective tax rate.