Kulicke & Soffa Industries, Inc. — Fiscal 2015 First Quarter 10-Q
Reporting period: Three months ended December 27, 2014, compared with the three months ended December 28, 2013. The interim financial statements are unaudited. K&S designs, manufactures and services semiconductor assembly equipment and expendable tools through its Equipment and Expendable Tools segments.
Financial Performance and Position
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net revenue | $107.4 million | $79.1 million | 35.8% |
| Gross profit | $54.7 million | $38.4 million | 42.7% |
| Gross margin | 50.9% | 48.5% | +240 basis points |
| Operating income/(loss) | $9.7 million | $(2.2) million | Improved $11.9 million |
| Net income/(loss) | $7.8 million | $(2.0) million | Returned to profitability |
| Diluted EPS | $0.10 | $(0.03) | Improved |
| Operating cash flow | $46.4 million | $37.2 million | +$9.2 million |
Equipment revenue increased 44.0% to $91.0 million, driven primarily by higher ball bonder and wedge bonder volume. Expendable Tools revenue increased 3.2% to $16.5 million, reflecting higher wire-bonding tool volume partly offset by pricing reductions.
Equipment gross margin increased to 49.3% from 45.4%, while Expendable Tools gross margin declined modestly to 59.9% from 60.7%. SG&A increased 10.1% to $25.4 million, primarily due to higher incentive compensation and professional services. R&D increased 12.1% to $19.6 million due to additional product-development investment.
The effective tax rate was 19.0%, compared with 4.4% in the prior-year quarter. The filing attributes the current rate primarily to foreign earnings taxed at lower statutory rates and tax holidays, partly offset by deferred taxes on unremitted earnings, other U.S. deferred taxes and foreign withholding taxes.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $622.6 million at December 27, 2014, up from $588.0 million at September 27, 2014.
- Cash, cash equivalents and short-term investments totaled $633.4 million, or 67.1% of total assets.
- Operating cash flow of $46.4 million was supported by a $49.3 million reduction in receivables, partly offset by lower accounts payable and accrued liabilities and higher inventory.
- Investing cash outflows were $4.2 million, including $2.5 million of capital expenditures and $1.6 million of short-term investment purchases.
- Financing cash outflows were $7.6 million, primarily for repurchase of approximately 0.6 million shares.
- The balance sheet included an $18.3 million financing obligation related to the Singapore headquarters lease. The filing does not disclose conventional funded debt beyond this obligation and related arrangements.
Material Changes Versus the Prior Comparable Period
- Revenue growth and improved Equipment margins produced a shift from a $2.2 million operating loss to $9.7 million of operating income.
- Net income improved from a $2.0 million loss to $7.8 million of profit.
- Gross margin expanded by 240 basis points, while operating expenses declined from 51.3% to 41.9% of revenue.
- Cash generation increased, although the quarter benefited materially from collections of accounts receivable following seasonally lower sales than the preceding September quarter.
- The Company began using its $100 million share-repurchase authorization, repurchasing $7.6 million of stock during the quarter; approximately $91.8 million remained authorized at quarter-end.
- Accumulated other comprehensive income declined to $1.2 million from $2.2 million, primarily due to foreign-currency translation losses and a $0.4 million after-tax unrealized hedging loss.
Guidance, Outlook, Risks and Unusual Items
Management expected fiscal 2015 capital expenditures of $17.0 million to $19.0 million, primarily for R&D projects, Asian manufacturing enhancements and information-technology infrastructure. Management stated that existing cash, investments and expected operating cash flow should satisfy liquidity and capital requirements for at least the next twelve months.
The semiconductor capital-equipment market remains cyclical and seasonal, with limited demand visibility. Management cited dependence on semiconductor manufacturers and OSAT capital spending, macroeconomic conditions, customer mix, foreign-exchange movements, competition, pricing pressure, customer concentration, sole-source suppliers and inventory obsolescence as significant risks. Approximately 88.9% of quarterly revenue was shipped to locations outside the United States, primarily in Asia-Pacific.
On December 29, 2014, the Company agreed to acquire Assembléon B.V. for EUR80 million, approximately $98 million, in cash. The acquisition closed on January 9, 2015 and was funded from available cash. Assembléon expands K&S's presence in automotive, industrial and advanced-packaging markets. The purchase-price allocation was not complete when the filing was prepared, and the transaction creates integration, customer-retention, foreign-currency, goodwill and intangible-asset impairment risks.
Unfunded commitments included $77.7 million of inventory purchase obligations and $28.5 million of operating lease obligations. The Company also maintained a $5.0 million credit facility supporting a Singapore-dollar bank guarantee related to its headquarters lease. No goodwill or long-lived-asset impairment triggering event was identified during the quarter. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the strong Equipment demand and 49.3% segment gross margin were sustained in subsequent quarters or reflected temporary semiconductor-cycle and seasonal factors.
- The final purchase-price allocation, acquired goodwill and intangible assets, and post-acquisition operating results for Assembléon.
- The effect of the $98 million acquisition payment, ongoing share repurchases and future capital expenditures on cash balances and liquidity.
- Exposure to foreign-exchange movements; management estimated that a 10% currency fluctuation could affect financial position, results or cash flows by approximately $3 million to $4 million.
- Execution of the stated $17 million to $19 million fiscal 2015 capital-expenditure plan and the related effect on free cash flow.
- Customer demand, backlog and concentration trends, including the filing's statement that no customer represented at least 10% of quarterly revenue but one customer represented 19.0% of accounts receivable at quarter-end.