Kulicke and Soffa Industries, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended June 29, 2019, compared with June 30, 2018. The request metadata identifies “2018 Q3,” but the filing is the fiscal 2019 third-quarter Form 10-Q, filed August 2, 2019.
Business context
Kulicke and Soffa designs, manufactures, sells, services, and upgrades semiconductor assembly equipment, tools, spare parts, and related products. Reportable segments are Capital Equipment and Aftermarket Products and Services (APS). Management stated that semiconductor demand softened beginning in the fourth quarter of fiscal 2018 and was expected to remain weak through fiscal 2019.
Financial performance and liquidity
| Metric | Q3 FY2019 | Q3 FY2018 | 9M FY2019 | 9M FY2018 |
|---|---|---|---|---|
| Net revenue | $127.1 million | $268.8 million | $400.2 million | $704.3 million |
| Gross profit | $58.8 million | $127.0 million | $189.2 million | $323.6 million |
| Gross margin | 46.2% | 47.2% | 47.3% | 45.9% |
| Operating income | $1.8 million | $64.5 million | $13.9 million | $142.1 million |
| Net income | $1.3 million | $60.3 million | $5.2 million | $27.0 million |
| Diluted EPS | $0.02 | $0.86 | $0.08 | $0.38 |
Q3 operating margin was approximately 1.4%, versus 24.0% in the prior-year quarter. Nine-month operating margin was approximately 3.5%, versus 20.2% in the prior-year period. The nine-month effective tax rate was 78.2%, compared with 81.9% in the prior year; Q3 tax rate was 75.0%, compared with 10.8%.
- Segment revenue: Q3 Capital Equipment revenue declined 60.8% to $89.9 million; APS revenue declined 5.4% to $37.2 million. Nine-month Capital Equipment revenue declined 50.5% to $286.4 million, while APS declined 9.7% to $113.9 million.
- Cash flow: Nine-month operating cash flow was $83.2 million, compared with $93.8 million in the prior year. Investing activities provided $30.4 million, primarily from net maturities of short-term investments. Financing activities used $38.8 million.
- Cash and investments: Cash, cash equivalents, restricted cash, and short-term investments totaled $644.0 million at June 29, 2019, or 57.9% of total assets. Management reported $572.8 million net of the bank overdraft.
- Debt and obligations: Short-term debt was $71.2 million under a $100 million unsecured overdraft facility. The financing obligation related to the Singapore headquarters was approximately $15.5 million. The company also had a $3.2 million outstanding Citibank credit facility supporting bank guarantees.
- Capital allocation: The company repurchased 4.0 million shares for $85.5 million during the first nine months and paid $23.9 million of dividends. Approximately $112.1 million remained authorized for repurchases at quarter-end.
Material changes versus the prior comparable period
- Revenue fell 52.7% in Q3 and 43.2% for the first nine months, driven primarily by lower customer investment and volume in Capital Equipment.
- Q3 gross margin declined 100 basis points due mainly to unfavorable Capital Equipment mix; nine-month gross margin increased 140 basis points because APS represented a larger share of revenue.
- Operating expenses declined in absolute dollars, but increased materially as a percentage of revenue because of the sharp sales decline. SG&A and R&D were 44.8% of Q3 revenue, compared with 23.2% in the prior year.
- Net income and EPS declined substantially despite lower operating expenses. Q3 interest income increased due to higher interest rates, partially offsetting increased interest expense from the overdraft facility.
- Accounts receivable and inventory declined by $92.7 million and $16.0 million, respectively, supporting operating cash flow; accounts payable and accrued liabilities also declined by $48.1 million.
Outlook, risks, contingencies, and unusual items
- Management expected semiconductor demand softness to continue through fiscal 2019 and noted limited visibility into future demand.
- Fiscal 2019 capital expenditures were expected to be $11 million to $13 million; approximately $9.3 million had been incurred through Q3.
- Management believed existing cash, investments, and expected operating cash flow were sufficient for liquidity and capital requirements for at least the next twelve months.
- Key risks include semiconductor cyclicality, tariffs and trade restrictions, customer and geographic concentration, foreign-exchange volatility, reliance on foreign suppliers and manufacturing operations, and potential disruption involving Taiwan and China.
- Approximately 93.2% of Q3 revenue and 93.6% of nine-month revenue came from shipments outside the United States. China represented approximately 49.0% of Q3 revenue and 42.1% of nine-month revenue.
- Contractual commitments included $85.8 million of inventory purchase obligations and $17.5 million of operating lease obligations. Long-term tax payable was $64.1 million, with timing subject to tax audit outcomes.
- The company recorded $10.2 million of nine-month tax expense related to adjustments to the one-time transition tax, and $0.7 million of Q2 tax expense from a change in assertion regarding undistributed foreign earnings.
- No goodwill or long-lived asset impairment triggering event was identified during the quarter. Warranty reserves were $14.0 million at June 29, 2019.
- Foreign-exchange forward contracts had a $34.8 million notional amount at quarter-end; a 10% currency fluctuation could affect financial position, results, or cash flow by approximately $1 million to $2 million.
Important facts for investors to verify
- Whether Capital Equipment demand and customer capital spending recover after the fiscal 2019 downturn.
- The sustainability of profitability at substantially lower revenue levels and the effect of fixed-cost absorption on gross margin.
- The use and repayment terms of the $71.2 million overdraft, including the bank’s 30-day demand right and LIBOR-plus-1.5% pricing.
- Future tax payments, uncertain tax positions, and the effect of the unusually high effective tax rate.
- Customer, China, supplier, tariff, and Taiwan-China geopolitical concentrations.
- The pace and financial effect of the remaining $112.1 million share-repurchase authorization and future dividends.
- The eventual balance-sheet impact of adopting the new lease accounting standard in fiscal 2020.