Kulicke & Soffa Industries, Inc. — Fiscal 2013 First-Quarter 10-Q
Reporting period: Three months ended December 29, 2012, compared with the three months ended December 31, 2011. The interim financial statements are unaudited. K&S designs, manufactures, sells and services semiconductor assembly equipment and expendable tools through its Equipment and Expendable Tools segments.
Financial performance and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net revenue | $114.0 million | $120.0 million | Down 5.0% |
| Gross profit | $51.5 million | $55.3 million | Down 6.8% |
| Gross margin | 45.2% | 46.1% | Down 90 bps |
| Operating income | $4.2 million | $12.4 million | Down 66.0% |
| Operating margin | 3.7% | 10.3% | Down approximately 660 bps |
| Net income | $3.6 million | $8.5 million | Down 57.6% |
| Diluted EPS | $0.05 | $0.11 | Down $0.06 |
| Operating cash flow | $58.5 million | $33.8 million | Up $24.7 million |
- Equipment revenue declined 5.9% to $99.9 million, primarily due to lower ball- and wedge-bonder volume, product mix and softness in key markets.
- Expendable Tools revenue increased 1.9% to $14.1 million, supported by higher wire-bonding tool volume but affected by unfavorable pricing and mix.
- Equipment gross margin was 43.5%, compared with 44.4%; Expendable Tools gross margin was 57.0%, compared with 58.6%.
- SG&A increased 1.1% to $29.1 million, while research and development increased 29.0% to $18.3 million. R&D included the reversal of a $2.3 million RISC grant receivable, including a $1.1 million prior-period adjustment.
- Cash and cash equivalents were $494.2 million at December 29, 2012, up $53.9 million from September 29, 2012 and equal to 64.2% of total assets. Restricted cash was $2.9 million.
- Total assets were $769.5 million and shareholders’ equity was $651.3 million at quarter-end. Total liabilities were $118.2 million.
- The company had no outstanding convertible notes at quarter-end; the $110.0 million principal balance of the 0.875% Convertible Subordinated Notes was repaid in cash at maturity during fiscal 2012. Interest expense was zero in the current quarter.
- Operating cash flow benefited substantially from a $90.0 million decrease in receivables, partly offset by a $54.1 million decrease in accounts payable, accrued expenses and other current liabilities. Capital expenditures were $1.6 million.
Material changes versus the prior comparable period
- Revenue, gross profit, operating income and net income all declined, reflecting weaker equipment demand and less favorable equipment pricing and mix.
- Operating expenses rose 10.3%, with R&D increasing materially to support new product development and additional engineering resources.
- The prior-year quarter included a $1.8 million pretax gain from a Switzerland pension-plan curtailment and $1.9 million of non-cash convertible-debt discount amortization; neither item recurred in the current quarter.
- Current-quarter equity-based compensation increased to $3.2 million from $2.1 million.
- Bookings declined to $95.0 million from $105.0 million, and backlog declined to $71.0 million from $88.0 million. Management cautions that orders are often cancellable or deferrable and backlog may not predict subsequent revenue.
Outlook, risks and unusual items
- Management expects typical semiconductor-industry seasonality and stated that current economic conditions are uncertain, demand visibility is limited and forecasting is difficult.
- Fiscal 2013 capital expenditures are expected to be $30.0 million to $31.0 million, including approximately $15.0 million for leasehold improvements related to the new Singapore facility.
- Management believes existing cash, investments and anticipated operating cash flow will satisfy liquidity and capital requirements for at least the next twelve months.
- The company is constructing a Singapore facility expected to be ready in the second half of 2013. It recorded a $4.4 million financing obligation and expects to record an additional $20.4 million over the construction term. The contemplated lease is expected to carry annual rent and service charges of approximately S$4.0 million to S$5.0 million during the initial 10-year term.
- Contractual obligations not reflected on the balance sheet included $63.0 million of inventory purchase obligations and $25.7 million of operating lease obligations. A S$3.4 million bank guarantee was secured by $2.9 million of restricted cash.
- Customer and geographic concentration is significant: approximately 97.1% of revenue was generated outside the United States, primarily in Asia/Pacific. Advanced Semiconductor Engineering and STATS ChipPAC represented 12.7% and 11.1% of revenue, respectively.
- Key risks include semiconductor industry cyclicality and seasonality, limited customer demand visibility, customer concentration and credit risk, reliance on selected suppliers, foreign-exchange exposure, inventory obsolescence and execution of the Singapore facility transition. A 10% currency fluctuation could affect financial position, results or cash flows by an estimated $3.0 million to $4.0 million.
- No goodwill impairment trigger occurred during the quarter. Management reported that disclosure controls and procedures were effective as of December 29, 2012.
Investor verification points
- Verify whether equipment bookings, backlog and customer demand improve after the reported seasonal slowdown.
- Assess whether R&D spending and the reversal of government-grant receivables continue to pressure operating margins.
- Monitor gross-margin recovery, particularly equipment pricing, product mix and manufacturing-cost reductions.
- Confirm the timing, total cost and financing impact of the Singapore facility and related lease commitments.
- Review receivables concentration, inventory reserves and exposure to major customers and sole-source suppliers.
- Reconcile future cash generation with planned fiscal 2013 capital expenditures and other contractual obligations.