Kulicke and Soffa Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2012, compared with the three and six months ended April 2, 2011. The request metadata identifies “2011 Q2,” but the filing is for fiscal 2012 Q2. The interim financial statements are unaudited.
Business Context
The company designs, manufactures, sells and services semiconductor assembly equipment and expendable tools. Its two 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 and seasonal. Approximately 98% of revenue was generated from shipments outside the United States, primarily in Asia/Pacific.
Financial Performance
| Metric | Three months ended Mar. 31, 2012 | Three months ended Apr. 2, 2011 | Six months ended Mar. 31, 2012 | Six months ended Apr. 2, 2011 |
|---|---|---|---|---|
| Revenue | $146.3 million | $206.7 million | $266.3 million | $355.6 million |
| Gross profit | $66.7 million | $99.0 million | $122.0 million | $171.1 million |
| Gross margin | 45.6% | 47.9% | 45.8% | 48.1% |
| Operating income | $20.2 million | $43.6 million | $32.6 million | $65.7 million |
| Operating margin | 13.8% | 21.1% | 12.2% | 18.5% |
| Net income | $16.6 million | $39.9 million | $25.1 million | $55.0 million |
| Diluted EPS | $0.22 | $0.54 | $0.33 | $0.75 |
Equipment revenue declined 31.0% in the quarter and 26.5% year to date, primarily because of lower wedge-bonder and ball-bonder volumes. Expendable Tools revenue declined 8.8% in the quarter and 11.4% year to date. The filing attributes the declines mainly to semiconductor industry cyclicality, unfavorable product and customer mix, and lower volumes.
Operating expenses declined 16.0% in the quarter and 15.2% year to date, but declined less than revenue. SG&A benefited from lower commissions, incentives, staff costs, professional fees, foreign-exchange effects and depreciation; R&D also declined modestly following headcount and technology-center consolidation. The effective tax rate for the six-month period was 12.5%, compared with 11.2% in the prior-year period.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $426.1 million at March 31, 2012, up from $378.2 million at October 1, 2011. Short-term investments declined from $6.4 million to zero.
- Operating cash flow was $56.9 million for the six months, compared with $100.8 million in the prior-year period. The decline primarily reflected lower net income and less favorable working-capital effects.
- Investing cash flow was negative $11.4 million, including $14.8 million paid for the Orthodyne earnout and $2.9 million of capital expenditures.
- Capital expenditures were $2.9 million during the first six months. Management expected $10.0 million to $11.0 million of additional fiscal 2012 capital expenditures.
- The company had $110.0 million principal amount of 0.875% convertible subordinated notes due June 1, 2012, with $108.8 million carrying value and $109.0 million estimated fair value. Management intended to repay the principal in cash at maturity.
- The DBS Bank facilities, consisting of a $12.0 million short-term loan facility and an $8.0 million revolving facility, had no borrowings and were cancelled after the balance-sheet date; the related debenture was discharged April 17, 2012.
- Management stated that existing cash, operating cash flow and available credit were expected to meet liquidity needs for at least the next twelve months. Because the credit facilities were subsequently cancelled, investors should focus on cash balances and operating cash flow as the primary liquidity sources.
Material Changes and Unusual Items
- Revenue fell 29.2% in the quarter and 25.1% for the first six months; operating income fell 53.6% and 50.4%, respectively.
- Total gross margin contracted by approximately 230 basis points in both comparison periods. Equipment margins declined 250 basis points in the quarter and 260 basis points year to date; Expendable Tools margins declined 300 and 210 basis points, respectively.
- A $1.8 million pretax gain from a Switzerland pension-plan curtailment was recognized in the quarter ended December 31, 2011 and reduced year-to-date SG&A.
- The company recorded a $0.2 million impairment/write-down on a Switzerland building classified as held for sale. A sale was expected within one year.
- The $14.8 million Orthodyne earnout accrued in fiscal 2011 was paid during the first quarter of fiscal 2012.
- Restructuring and workforce transfers from California and Switzerland to Asia continued. The restructuring severance accrual was $1.1 million at March 31, 2012, and management expected related cash payments to be substantially complete by fiscal year-end.
Outlook and Principal Risks
Management emphasized continued semiconductor-cycle volatility and uncertainty in capital spending. Strategic opportunities included the transition from gold to copper wire bonding, demand for copper-capable and large-area equipment, LED and power-semiconductor applications, and continued technology investment. The filing does not provide a specific revenue or earnings forecast.
- Revenue and profitability remain exposed to semiconductor demand, customer capital spending, seasonality, product mix and macroeconomic conditions.
- Customer concentration is material: Advanced Semiconductor Engineering represented 16.1% of six-month revenue, while Siliconware Precision Industries represented 17.0% of accounts receivable and other disclosed customers also exceeded 10%.
- The company relies on subcontractors and sole-source suppliers for certain components and is exposed to inventory obsolescence and excess commitments.
- International operations create foreign-currency risk; management estimated that a 10% move in the foreign-currency portfolio against the U.S. dollar could affect financial position, results or cash flow by approximately $3 million to $4 million. No hedging instruments were outstanding.
- Operating lease obligations totaled $27.6 million, and inventory purchase obligations totaled $118.5 million, including amounts that may be non-cancelable or subject to cancellation penalties.
- A foreign tax application was rejected in fiscal 2011, resulting in a $7.5 million unrecognized tax-position liability, including penalties; an appeal was pending.
Facts Investors Should Verify
- Whether the $110.0 million convertible notes were repaid or otherwise settled on June 1, 2012 and the resulting effect on cash and share count.
- Subsequent revenue, orders, backlog and gross-margin trends, particularly for ball bonders and wedge bonders.
- The effect of cancelling the DBS credit facilities on liquidity flexibility.
- Progress and realized savings from manufacturing, workforce and R&D consolidation in Asia.
- Resolution of the foreign tax appeal and any changes to tax liabilities or effective tax rates.
- Collection risk from concentrated customers, inventory reserves, supplier commitments and other disclosed contingencies.