February 13, 1998
KULICKE & SOFFA INDUSTRIES INC (KLIC)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this report are forward looking statements and are subject to risks and uncertainties that could
cause actual results to differ materially. These risks and uncertainties include, but are not limited to the following: the risks
associated with a substantial foreign customer base; the risks associated with recent instability in foreign capital markets and
foreign currency fluctuations; the upward and downward volatility in demand for semiconductors and for the Company's
products and services; the risk of order postponements or cancellations; the Company's ability to manufacture and ship its
products on a timely basis; competitive pricing pressures; the risk of delays in customer qualification of new products and
services; and the risk that certain customers may adopt alternate semiconductor assembly processes. Reference is made to a
more detailed discussion of risk factors affecting the Company's business in other Company reports filed with the Securities
and Exchange Commission including the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1997, and "Risk Factors" and other sections of the Company's Registration Statement on Form S-3 (33-69734) filed in May
1997.
INTRODUCTION
The Company's operating results primarily depend upon the capital expenditures of semiconductor manufacturers and
subcontract assemblers worldwide which, in turn, depend on the current and anticipated market demand for semiconductors.
The Company does not consider its business to be seasonal in nature. The semiconductor industry has historically been volatile
and experienced periodic slowdowns which have had a severe negative effect on the semiconductor industry's demand for
capital equipment, including assembly equipment manufactured and sold by the Company and, to a lesser extent, packaging
materials such as those sold by the Company. These slowdowns have also adversely affected the Company's operating results.
The Company believes that such volatility will continue to characterize the industry and the Company's operations in the future.
A significant portion of the Company's revenue is derived from sales of a relatively small number of machines, most with selling
prices ranging from $60,000 to over $400,000. A delay in the shipment of a limited quantity of machines, either due to
manufacturing delays, which occur from time to time, or to rescheduling or cancellations of customer orders, could have a
material adverse effect on the Company's results of operations for any particular quarter.
The Company is in the process of transitioning to its new family of wire bonders, the 8000 family, which is based on an entirely
new platform and has required the development of new software and many subassemblies not part of the Company's current
wire bonders. The first products in the 8000 family are the Model 8020 ball bonder which will replace the Model 1488 plus,
and the Model 8060 wedge bonder which will replace the Model 1474fp. Sales of Model 8020 and 8060 wire bonders
accounted for approximately 20% of automatic wire bonder revenues during the fiscal 1998 first quarter. While development
and technical risks exist which have the potential to further affect the transition to the 8000 family wire bonders, the Company
expects the transition to volume production and sales of Model 8020 and 8060 machines to continue through the first half of
fiscal 1998.
The Company has incurred incremental costs to date and may incur substantial additional costs during the customer evaluation
and qualification process to ensure the functionality and reliability of these new products. The Company's inability to
successfully qualify new products, or its inability to manufacture and ship these products in volume and on a timely basis, could
adversely affect the Company's competitive position.
Furthermore, the transition to the Model 8020 and 8060 platforms involves numerous risks, including the possibility that
customers will defer purchases of Model 1488 plus and 1474fp wire bonders in anticipation of the availability of the Model
8020 or 8060, or that the Model 8020 or 8060 will fail to meet customer needs or achieve market acceptance. To the extent
that the Company fails to accurately forecast demand in volume and configuration for both its current and next-generation wire
bonders and generally to manage product transitions successfully, it could experience reduced orders, delays in product
shipments and increased risk of inventory obsolescence. There can be no assurance that the Company will successfully
introduce and manufacture new products, including the Model 8020 and 8060, that new products introduced by the Company
will be accepted in the marketplace or that the Company will manage its product transitions successfully. The Company's
failure to do any of the foregoing could materially adversely affect the Company's business, financial condition and operating
results.
RESULTS OF OPERATIONS - Three months ended December 31, 1997 compared to the three months ended December
31, 1996.
Customer orders booked into backlog during the fiscal 1998 first quarter totaled $136.0 million. While this amount is higher
than the $105.0 million booked in the comparable quarter last year, it is lower than the $155.0 million booked in the fiscal
1997 fourth quarter, primarily reflecting reduced orders for assembly equipment, principally automatic ball bonders. This
decline is due, in part, to the ongoing financial turmoil in the Asia/Pacific region. The backlog of customer orders totaled
$131.0 million at December 31, 1997, compared to $118.0 million at September 30, 1997 and $93.0 million at December
31, 1996. Since the timing of deliveries may vary and orders generally are subject to delay or cancellation, the Company's
backlog as of any date may not be indicative of sales for any succeeding period.
Net sales for the fiscal 1998 first quarter ended December 31, 1997, totaled $123.1 million, up $41.3 million from the $81.8
million for the comparable quarter of fiscal 1997, but $29.1 million lower than the $152.2 million in sales reported for the fiscal
1997 fourth quarter. During fiscal 1997 quarterly sales increased steadily throughout the year, boosted principally by the
rebound in equipment sales. In the first quarter of fiscal 1998, equipment sales declined in relation to the late 1997 levels,
largely reflecting the need for customers to assimilate the record number of machines sold late in 1997, and the growing
uncertainty over the impact of the recent financial instability in the Asia/Pacific region.
During the first quarter of fiscal 1998, equipment segment sales totaled $93.9 million compared to $56.2 million for the fiscal
1997 first quarter. This increase primarily resulted from increased unit sales of automatic wire bonders. During the fiscal 1998
first quarter, sales of the Company's new Model 8020 and 8060 wire bonders totaled $13.5 million, representing
approximately 20% of total wire bonder revenues for the period. Sales of packaging materials increased to $29.2 million in the
fiscal 1998 first quarter compared to $25.6 million for the same period last year, reflecting higher unit sales of expendable tools
and increased gold and aluminum wire volume. However, the favorable effect of higher fiscal 1998 gold wire volumes was
largely offset by lower average gold prices in fiscal 1998 compared to fiscal 1997.
By geographic region, during the first quarter of fiscal 1998, shipments to customer locations in the United States and Taiwan
increased significantly in relation to the first quarter of fiscal 1997. However, compared to the fiscal 1997 fourth quarter, fiscal
1998 first quarter sales to US based customers increased, while sales to customer locations throughout the Asia/Pacific region,
primarily Taiwan, Korea, Malaysia and Singapore declined.
Gross profit as a percentage of net sales increased to 36.8% in the first quarter of fiscal 1998 compared to 35.2% during the
same period last year. This increase primarily reflects a shift in the overall mix of product sales to higher margin equipment
products from lower margin packaging materials, as summarized in the table below:
Three months ended
December 31,
------------------
1997 1996
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Equipment segment sales 76.3% 68.7%
Packaging materials segment sales 23.6% 31.3%
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Total net sales 100.0% 100.0%
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Equipment segment gross margin as a percentage of net sales declined to 40.8% in the fiscal 1998 first quarter from 42.5% in
the comparable period last year, due primarily to lower average selling prices on older model 1488 plus ball bonders and to
reduced sales of higher margin upgrade kits and accessories in fiscal 1998 compared to fiscal 1997. These declines offset the
favorable effect on gross margins from sales of the Model 8020 and 8060 machines during the quarter. Gross profit margins in
the packaging materials segment improved, primarily due to a shift in total sales mix to higher margin expendable tools and
aluminum wire during the fiscal 1998 first quarter.
Selling, general and administrative ("SG&A") expenses totaled $22.4 million for the first quarter of fiscal 1998 compared to
$16.2 million for the same period last year. Fiscal 1997 first quarter SG&A levels reflected the effect of certain cost reduction
initiatives implemented late in fiscal 1996 in response to the 1996 business downturn. On a sequential quarter basis, fiscal 1998
first quarter SG&A costs were down slightly compared to the fiscal 1997 fourth quarter, despite the effect of annual merit
increases commencing in October 1997. Net research and development ("R&D") costs increased to $12.3 million in the first
quarter of fiscal 1998, compared to $10.7 million for the same period last year. The increase in fiscal 1998 R&D costs
primarily reflects increased development activities related to the 8000 family of products and continuous improvement of
existing products in the equipment segment, and increased expenditures in the packaging materials segment, primarily for new
product development.
Operating income totaled $10.6 million for the first quarter of fiscal 1998 compared to $1.9 million for the same period in fiscal
1997. Increased sales and gross profits in both the equipment and packaging materials segments, offset in part by higher
operating costs due to the greater volume of business in fiscal 1998 compared to fiscal 1997, contributed to this increase.
During the fiscal 1998 first quarter, the Company was essentially debt-free, principally as a result of the Company's May 1997
underwritten public offering of common stock which generated net proceeds of $101.1 million. A portion of such proceeds
was used to repay the $50.0 million borrowed under the Company's bank revolving credit facility to fund the AFW acquisition,
and the $4.7 million obligation incurred in connection with the October 1996 Semitec acquisition, which borrowings accounted
for the majority of the fiscal 1997 interest expense.
In the fiscal 1998 first quarter, the Company recognized $2.2 million as its 51% equity interest in the loss from its joint venture
investment in Flip Chip Technologies, LLC ("FCT"), compared to a $1.1 million loss during the same period last year.
Through December 31, 1997, the Company has made capital contributions totaling $16.8 million and has loaned to FCT $9.0
million to fund start-up operations. The Company is currently evaluating FCT's fiscal 1998 operating and financial plans with
FCT management and Delco. As a result of delays in the customer evaluation process and in the generation of substantial
operating revenues, the Company now anticipates that its proportionate share of FCT's fiscal 1998 loss will exceed $7.0
million, and that an additional $10 million to $15 million of loans may be required by FCT during the remainder of fiscal 1998.
The joint venture is subject to numerous risks common to business arrangements of this nature. There can be no assurance that
FCT will ever become profitable, that the Company will not make additional capital contributions and loans to FCT or that the
anticipated benefits of the joint venture will ever be realized. If the joint venture were to not realize such benefits, the
Company's business, financial condition and operating results could be materially adversely affected.
The fiscal 1998 effective tax rate is presently expected to approximate 30%, compared to approximately 29% for the 1997
fiscal year.
COMPANY OUTLOOK
The Company presently expects sales for the fiscal 1998 second quarter to approximate the fiscal 1998 first quarter level.
However, because of a shift in product mix toward newer, more profitable 8000 family machines, second quarter earnings are
expected to show some improvement over the first quarter. While the Company continues to believe that long-term growth
prospects for the semiconductor industry and for the Company's products remain positive, the ongoing financial instability
affecting the Asia/Pacific region has significantly hampered the Company's ability to accurately forecast financial results for the
balance of the 1998 fiscal year. However, while sales destined for customer locations in Korea accounted for approximately
19% of consolidated sales in fiscal 1997, the Company currently expects shipments to Korean-based customers to be
relatively insignificant for the balance of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the past three fiscal years, the Company has financed its operations principally through cash flows from operations. In
May 1997, the Company completed an underwritten public offering of 3,450,000 shares of common stock which generated
$101.1 million in net proceeds, of which a portion was used to repay the $50.0 million outstanding balance on the Company's
bank revolving credit facility.
During the fiscal 1998 first quarter, cash used by operating activities totaled $6.4 million, compared to cash generated by
operating activities of $3.6 million during the fiscal 1997 first quarter. In addition, cash and total investments decreased to
$103.8 million at December 31, 1997 compared to $115.6 million at September 30, 1997. At December 31, 1997, working
capital increased to $196.7 million compared to $190.2 million at September 30, 1997.
The decrease in operating cash flow and total cash and investments in the fiscal 1998 first quarter resulted primarily from
increases in inventory and payments of trade accounts payable and accrued liabilities during the quarter. The growth in
inventory primarily resulted from delays in shipments of certain machines late in the fiscal 1998 first quarter. Lower trade
payables and accrued liability balances reflect payments to vendors in accordance with normal terms and payment during the
quarter of fiscal 1997 management incentive and employee success sharing accruals.
During fiscal 1998 first quarter, the Company invested approximately $3.1 million in property and equipment, primarily to
upgrade equipment used in the Company's manufacturing and R&D activities. The Company presently expects total fiscal
1998 capital spending to approximate $18.0 million. The principal capital projects planned for fiscal 1998 include the purchase
of additional tooling and equipment necessary to manufacture the 8000 series of machines, the purchase of equipment
necessary to expand manufacturing capacity, primarily in the United States and Israel, and additional investments in a new
global management information system.
The Company has initiated a project to replace existing business and accounting systems with an enterprise-wide business
system which is "Year 2000" compliant. The Company expects to incur capital expenditures, primarily for computer hardware
and software, related to this system implementation project. Such amounts are included in the estimated capital expenditures
discussed above. Internal staffing costs and reengineering costs, if any, associated with this system implementation project will
be expensed as incurred. The Company's business system implementation plan currently anticipates conversion to the new
enterprise business system in early 1999. The Company does not currently anticipate any material disruption in its business
operations as a consequence of the year 2000 issue.
See "Results of Operations" above for information concerning anticipated capital contributions and loans to FCT.
A significant portion of the Company's consolidated earnings are attributable to undistributed earnings of certain of its foreign
subsidiaries. Deferred income taxes have not been provided on that portion of undistributed foreign earnings which is expected
to be indefinitely reinvested in foreign operations. If funds were required to be repatriated to fund the Company's operations or
other financial obligations, additional U.S. Federal income tax expense could be required to be recognized.
The Company currently has available the entire amount of a $10.0 million revolving credit facility expiring February 28, 1998,
which it expects to renew under comparable terms, and a $50.0 million revolving credit facility expiring March 30, 2001.
There were no borrowings under these facilities during fiscal 1998. The Company intends to retain both of these revolving
credit facilities.
The Company believes that anticipated cash flows from operations, its working capital and amounts expected to be available
under its revolving credit facility will be sufficient to meet the Company's liquidity and capital requirements for at least the next
twelve months, including any capital contributions and possible loans to FCT. The Company may, however, seek equity or
debt financing to provide capital for corporate purposes and/or to fund strategic business opportunities, including possible
acquisitions, joint ventures, alliances or other business arrangements which could require substantial capital outlays. The timing
and amount of such potential capital requirements cannot be determined at this time and will depend on a number of factors,
including demand for the Company's products, semiconductor and semiconductor capital equipment industry conditions and
competitive factors and the nature and size of strategic business opportunities which the Company may elect to pursue.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards issued Statement of Financial Standards No. 130, "Reporting
Comprehensive Income," ("SFAS 130"), which establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. The Company will
implement the provisions of this statement in the quarterly financial statements commencing for its fiscal 1999 first quarter. The
Company presently expects that foreign currency translation adjustments and unrealized gains or losses on short-term
investments classified as available for sale will be reported as components of the Company's comprehensive income under the
requirements of SFAS No. 130.
Recent Filings: Apr 1997 (Qtrly Rpt) | Aug 1997 (Qtrly Rpt) | Dec 1997 (Annual Rpt) | Feb 1998 (Qtrly Rpt)
More filings for KLIC available from EDGAR Online |
