ROSE [Jan 2013]

Company

Kulicke & Soffa Industries Inc. (KLIC) designs, manufactures and sells capital equipment and expendable tools used to assemble semiconductor devices. Anything that's computerized or uses radio waves depends on semiconductors and KLIC provides equipment and tools that are used in the production of a wide range of semiconductor devices. Their customers produce computers, smartphones, media tablets, LED TVs, and pacemakers. it also includes automotive electronic suppliers

Business

Over the long term, semiconductor consumption has historically grown, and is forecast to continue to grow. This growth is driven by regular advances in device performance and by price declines that result from improvements in manufacturing technology. Semiconductor manufacturers, both integrated device manufacturers (“IDMs”) and Outsourced Semiconductor Assembly & Test ("OSATs"), periodically invest aggressively in latest generation equipment. 

Kulicke & Soffa Industries Inc. (KLIC) focuses on the step of wire bonding silicon chips to plastic packaging. The company is a global leader in the design and manufacture of semiconductor assembly equipment. In recent years K&S has expanded its product offerings through strategic acquisitions, adding die bonding, wedge bonding and a broader range of expendable tools to its core ball bonding products. These are all ways of bonding wires to a chip. 

More about bonding process here.

This is part of the Equipment segment which accounts for 90% of revenues. The other 10% comes from Expendable Tools segment which are more directly tied to semiconductor unit consumption rather than capacity requirements and production capability improvements and thus its sales are less volatile than the Equipment segment's. Capillaries used in ball bonders, Bonding wedges and Saw blades to cut silicon wafers are some of the tools. 

More about how semiconductors work here.

Industry

(Source: Investor's Presentation)

Kulicke & Soffa Industries Inc. (KLIC) has 70% of Wire Bonder market share. The company has been strengthening its competitive position in the last few years even as the market seems to decrease in the past couple of years. KLIC states that demand for its solutions remain robust, but the company's revenue is in direct relationship to the total global semiconductor sales. Kulicke & Soffa's equipments are used in the last phase of the Integrated Circuit production so assembling companies do not have to keep a stock of Kulicke & Soffa's equipment. In contrast to most other semiconductor equipment producers which get their orders in advance, KLIC gets orders for an immediate supply and that explains the high volatility of the company's revenue and volatility of the stock price.

The figure on the right showsthat market research forecasts that 83% of all Integrated Circuits packages will be wire bonded, which demonstrates the importance of this market.

(Source: Investor's Presentation)

When manufacturing a semiconductor one can use gold or copper to make the electrical interconnections between a chip and the outside world (wires). Since 2010 manufacturers have began to use copper (gold was more common). Of course this requires suitable equipment and investments from manufacturers. The current gold prices are a big incentive for this conversion and the company expects this trend to continue for several years to come.

Kulicke & Soffa (KLIC) have developed extensions of its main ball bonding platforms to address opportunities in LED assembly. In the last few years, the LED backlights for flat-screen displays have been the main driver of the LED market. The company expects the next wave of growth in the LED market to be high brightness LED for general lighting, and believes it's well positioned for this trend. Market Research forecasts a CAGR 2012-2016 of 21% in the LED market.

Customers

Here follows a list of some of Kulick & Soffa's customers:

  • Advance Semiconductor Engineering
  • Siliconware Precision Industries, Ltd.
  • Haoseng Industrial Co., Ltd.
  • Rohm Intergrated Systems
  • Amkor Technology Inc.
  • STATS ChipPAC Ltd
  • LG Innotek Co. Ltd.
  • First Technology China, Ltd.
  • Super Power International Ltd
  • ST Microelectronics

Most of them are OSAT. The Outsourced model has enabled efficiency and productivity gains in the industry. This means that as a consumer I don't know most of these names, so I dug a little deeper and looked for their customers, at least for some of them:

Ok, it took me a while but the orange names are familiar to me, and this is important. This industry is complex enough without you knowing exactly how the company's work reflects into consumer goods.

Revenue Analysis

For fiscal 2012, the lower net revenue as compared to the prior year period was primarily due to the lower volume from wedge bonders and less favorable pricing for ball bonders. The volume reduction in wedge bonders was attributable mainly to decreased demand from key markets: power semiconductor, automotive power modules and industrial power hybrids. Slowing demand from the end users of our customers’ devices resulted in our customers cutting back their production, reducing their need for new equipment. This volume reduction was partially offset by higher ATPremier (Ball Bonder) volume driven by a change in technology used in smartphones and tablet applications.

For the last quarter, ball bonder equipment net revenue increased 7.0% over the June quarter,84.5% of ball bonder equipment was sold as copper capable bonders and wedge bonder equipment net revenue increased 20.8% from the June quarter.

The Company expects net revenue in the typically seasonally slower fiscal first quarter of 2013 ending December 29, 2012, to be approximately $95 million to $115 million which represents a 12.5% drop compared to the same period in the previous year.

Operational Expenses

Selling, General and Administrative expenses have recorded for the last years a continuous growth, being 2012 the exception year. Nevertheless, when compared with revenues, it has recorded a consistent 17% average in the last years. In 2009 the spike registered was due to a big drop in revenues the company wasn't able to reflect in its costs. In 2012 SG&A decreased as sales commissions and incentives decreased due to lower net revenue, a favorable variance in foreign exchange rates due to the strengthening of foreign currencies against the U.S. dollar and also a favorable change in the Accounts Receivable reserve the company was able to collect outstanding balances from customers that were previously reserved. Depreciation and amortization expense was also lower mainly due to less equipment being sent to customers for demonstration and evaluation.

R&D expense decreased during fiscal 2012 as compared to fiscal 2011 primarily due to a decrease in staff costs as a result of the consolidation and reduction of headcount. The decrease was partially offset by $1.0 million higher project based professional services for products development. We can see that the company invests an average of $60 million/year but that in proportion to revenue it reflects a lower investment (~8%)

Cash Flow Analysis

The company has a strong cash position, has recently paid all its debt so it has a net cash position. It seems to generate strong cash-flow from operational activities and you can see that it comes mostly from net income. In 2011, Other adjustments also contributed a great deal more due to deferred taxes recorded. This account also includes amortization of debt discount and debt issuance costs, equity-based compensation and employee benefits, provision for inventory valuation among others.

Market Analysis

Kulicke & Soffa Industries Inc. (KLIC) is trading at a PER (TTM) of 5.77 and a PEG of 0.39, which looks cheap compared to the other companies in the industry. A good indicator is that for the last 6 months both insiders and institutional investors increased their exposure to the company which is now debt-free. I should notice that it doesn't pay dividends nor intends to in the near future.

As for the current price, it is showing some positive momentum in the last month as China is showing some good signs on economic growth and US Cliff deal gave more confidence to the global economy.

Recommendations and Price Targets

There are only three analysts covering the company and I'm not sure they are paying much attention to the stock recently. Two of them are positive (BUY) and one is negative (UNDERWEIGHT). The price target from the consensus represents an upside potential of 22% to the current market price.

I also noticed that Revenue guidance fo the first quarter of 2013 ($95 - $105 million) was below analyst estimates ($171million). 

Tópico: KLIC [Jan 2013]

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