Q3 2013 10Q DRAFT

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 29, 2013
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                  to                    .
 
Commission File No. 0-121
 
KULICKE AND SOFFA INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
PENNSYLVANIA
23-1498399
(State or other jurisdiction of incorporation)
(IRS Employer
 
Identification No.)
 
6 Serangoon North, Avenue 5, #03-16, Singapore 554910
(Address of principal executive offices and Zip Code)
 
(215) 784-7518
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý
Accelerated filer [ ] 
Non-accelerated filer [ ] 
Smaller reporting company [ ] 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
 
As of July 26, 2013, there were 75,277,538 shares of the Registrant's Common Stock, no par value, outstanding.


Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
 
FORM 10 – Q
 
June 29, 2013
 Index
 
 
 
Page Number
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
Item 1.
FINANCIAL STATEMENTS (Unaudited)
 
 
 
 
 
Consolidated Balance Sheets as of June 29, 2013 and September 29, 2012
 
 
 
 
Consolidated Statements of Operations for the three and nine months ended June 29, 2013 and June 30, 2012
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and nine months ended June 29, 2013 and June 30, 2012
 
 
 
 
Consolidated Statements of Cash Flows for the nine months ended June 29, 2013 and June 30, 2012
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
Item 4.
CONTROLS AND PROCEDURES
 
 
 
PART II - OTHER INFORMATION
 
 
 
Item 1A.
RISK FACTORS
 
 
 
Item 6.
EXHIBITS
 
 
 
 
SIGNATURES




Table of Contents

PART I. - FINANCIAL INFORMATION

Item 1. – FINANCIAL STATEMENTS
 
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
 
 
As of
 
 
June 29, 2013

 
September 29, 2012
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
508,493

 
$
440,244

Accounts and notes receivable, net of allowance for doubtful accounts of $817 and $937 respectively
 
147,038

 
188,986

Inventories, net
 
48,087

 
58,994

Prepaid expenses and other current assets
 
21,565

 
21,577

Deferred income taxes
 
3,812

 
3,515

Total current assets
 
728,995

 
713,316

 
 
 
 


Property, plant and equipment, net
 
32,881

 
28,441

Goodwill
 
41,546

 
41,546

Intangible assets
 
13,504

 
20,387

Other assets
 
9,622

 
11,919

TOTAL ASSETS
 
$
826,548

 
$
815,609

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
46,246

 
$
57,231

Accrued expenses and other current liabilities
 
48,509

 
57,946

Income taxes payable
 
2,974

 
8,192

Total current liabilities
 
97,729

 
123,369

 
 
 
 
 
Deferred income taxes
 
36,481

 
37,875

Other liabilities
 
9,100

 
10,698

TOTAL LIABILITIES
 
$
143,310

 
$
171,942

 
 
 
 
 
Commitments and contingent liabilities (Note 9)
 


 


 
 
 
 
 
SHAREHOLDERS' EQUITY:
 
 

 
 

Preferred stock, without par value:
 
 

 
 

Authorized 5,000 shares; issued - none
 
$

 
$

Common stock, no par value:
 
 

 
 

Authorized 200,000 shares; issued 80,209 and 79,099, respectively; outstanding 75,255 and 74,145 shares, respectively
 
464,078

 
455,122

Treasury stock, at cost, 4,954 shares
 
(46,356
)
 
(46,356
)
Accumulated income
 
262,347

 
232,520

Accumulated other comprehensive income
 
3,169

 
2,381

TOTAL SHAREHOLDERS' EQUITY
 
$
683,238

 
$
643,667

 
 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
826,548

 
$
815,609

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Unaudited
 
 
 
Three months ended
 
Nine months ended
 
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Net revenue
 
$
141,181

 
$
255,525

 
$
361,330

 
$
521,857

Cost of sales
 
75,267

 
133,082

 
195,071

 
277,451

Gross profit
 
65,914

 
122,443

 
166,259

 
244,406

Selling, general and administrative
 
31,264

 
30,149

 
88,754

 
89,435

Research and development
 
15,783

 
16,018

 
46,243

 
46,077

Operating expenses
 
47,047

 
46,167

 
134,997

 
135,512

Income from operations
 
18,867

 
76,276

 
31,262

 
108,894

Interest income
 
267

 
200

 
629

 
651

Interest expense
 

 
(1,455
)
 
(1
)
 
(5,807
)
Income from operations before income taxes
 
19,134

 
75,021

 
31,890

 
103,738

Provision for income taxes
 
247

 
6,847

 
2,063

 
10,440

Net income
 
$
18,887

 
$
68,174

 
$
29,827

 
$
93,298

 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.25

 
$
0.92

 
$
0.40

 
$
1.26

Diluted
 
$
0.25

 
$
0.90

 
$
0.39

 
$
1.24

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
75,231

 
74,067

 
75,083

 
73,811

Diluted
 
76,473

 
75,994

 
76,204

 
75,516

 
The accompanying notes are an integral part of these consolidated financial statements.














 


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KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Unaudited


 
Three months ended
 
Nine months ended
 
June 29, 2013

 
June 30, 2012

 
June 29, 2013

 
June 30, 2012

 
 
 
 
 
 
 
 
Net income
$
18,887

 
$
68,174

 
$
29,827

 
$
93,298

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
186

 
(408
)
 
784

 
(39
)
Unrecognized actuarial gain, Switzerland pension plan, net of tax
41

 
17

 
4

 
28

Total other comprehensive income (loss)
227

 
(391
)
 
788

 
(11
)
Comprehensive income
$
19,114

 
$
67,783

 
$
30,615

 
$
93,287

The accompanying notes are an integral part of these consolidated financial statements.




































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KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
 
 
Nine months ended
 
 
June 29, 2013

 
June 30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income
 
$
29,827

 
$
93,298

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
14,302

 
12,650

Amortization of debt discount and debt issuance costs
 

 
5,174

Equity-based compensation and employee benefits
 
8,088

 
6,390

Adjustment for doubtful accounts
 
(111
)
 
1,009

Adjustment for inventory valuation
 
(205
)
 
2,568

Deferred taxes
 
190

 
(793
)
Switzerland pension plan curtailment
 

 
(1,820
)
Impairment of buildings and building improvements
 

 
206

Gain on disposal on building
 
(147
)
 

Changes in operating assets and liabilities, net of businesses acquired or sold:
 
 

 
 

Accounts and notes receivable
 
42,728

 
(40,088
)
Inventory
 
10,869

 
5,244

Prepaid expenses and other current assets
 
40

 
(1,398
)
Accounts payable, accrued expenses and other current liabilities
 
(31,296
)
 
40,349

Income taxes payable
 
(5,454
)
 
2,117

Other, net
 
(651
)
 
(258
)
Net cash provided by continuing operations
 
68,180

 
124,648

Net cash used in discontinued operations
 

 
(1,469
)
Net cash provided by operating activities
 
68,180

 
123,179

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Purchases of property, plant and equipment
 
(5,957
)
 
(5,145
)
Proceeds from sales of property, plant and equipment
 
5,310

 

Sales of investments classified as available-for-sale
 

 
6,364

Earnout payment related to prior acquisition
 

 
(14,848
)
Net cash used in investing activities
 
(647
)
 
(13,629
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Payments on debt
 

 
(110,000
)
Proceeds from exercise of common stock options
 
868

 
3,028

Net cash provided by(used in) financing activities
 
868

 
(106,972
)
Effect of exchange rate changes on cash and cash equivalents
 
(152
)
 
(69
)
Changes in cash and cash equivalents
 
68,249

 
2,509

Cash and cash equivalents at beginning of period
 
440,244

 
378,188

Cash and cash equivalents at end of period
 
$
508,493

 
$
380,697

 
 
 
 
 
CASH PAID FOR:
 
 

 
 

Interest
 
$

 
$
633

Income taxes
 
$
8,060

 
$
7,878

The accompanying notes are an integral part of these consolidated financial statements. 

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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited



NOTE 1: BASIS OF PRESENTATION
These consolidated financial statements include the accounts of Kulicke and Soffa Industries, Inc. and its subsidiaries (the “Company”), with appropriate elimination of intercompany balances and transactions.
The interim consolidated financial statements are unaudited and, in management's opinion, include all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of results for these interim periods. The interim consolidated financial statements do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended September 29, 2012, filed with the Securities and Exchange Commission, which includes Consolidated Balance Sheets as of September 29, 2012 and October 1, 2011, and the related Consolidated Statements of Operations, Cash Flows, and Changes in Shareholders' Equity for each of the years in the three-year period ended September 29, 2012. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full year.
Fiscal Year    
Each of the Company's first three fiscal quarters end on the Saturday that is 13 weeks after the end of the immediately preceding fiscal quarter. The fourth quarter of each fiscal year ends on the Saturday closest to September 30th. Fiscal 2013 quarters end on December 29, 2012, March 30, 2013, June 29, 2013 and September 28, 2013. Fiscal 2012 quarters ended on December 31, 2011, March 31, 2012, June 30, 2012 and September 29, 2012. In fiscal years consisting of 53 weeks, the fourth quarter will consist of 14 weeks.
Nature of Business
The Company designs, manufactures and sells capital equipment and expendable tools as well as services, maintains, repairs and upgrades equipment, all used to assemble semiconductor devices. The Company's operating results depend upon the capital and operating expenditures of semiconductor manufacturers and outsourced semiconductor assembly and test providers (“OSATs”) worldwide which, in turn, depend on the current and anticipated market demand for semiconductors and products utilizing semiconductors. The semiconductor industry is highly volatile and experiences downturns and slowdowns which have a severe negative effect on the semiconductor industry's demand for semiconductor capital equipment, including assembly equipment manufactured and sold by the Company and, to a lesser extent, expendable tools, including those sold by the Company. These downturns and slowdowns have in the past adversely affected the Company's operating results. The Company believes such volatility will continue to characterize the industry and the Company's operations in the future.
Use of Estimates
The preparation of consolidated financial statements requires management to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, net revenue and expenses during the reporting periods, and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. On an on-going basis, management evaluates estimates, including but not limited to, those related to accounts receivable, reserves for excess and obsolete inventory, carrying value and lives of fixed assets, goodwill and intangible assets, valuation allowances for deferred tax assets and deferred tax liabilities, repatriation of un-remitted foreign subsidiary earnings, equity-based compensation expense, restructuring, and warranties. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable. As a result, management makes judgments regarding the carrying values of its assets and liabilities that are not readily apparent from other sources. Authoritative pronouncements, historical experience and assumptions are used as the basis for making estimates, and on an ongoing basis, management evaluates these estimates. Actual results may differ from these estimates under different assumptions or conditions.
Vulnerability to Certain Concentrations
Financial instruments which may subject the Company to concentrations of credit risk as of June 29, 2013 and September 29, 2012 consisted primarily of short-term investments and trade receivables. The Company manages credit risk associated with investments by investing its excess cash in highly rated debt instruments of the U.S. Government and its agencies, financial institutions, and corporations. The Company has established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity. These guidelines are periodically reviewed and modified as appropriate. The Company does not have any exposure to sub-prime financial instruments or auction rate securities.

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Table of Contents
KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited


The Company's trade receivables result primarily from the sale of semiconductor equipment, related accessories and replacement parts, and expendable tools to a relatively small number of large manufacturers in a highly concentrated industry. Write-offs of uncollectible accounts have historically not been significant; however, the Company closely monitors its customers' financial strength to reduce the risk of loss.
The Company's products are complex and require raw materials, components and subassemblies having a high degree of reliability, accuracy and performance. The Company relies on subcontractors to manufacture many of these components and subassemblies and it relies on sole source suppliers for some important components and raw material inventory.
The Company's international operations are exposed to changes in foreign currency exchange rates due to transactions denominated in currencies other than the location's functional currency. The Company is also exposed to foreign currency fluctuations that impact the remeasurement of net monetary assets of those operations whose functional currency, the U.S. dollar, differs from their respective local currencies, most notably in Israel, Malaysia, Singapore and Switzerland. In addition to net monetary remeasurement, the Company has exposures related to the translation of subsidiary financial statements from their functional currency, the local currency, into its reporting currency, the U.S. dollar, most notably in China, Taiwan, Japan and Germany. The Company's U.S. operations also have foreign currency exposure due to net monetary assets denominated in currencies other than the U.S. dollar.
Foreign Currency Translation
The majority of the Company's business is transacted in U.S. dollars; however, the functional currencies of some of the Company's subsidiaries are their local currencies. In accordance with ASC No. 830, Foreign Currency Matters (“ASC 830”), for a subsidiary of the Company that has a functional currency other than the U.S. dollar, gains and losses resulting from the translation of the functional currency into U.S. dollars for financial statement presentation are not included in determining net income, but are accumulated in the cumulative translation adjustment account as a separate component of shareholders' equity (accumulated other comprehensive income (loss)). Under ASC 830, cumulative translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. Gains and losses resulting from foreign currency transactions are included in the determination of net income.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Cash equivalents are measured at fair value based on level one measurement, or quoted market prices, as defined by ASC No. 820, Fair Value Measurements and Disclosures. As of June 29, 2013 and September 29, 2012, fair value approximated the cost basis for cash equivalents.
Investments
Investments, other than cash equivalents, are classified as “trading,” “available-for-sale” or “held-to-maturity,” in accordance with ASC No. 320, Investments-Debt & Equity Securities, and depending upon the nature of the investment, its ultimate maturity date in the case of debt securities, and management's intentions with respect to holding the securities. Investments classified as “trading” are reported at fair market value, with unrealized gains or losses included in earnings. Investments classified as “available-for-sale” are reported at fair market value, with net unrealized gains or losses reflected as a separate component of shareholders' equity (accumulated other comprehensive income (loss)). The fair market value of trading and available-for-sale securities is determined using quoted market prices at the balance sheet date. Investments classified as held-to-maturity are reported at amortized cost. Realized gains and losses are determined on the basis of specific identification of the securities sold.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from its customers' failure to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company is also subject to concentrations of customers and sales to a few geographic locations, which could also impact the collectability of certain receivables. If global economic conditions deteriorate or political conditions were to change in some of the countries where the Company does business, it could have a significant impact on the results of operations, and the Company's ability to realize the full value of its accounts receivable.

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Table of Contents
KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited (continued)


Inventories
Inventories are stated at the lower of cost (on a first-in first-out basis) or market value. The Company generally provides reserves for obsolete inventory and for inventory considered to be in excess of demand. Demand is generally defined as 18 months future consumption for equipment, 24 months consumption for all spare parts, and 12 months consumption for expendable tools. Forecasted demand is based upon internal projections, historical sales volumes, customer order activity and a review of consumable inventory levels at customers' facilities. The Company communicates forecasts of its future demand to its suppliers and adjusts commitments to those suppliers accordingly. If required, the Company reserves the difference between the carrying value of its inventory and the lower of cost or market value, based upon assumptions about future demand, and market conditions. If actual market conditions are less favorable than projections, additional inventory reserves may be required.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. The cost of additions and those improvements which increase the capacity or lengthen the useful lives of assets are capitalized while repair and maintenance costs are expensed as incurred. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives as follows: buildings 25 years; machinery and equipment 3 to 10 years; and leasehold improvements are based on the shorter of the life of lease or life of asset. Purchased computer software costs related to business and financial systems are amortized over a five-year period on a straight-line basis.
Valuation of Long-Lived Assets
In accordance with ASC No. 360, Property, Plant & Equipment ("ASC 360"), the Company's property, plant and equipment is tested for impairment based on undiscounted cash flows when triggering events occur, and if impaired, written-down to fair value based on either discounted cash flows or appraised values. ASC 360 also provides a single accounting model for long-lived assets to be disposed of by sale and establishes additional criteria that would have to be met to classify an asset as held for sale. The carrying amount of an asset or asset group is not recoverable to the extent it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. Estimates of future cash flows used to test the recoverability of a long-lived asset or asset group must incorporate the entity's own assumptions about its use of the asset or asset group and must factor in all available evidence.
ASC 360 requires that long-lived assets be tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Such events include significant under-performance relative to the expected historical or projected future operating results; significant changes in the manner of use of the assets; significant negative industry or economic trends and significant changes in market capitalization.
Accounting for Impairment of Goodwill
The Company operates two reportable segments: Equipment and Expendable Tools. Goodwill was recorded in 2009 for the acquisition of Orthodyne Electronics Corporation ("Orthodyne"), which added wedge bonder products to the Equipment business.
Accounting Standard Update 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”), provides companies with the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, after assessing the qualitative factors, a company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then performing the two-step impairment test is unnecessary. However, if a company concludes otherwise, then it is required to perform the first step of the two-step goodwill impairment test. If the carrying value of a reporting unit exceeds its fair value, then a company is required to perform the second step of the two-step goodwill impairment test. 
As part of the annual evaluation, the Company performs an impairment test of its goodwill in the fourth quarter of each fiscal year to coincide with the completion of its annual forecasting and refreshing of business outlook process. On an on-going basis, the Company monitors if a “triggering” event has occurred that may have the effect of reducing the fair value of a reporting unit below its respective carrying value. Adverse changes in expected operating results and/or unfavorable changes in other economic factors used to estimate fair values could result in a non-cash impairment charge in the future. During the three and nine months ended June 29, 2013, no triggering events occurred.  

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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited (continued)


Impairment assessments inherently involve judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact the assumptions as to prices, costs, growth rates or other factors that may result in changes in the estimates of future cash flows. Although the Company believes the assumptions that it has used in testing for impairment are reasonable, significant changes in any one of the assumptions could produce a significantly different result. Indicators of potential impairment may lead the Company to perform interim goodwill impairment assessments including, significant and unforeseen customer losses, a significant adverse change in legal factors or in the business climate, a significant adverse action or assessment by a regulator, a significant stock price decline or unanticipated competition.
For further information on goodwill and other intangible assets, see Note 3 below.
Revenue Recognition
In accordance with ASC No. 605, Revenue Recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, the collectability is reasonably assured, and equipment installation obligations have been completed and customer acceptance, when applicable, has been received or otherwise released from installation or customer acceptance obligations. If terms of the sale provide for a customer acceptance period, revenue is recognized upon the expiration of the acceptance period or customer acceptance, whichever occurs first. The Company’s standard terms are ex works (the Company’s factory), with title transferring to its customer at the Company’s loading dock or upon embarkation. The Company has a small percentage of sales with other terms, and revenue is recognized in accordance with the terms of the related customer purchase order. Revenue related to services is recognized upon performance of the services requested by a customer order. Revenue for extended maintenance service contracts with a term more than one month is recognized on a prorated straight-line basis over the term of the contract.
Shipping and handling costs billed to customers are recognized in net revenue. Shipping and handling costs paid by the Company are included in cost of sales.
Research and Development
The Company charges research and development costs associated with the development of new products to expense when incurred. In certain circumstances, pre-production machines which the Company intends to sell are carried as inventory until sold.
Income Taxes
In accordance with ASC No. 740, Income Taxes, deferred income taxes are determined using the liability method. The Company records a valuation allowance to reduce its deferred tax assets to the amount it expects is more likely than not to be realized. While the Company has considered future taxable income and its ongoing tax planning strategies in assessing the need for the valuation allowance, if it were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax asset would decrease income in the period such determination was made.
In accordance with ASC No. 740 Topic 10, Income Taxes, General (“ASC 740.10”), the Company accounts for uncertain tax positions taken or expected to be taken in its income tax return. Under ASC 740.10, the Company utilizes a two-step approach for evaluating uncertain tax positions. Step one, or recognition, requires a company to determine if the weight of available evidence indicates a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, or measurement, is based on the largest amount of benefit, which is more likely than not to be realized on settlement with the taxing authority.
Equity-Based Compensation
The Company accounts for equity-based compensation under the provisions of ASC No. 718, Compensation - Stock Compensation (“ASC 718”). ASC 718 requires the recognition of the fair value of the equity-based compensation in net income. Compensation expense associated with market-based restricted stock is determined using a Monte-Carlo valuation model, and compensation expense associated with time-based and performance-based restricted stock is determined based on the number of shares granted and the fair value on the date of grant. The fair value of the Company's stock option awards are estimated using a Black-Scholes option valuation model. In addition, the calculation of equity-based compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. The fair value of equity-based awards is amortized over the vesting period of the award and the Company elected to use the straight-line method for awards granted after the adoption of ASC 718.

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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited (continued)


Earnings per Share
Earnings per share (“EPS”) are calculated in accordance with ASC No. 260, Earnings per Share. Basic EPS include only the weighted average number of common shares outstanding during the period. Diluted EPS includes the weighted average number of common shares and the dilutive effect of stock options, restricted stock and share unit awards and convertible subordinated notes outstanding during the period, when such instruments are dilutive.
In accordance with ASC No. 260.10.55, Earnings per Share - Implementation & Guidance, the Company treats all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends as participating in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted EPS must be applied.
Prior Period Adjustment
During the three months ended December 29, 2012, the Company identified a prior period adjustment of $1.1 million relating to the recognition of government grants that resulted in increased R&D expenses and a reduction of grants receivable. This error was corrected during the quarter ended December 29, 2012 and management deemed that the adjustment was not material to the previous fiscal year ended September 29, 2012 or the expected full year results of the current fiscal year ending September 28, 2013. This amount impacted the nine month period ended June 29, 2013.
Recent Accounting Pronouncements
There were no new accounting pronouncements during the three months ended June 29, 2013.
NOTE 2: BALANCE SHEET COMPONENTS
The following tables reflect the components of significant balance sheet accounts as of June 29, 2013 and September 29, 2012:
 
 
As of
(in thousands)
 
June 29, 2013
 
September 29, 2012
Inventories, net:
 
 

 
 

Raw materials and supplies
 
$
29,703

 
$
26,660

Work in process
 
16,646

 
23,352

Finished goods
 
18,241

 
27,599

 
 
64,590

 
77,611

Inventory reserves
 
(16,503
)
 
(18,617
)
 
 
$
48,087

 
$
58,994

Property, plant and equipment, net:
 
 

 
 

Land
 
$

 
$
2,086

Buildings and building improvements
 

 
4,830

Leasehold improvements
 
16,286

 
16,005

Data processing equipment and software
 
24,096

 
23,819

Machinery, equipment, furniture and fixtures
 
41,410

 
40,580

Construction in progress (1)
 
14,078

 
3,219

 
 
95,870

 
90,539

Accumulated depreciation
 
(62,989
)
 
(62,098
)
 
 
$
32,881

 
$
28,441

Accrued expenses and other current liabilities:
 
 

 
 

Wages and benefits
 
$
17,053

 
$
18,734

Accrued customer obligations (2)
 
8,077

 
22,984

Accrued other (1)
 
14,078

 
3,219

Commissions and professional fees (3)
 
2,241

 
2,776

Severance
 
1,719

 
2,840

Other
 
5,341

 
7,393

 
 
$
48,509

 
$
57,946


9

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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited (continued)


(1)
Pursuant to ASC No. 840, Leases, for lessee's involvement in asset construction, the Company is considered the owner of the building during the construction phase for the Agreement to Develop and Lease (the “ADL”) facility being developed by Mapletree Industrial Trust (the “Landlord”) in Singapore, see Note 9 below. The estimated construction costs incurred to date in relation to the relevant proportion of the Company's lease is recognized on the Consolidated Balance Sheet as at June 29, 2013 and September 29, 2012. Applicable ground lease expense was accrued of $0.4 million.
(2)
Represents customer advance payments, customer credit program, accrued warranty expense and accrued retrofit costs.
(3)
In connection with the September 2010 retirement of the Company's former Chief Executive Officer (“CEO”), balances as of June 29, 2013 and September 29, 2012 include $0.1 million and $0.3 million, respectively, related to his three-year consulting arrangement.
NOTE 3: GOODWILL AND INTANGIBLE ASSETS
Goodwill
Intangible assets classified as goodwill are not amortized. The Company performs an annual impairment test of its goodwill during the fourth quarter of each fiscal year, which coincides with the completion of its annual forecasting and refreshing of business outlook process. The Company performed its annual impairment test in the fourth quarter of fiscal 2012 and concluded that no impairment charge was required. The Company also tests for impairment if a “triggering” event occurs that may have the effect of reducing the fair value of a reporting unit below its respective carrying value. No triggering event has occurred during the three and nine months ended June 29, 2013.
On October 3, 2008, the Company completed the acquisition of Orthodyne and agreed to pay Orthodyne an additional amount in the future based upon the gross profit realized by the acquired business over a three year period from date of acquisition pursuant to an Earnout Agreement entered into in connection with the acquisition. At the end of fiscal 2011, the Company accrued $14.8 million as an earnout payment related to the Orthodyne acquisition to goodwill which was paid during the first quarter of fiscal 2012. Following the acquisition of Orthodyne, wedge bonder products were added to the Equipment business.
Intangible Assets
Intangible assets with determinable lives are amortized over their estimated useful lives. The Company's intangible assets consist primarily of wedge bonder developed technology and customer relationships.

The following table reflects net intangible assets as of June 29, 2013 and September 29, 2012
 
 
As of
 
Average estimated
(dollar amounts in thousands)
 
June 29, 2013
 
September 29, 2012
 
useful lives (in years)
Wedge bonder developed technology
 
$
33,200

 
$
33,200

 
7.0
Accumulated amortization
 
(22,530
)
 
(18,973
)
 
 
Net wedge bonder developed technology
 
10,670

 
14,227

 
 
 
 
 
 
 
 
 
Wedge bonder customer relationships
 
19,300

 
19,300

 
5.0
Accumulated amortization
 
(18,335
)
 
(15,440
)
 
 
Net wedge bonder customer relationships
 
965

 
3,860

 
 
 
 
 
 
 
 
 
Wedge bonder trade name
 
4,600

 
4,600

 
8.0
Accumulated amortization
 
(2,731
)
 
(2,300
)
 
 
Net wedge bonder trade name
 
1,869

 
2,300

 
 
 
 
 
 
 
 
 
Wedge bonder other intangible assets
 
2,500

 
2,500

 
1.9
Accumulated amortization
 
(2,500
)
 
(2,500
)
 
 
Net wedge bonder other intangible assets
 

 

 
 
Net intangible assets
 
$
13,504

 
$
20,387

 
 


10

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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited (continued)


The following table reflects estimated annual amortization expense related to intangible assets as of June 29, 2013:
 
 
As of
(in thousands)
June 29, 2013
Remaining fiscal 2013
$
2,295

Fiscal 2014
5,318

Fiscal 2015
5,318

Fiscal 2016
573

Total amortization expense
$
13,504

 

NOTE 4: DEBT AND OTHER OBLIGATIONS
Bank Guarantee
On May 9, 2012, Kulicke & Soffa Pte Ltd. (“Pte”), the Company's wholly owned subsidiary, obtained a bank guarantee (“Bank Guarantee”) from DBS Bank Ltd. in the amount of $3.4 million Singapore dollars. Pte furnished the Bank Guarantee to the Landlord in lieu of a cash deposit in connection with building and leasing of a new facility in Singapore. (See Note 9)
On May 9, 2013, the Bank Guarantee expired and Pte replaced the Bank Guarantee with a cash deposit of an equivalent amount which is included in the Consolidated Balance Sheet as part of prepaid expenses and other current assets.
0.875% Convertible Subordinated Notes
The 0.875% Convertible Subordinated Notes (the “Notes”) matured on June 1, 2012. Prior to maturity, holders of the Notes were entitled to convert their Notes based on an initial conversion rate of approximately 69.6621 shares per $1,000 principal amount of Notes (equal to an initial conversion price of approximately $14.355 per share, subject to adjustment for certain events) only under specific circumstances. The Company had the option to elect to satisfy the conversion obligations in cash, common stock or a combination thereof. The Company repaid the entire principal balance of the Notes of $110.0 million plus interest of $0.5 million in cash in fiscal 2012. No common shares were issued in connection with repayment of the Notes.
For the three months and nine months ended June 30, 2012, $0.1 million and $0.4 million of amortization expense was incurred, respectively, relating to the Notes. There was no amortization expense for the nine months ended June 29, 2013.
The Company adopted ASC 470.20, Debt, Debt with Conversion Options, which requires that issuers of convertible debt that may be settled in cash upon conversion record the liability and equity components of the convertible debt separately. The liability component of the Company's Notes was classified as debt and the equity component of the Notes was classified as common stock on the Company's Consolidated Balance Sheets.
 
NOTE 5: SHAREHOLDERS’ EQUITY AND EMPLOYEE BENEFIT PLANS
Common Stock and 401(k) Retirement Income Plan
The Company has a 401(k) retirement income plan (the “Plan”) for its employees. Historically, the Company's matching contributions to the Plan were made in the form of issued and contributed shares of Company common stock; however, beginning January 2, 2011, matching contributions to the Plan are made in cash instead of stock. The Plan allows for employee contributions and matching Company contributions up to 4% or 6% of the employee's contributed amount based upon years of service.
The following table reflects the Company’s matching contributions to the Plan during the three and nine months ended June 29, 2013 and June 30, 2012:
 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Cash
 
$
323

 
$
382

 
$
1,082

 
$
1,314

 






11

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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited (continued)



Accumulated Other Comprehensive Income
The following table reflects accumulated other comprehensive income reflected on the Consolidated Balance Sheets as of June 29, 2013 and September 29, 2012
 
 
As of
(in thousands)
 
June 29, 2013
 
September 29, 2012
Gain from foreign currency translation adjustments
 
$
3,780

 
$
2,996

Unrecognized actuarial gain, Switzerland pension plan, net of tax
 
(227
)
 
(227
)
Switzerland pension plan curtailment
 
(384
)
 
(388
)
Accumulated other comprehensive income
 
$
3,169

 
$
2,381

Equity-Based Compensation
As of June 29, 2013, the Company had seven equity-based employee compensation plans (the “Employee Plans”) and three director compensation plans (the “Director Plans”) (collectively, the “Plans”). Under these Plans, market-based share awards (collectively, “market-based restricted stock”), time-based share awards (collectively, “time-based restricted stock”), performance-based share awards (collectively, “performance-based restricted stock”), stock options, or common stock have been granted at 100% of the market price of the Company's common stock on the date of grant. As of June 29, 2013, the Company’s one active plan, the 2009 Equity Plan, had 4.5 million shares of common stock available for grant to its employees and directors.
Market-based restricted stock entitles the employee to receive common shares of the Company on the award vesting date, if market performance objectives which measure relative total shareholder return (“TSR”) are attained. Relative TSR is calculated based upon the 90-calendar day average price of the Company's stock as compared to specific peer companies that comprise the Philadelphia Semiconductor Index. TSR is measured for the Company and each peer company over a performance period, which is generally three years. Vesting percentages range from 0% to 200% of awards granted. The provisions of the market-based restricted stock are reflected in the grant date fair value of the award; therefore, compensation expense is recognized regardless of whether or not the market condition is ultimately satisfied. Compensation expense is reversed if the award is forfeited prior to the vesting date.
In general, stock options and time-based restricted stock awarded to employees vest annually over a three year period provided the employee remains employed. The Company follows the non-substantive vesting method for stock options and recognizes compensation expense immediately for awards granted to retirement eligible employees, or over the period from the grant date to the date retirement eligibility is achieved.
In general, performance-based restricted stock (“PSU”) entitles the employee to receive common shares of the Company on the three-year anniversary of the grant date (if employed by the Company) if return on invested capital and revenue growth targets set by the Management Development and Compensation Committee (“MDCC”) of the Board of Directors on the date of grant are met. If return on invested capital and revenue growth targets are not met, performance-based restricted stock does not vest. Certain PSUs vest based on achievement of strategic goals over a certain time period or periods set by the MDCC. If the strategic goals are not achieved, the PSUs do not vest.
Equity-based compensation expense recognized in the Consolidated Statements of Operations for the three and nine months ended June 29, 2013 and June 30, 2012 was based upon awards ultimately expected to vest. In accordance with ASC No. 718, Stock Based Compensation, forfeitures have been estimated at the time of grant and were based upon historical experience. The Company reviews the forfeiture rates periodically and makes adjustments as necessary.







12

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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited (continued)


The following table reflects restricted stock and common stock granted during the three and nine months ended June 29, 2013 and June 30, 2012:
 
 
Three months ended
 
Nine months ended
(shares in thousands)
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Market-based restricted stock
 

 

 
343

 
437

Time-based restricted stock
 
42

 

 
581

 
689

Performance-based restricted stock
 

 

 
57

 

Common stock
 
19

 
14

 
56

 
58

Equity-based compensation in shares
 
61

 
14

 
1,037

 
1,184

The following table reflects total equity-based compensation expense, which includes restricted stock, stock options and common stock, included in the Consolidated Statements of Operations during the three and nine months ended June 29, 2013 and June 30, 2012
 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Cost of sales
 
$
53

 
$
44

 
$
275

 
$
226

Selling, general and administrative
 
2,125

 
1,583

 
6,375

 
5,027

Research and development
 
418

 
450

 
1,438

 
1,316

Total equity-based compensation expense
 
$
2,596

 
$
2,077

 
$
8,088

 
$
6,569

The following table reflects equity-based compensation expense, by type of award, for the three and nine months ended June 29, 2013 and June 30, 2012:  
 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Market-based restricted stock 
 
$
1,042

 
$
673

 
$
3,175

 
$
2,202

Time-based restricted stock
 
1,303

 
1,214

 
4,171

 
3,526

Performance-based restricted stock 
 
33

 

 
75

 
269

Stock options
 
8

 
10

 
37

 
32

Common stock
 
210

 
180

 
630

 
540

Total equity-based compensation expense
 
$
2,596

 
$
2,077

 
$
8,088

 
$
6,569

Pension Plan
In accordance with regulations in Switzerland, the Company sponsors a Switzerland pension plan covering active employees whose minimum benefits are guaranteed. During fiscal 2012, the Company announced the intention to reduce its Switzerland workforce by approximately 41 employees, which triggered a curtailment of the Switzerland pension plan under ASC No. 715, Topic 30, Compensation - Retirement Benefits, Defined Benefit Plans. As a result, the Company recognized a pretax curtailment and settlement gain of $1.8 million during the first quarter of fiscal 2012.  
NOTE 6: EARNINGS PER SHARE
Basic income (loss) per share is calculated using the weighted average number of shares of common stock outstanding during the period. In addition, net income applicable to participating securities and the related participating securities are excluded from the computation of basic income per share.
Diluted income per share is calculated using the weighted average number of shares of common stock outstanding during the period and, if there is net income during the period, the dilutive impact of common stock equivalents outstanding during the period. In computing diluted income per share, if convertible debt is assumed to be converted to common shares, the after-tax amount of interest expense recognized in the period associated with the convertible debt is added back to net income.

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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited (continued)


As of October 1, 2011, the Company determined that the Notes would not result in the issuance of any dilutive shares, since the conversion option was not “in the money” as of October 1, 2011. The Notes matured on June 1, 2012. The Company repaid the entire principal balance of the Notes of $110.0 million plus interest of $0.5 million in cash in fiscal 2012. No common shares were issued in connection with repayment of the Notes. Accordingly, diluted EPS excludes the effect of the conversion of the Notes.
The following tables reflect a reconciliation of the shares used in the basic and diluted net income per share computation for the three and nine months ended June 29, 2013 and June 30, 2012
 
 
Three months ended
(in thousands, except per share)
 
June 29, 2013
 
June 30, 2012
 
 
Basic
 
Diluted
 
Basic
 
Diluted
NUMERATOR:
 
 

 
 

 
 

 
 

Net income
 
$
18,887

 
$
18,887

 
$
68,174

 
$
68,174

Less: income applicable to participating securities
 

 

 

 

Net income applicable to common shareholders
 
$
18,887

 
$
18,887

 
$
68,174

 
$
68,174

DENOMINATOR:
 
 

 
 

 
 

 
 

Weighted average shares outstanding - Basic
 
75,231

 
75,231

 
74,067

 
74,067

Stock options
 
 

 
108

 
 

 
144

Time-based restricted stock
 
 

 
535

 
 

 
740

Market-based restricted stock
 
 

 
599

 
 

 
1,043

Weighted average shares outstanding - Diluted (1)
 
 

 
76,473

 
 

 
75,994

EPS:
 
 

 
 

 
 

 
 

Net income per share - Basic
 
$
0.25

 
$
0.25

 
$
0.92

 
$
0.92

Effect of dilutive shares
 
 

 

 
 

 
$
(0.02
)
Net income per share - Diluted
 
 

 
$
0.25

 
 

 
$
0.90

 
(1)
There were no potentially dilutive shares excluded for the three months ended June 30, 2012 and June 29, 2013, respectively.

14

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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited (continued)


 
 
Nine months ended
(in thousands, except per share)
 
June 29, 2013
 
June 30, 2012
 
 
Basic
 
Diluted
 
Basic
 
Diluted
NUMERATOR:
 
 

 
 

 
 

 
 

Net income
 
$
29,827

 
$
29,827

 
$
93,298

 
$
93,298

Less: income applicable to participating securities
 

 

 
(7
)
 
(7
)
Net income applicable to common shareholders
 
$
29,827

 
$
29,827

 
$
93,291

 
$
93,291

DENOMINATOR:
 
 

 
 

 
 

 
 

Weighted average shares outstanding - Basic
 
75,083

 
75,083

 
73,811

 
73,811

Stock options
 
 
 
111

 
 

 
152

Time-based restricted stock
 
 
 
499

 
 

 
611

Market-based restricted stock
 
 
 
511

 
 

 
942

Weighted average shares outstanding - Diluted (1)
 
 

 
76,204

 
 

 
75,516

EPS:
 
 

 
 

 
 

 
 

Net income per share - Basic
 
$
0.40

 
$
0.40

 
$
1.26

 
$
1.26

Effect of dilutive shares
 
 

 
(0.01
)
 
 

 
(0.02
)
Net income per share - Diluted
 
 

 
$
0.39

 
 

 
$
1.24

 
(1)
For the nine months ended June 30, 2012, 0.1 million potentially dilutive shares related to out of the money stock options were excluded from EPS. There were no potentially dilutive shares excluded for the nine months ended June 29, 2013.
 
NOTE 7: INCOME TAXES
The following table reflects the provision for income taxes and the effective tax rate for the nine months ended June 29, 2013 and June 30, 2012
 
Nine months ended
(dollar amounts in thousands)
June 29, 2013
 
June 30, 2012
Income from operations before income taxes
$
31,890

 
$
103,738

Provision for income taxes
2,063

 
10,440

Net income
$
29,827

 
$
93,298

 
 
 
 
Effective tax rate
6.5
%
 
10.1
%
 
For the nine months ended June 29, 2013 and June 30, 2012, the effective income tax rate differed from the federal statutory rate primarily due to tax from foreign operations at a lower effective tax rate than the U.S. statutory rate, the release of a prior year reserve and the impact of tax holidays, offset by an increase for deferred taxes on un-remitted earnings, other U.S. current and deferred taxes and additional domestic and foreign expenses or benefits related to returns filed in the current period.
For the nine months ended June 29, 2013, the Company recognized a benefit of $1.7 million related to the reversal of a reserve for uncertain tax positions based on administrative practices in a foreign jurisdiction and recognized income tax expense of $0.9 million due to a change in estimate upon filing tax returns in a foreign jurisdiction.
The effective tax rate for the period ended June 29, 2013 of 6.5% decreased from the effective rate for the fiscal period ended September 29, 2012 of 7.8% primarily due to a shift in foreign earnings to tax jurisdictions with lower effective tax rates and certain changes in estimate that were recorded upon filing tax returns in foreign jurisdictions, offset by the recording of a valuation allowance against certain deferred tax assets in foreign jurisdictions.
The Company's future effective tax rate would be affected if earnings were lower than anticipated in countries where it has lower statutory rates and higher than anticipated in countries where it has higher statutory rates, by changes in the valuation of its deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. The Company regularly assesses the effects resulting from these factors to determine the adequacy of its provision for income taxes.

15

Table of Contents
KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited (continued)


NOTE 8: SEGMENT INFORMATION
The Company operates two reportable segments: Equipment and Expendable Tools. The Equipment segment manufactures and sells a line of ball bonders, heavy wire wedge bonders and die bonders that are sold to semiconductor device manufacturers, their outsourced semiconductor assembly and test subcontractors, other electronics manufacturers and automotive electronics suppliers. The Company also services, maintains, repairs and upgrades its equipment. The Expendable Tools segment manufactures and sells a variety of expendable tools for a broad range of semiconductor packaging applications.
The following table reflects operating information by segment for the three and nine months ended June 29, 2013 and June 30, 2012
 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Net revenue:
 
 

 
 

 
 

 
 

       Equipment
 
$
125,103

 
$
237,095

 
$
316,088

 
$
474,297

       Expendable Tools
 
16,078

 
18,430

 
45,242

 
47,560

              Net revenue
 
141,181

 
255,525

 
361,330

 
521,857

Cost of sales :
 
 

 
 

 
 

 
 

       Equipment
 
67,632

 
125,892

 
175,204

 
257,731

       Expendable Tools
 
7,635

 
7,190

 
19,867

 
19,720

              Cost of sales
 
75,267

 
133,082

 
195,071

 
277,451

Gross profit :
 
 

 
 

 
 

 
 

        Equipment
 
57,471

 
111,203

 
140,884

 
216,566

        Expendable Tools
 
8,443

 
11,240

 
25,375

 
27,840

              Gross profit
 
65,914

 
122,443

 
166,259

 
244,406

Operating expenses:
 
 

 
 

 
 

 
 

        Equipment
 
40,997

 
40,351

 
118,237

 
117,821

        Expendable Tools
 
6,050

 
5,816

 
16,760

 
17,691

              Operating expenses
 
47,047

 
46,167

 
134,997

 
135,512

Income from operations:
 
 

 
 

 
 

 
 

        Equipment
 
16,474

 
70,852

 
22,647

 
98,745

        Expendable Tools
 
2,393

 
5,424

 
8,615

 
10,149

              Income from operations
 
$
18,867

 
$
76,276

 
$
31,262

 
$
108,894

 
The following table reflects assets by segment as of June 29, 2013 and September 29, 2012:
 
 
 
As of
(in thousands)
 
June 29, 2013
 
September 29, 2012
Segment assets:
 
 

 
 

Equipment
 
$
728,602

 
$
746,636

Expendable Tools
 
97,946

 
68,973

Total assets
 
$
826,548

 
$
815,609

 

16

Table of Contents
KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited (continued)


The following tables reflect capital expenditures for the nine months ended June 29, 2013 and June 30, 2012, and depreciation expense for the three and nine months ended June 29, 2013 and June 30, 2012:
 
 
 
Nine months ended
(in thousands)
 
June 29, 2013
 
June 30, 2012
Capital expenditures:
 
 

 
 

Equipment
 
$
4,425

 
$
3,983

Expendable Tools
 
1,532

 
1,162

Capital expenditures
 
$
5,957

 
$
5,145


 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Depreciation expense
 
 

 
 

 
 

 
 

Equipment
 
$
1,898

 
$
1,297

 
$
5,599

 
$
4,032

Expendable Tools
 
606

 
579

 
1,820

 
1,734

Depreciation expense
 
$
2,504

 
$
1,876

 
$
7,419

 
$
5,766

 
NOTE 9: COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Agreement to Develop and Lease
On May 7, 2012, Pte entered into the ADL and a Lease Agreement with DBS Trustee Limited as trustee of the Landlord. Pursuant to the ADL, the Landlord agreed to develop a building at Lot 17622A Pt Mukim 18 at Serangoon North Avenue 5 (the “Building”) and Pte agreed to lease from the Landlord 198,134 square feet (the “Initial Premises”) representing approximately 69% of the Building. The Building is expected to be completed and ready for occupancy in the first quarter of fiscal 2014. Subject to approval from the relevant authorities, the Building will bear a name to be chosen by Pte.
Warranty Expense
The Company's equipment is generally shipped with a one-year warranty against manufacturing defects. The Company establishes reserves for estimated warranty expense when revenue for the related equipment is recognized. The reserve for estimated warranty expense is based upon historical experience and management's estimate of future warranty costs.
The following table reflects the reserve for product warranty activity for the three and nine months ended June 29, 2013 and June 30, 2012
 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 29, 2013

 
June 30, 2012

 
June 29, 2013
 
June 30, 2012
Reserve for product warranty, beginning of period
 
$
1,163

 
$
1,363

 
$
2,412

 
$
2,245

Provision for product warranty
 
379

 
1,514

 
443

 
2,366

Product warranty costs paid
 
(468
)
 
(818
)
 
(1,781
)
 
(2,552
)
Reserve for product warranty, end of period
 
$
1,074

 
$
2,059

 
$
1,074

 
$
2,059


Other Commitments and Contingencies
The following table reflects obligations not reflected on the Consolidated Balance Sheet as of June 29, 2013:
 
 
 
 

 
Payments due by fiscal year
(in thousands)
 
Total
 
2013
 
2014
 
2015
 
2016
 
thereafter
Inventory purchase obligation (1)
 
$
107,654

 
$
107,654

 
$

 
$

 
$

 
$

Operating lease obligations (2)
 
31,448

 
1,751

 
2,868

 
2,972

 
2,622

 
21,235

Total
 
$
139,102

 
$
109,405

 
$
2,868

 
$
2,972

 
$
2,622

 
$
21,235



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Table of Contents
KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited (continued)


(1)
The Company orders inventory components in the normal course of its business. A portion of these orders are non-cancelable and a portion may have varying penalties and charges in the event of cancellation.
(2)
The Company has minimum rental commitments under various leases (excluding taxes, insurance, maintenance and repairs, which are also paid by the Company) primarily for various facility and equipment leases, which expire periodically through 2018 (not including lease extension options, if applicable).
Pursuant to ASC No. 840, Leases, for lessee's involvement in asset construction, the Company is considered the owner of the Building during the construction phase of the ADL.  As of June 29, 2013, the Company has recorded a financing obligation of $14.1 million related to the Building and is expected to record an additional $14.4 million over the construction term, which is expected to be completed in the next twelve months. This financing obligation is not reflected in the table above.
Under the lease agreement contemplated by the ADL, (the “Lease Agreement”), the term for the rental of the Initial Premises is expected to be 10 years, (the “Initial Term”). Pte will have the option to renew for two additional ten-year terms. The combined annual rent and service charge for the Initial Term will range between approximately $4.0 to $5.0 million Singapore dollars. Subject to renting a minimum amount of space, Pte will have a right of first refusal for all space that becomes available in the Building, and the Landlord has agreed to make available a certain amount of additional space for rental at Pte's option which may be exercised at certain points during the second half of the Initial Term. Subject to renting a minimum amount of space for a certain period, Pte will have partial surrender rights. In addition, Pte will have termination rights after renting the Initial Premises for a certain period of time. The Lease Agreement is not in effect as of the date of this report and is not reflected in the above table.
Concentrations
The following tables reflect significant customer concentrations as a percentage of net revenue for the nine months ended June 29, 2013 and June 30, 2012:
 
 
Nine months ended
 
 
June 29, 2013
 
June 30, 2012
Advanced Semiconductor Engineering
 
*

 
23.1
%
Siliconware Precision Industries Co. Limited
 
11.1
%
 
11.8
%
STATS ChipPAC Ltd
 
10.5
%
 
*

 * Represents less than 10% of net revenue
The following table reflects significant customer concentrations as a percentage of total accounts receivable as of June 29, 2013 and June 30, 2012:
 
 
As of
 
 
June 29, 2013
 
June 30, 2012
STATS ChipPAC Ltd
 
19.0
%
 
*

Haoseng Industrial Co., Ltd
 
15.0
%
 
*

Siliconware Precision Industries Co. Limited
 
13.0
%
 
20.4
%
Advanced Semiconductor Engineering
 
*

 
12.7
%
* Represents less than 10% of total accounts receivable 

18

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Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements
In addition to historical information, this filing contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the safe harbor provisions created by statute. Such forward-looking statements include, but are not limited to, our future revenue, sustained, increasing, continuing or strengthening demand for our products, the continuing transition from gold to copper wire bonding, replacement demand, our research and development efforts, our ability to identify and realize new growth opportunities, our ability to control costs and our operational flexibility as a result of (among other factors):
projected growth rates in the overall semiconductor industry, the semiconductor assembly equipment market, and the market for semiconductor packaging materials; and
projected demand for ball, wedge and die bonder equipment and for expendable tools.
Generally, words such as “may,” “will,” “should,” “could,” “anticipate,” “expect,” “intend,” “estimate,” “plan,” “continue,” “goal” and “believe,” or the negative of or other variations on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this filing. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.
Forward-looking statements are based on current expectations and involve risks and uncertainties. Our future results could differ significantly from those expressed or implied by our forward-looking statements. These risks and uncertainties include, without limitation, those described below and under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 29, 2012 (the “Annual Report”) and our other reports and registration statements filed from time to time with the Securities and Exchange Commission. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in this report, as well as our audited financial statements included in the Annual Report.
We operate in a rapidly changing and competitive environment. New risks emerge from time to time and it is not possible for us to predict all risks that may affect us. Future events and actual results, performance and achievements could differ materially from those set forth in, contemplated by or underlying the forward-looking statements, which speak only as of the date on which they were made. Except as required by law, we assume no obligation to update or revise any forward-looking statement to reflect actual results or changes in, or additions to, the factors affecting such forward-looking statements. Given those risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictions of actual results.
OVERVIEW
Kulicke and Soffa Industries, Inc. designs, manufactures and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits (“ICs”), high and low powered discrete devices, light-emitting diodes (“LEDs”), and power modules. We also service, maintain, repair and upgrade our equipment. Our customers primarily consist of semiconductor device manufacturers, outsourced semiconductor assembly and test providers (“OSATs”), other electronics manufacturers and automotive electronics suppliers.
We operate two main business segments, Equipment and Expendable Tools. Our goal is to be the technology leader and the most competitive supplier in terms of cost and performance in each of our major product lines. Accordingly, we invest in research and engineering projects intended to enhance our position at the leading edge of semiconductor assembly technology. We also remain focused on our cost structure, through consolidating our manufacturing facilities. Cost reduction efforts remain an important part of our normal ongoing operations, and are expected to generate savings without compromising overall product quality and service levels.
Business Environment
The semiconductor business environment is highly volatile, driven by internal dynamics, both cyclical and seasonal, in addition to macroeconomic forces. Over the long term, semiconductor consumption has historically grown, and is forecast to continue to grow. This growth is driven, in part, by regular advances in device performance and by price declines that result from improvements in manufacturing technology. In order to exploit these trends, semiconductor manufacturers, both integrated device manufacturers (“IDMs”) and OSATs, periodically invest aggressively in latest generation capital equipment. This buying pattern often leads to periods of excess supply and reduced capital spending - the so called semiconductor cycle. Within this broad semiconductor cycle there are also, generally weaker, seasonal effects that are specifically tied to annual, end-consumer purchasing patterns. Typically, semiconductor manufacturers prepare for heightened demand by adding or replacing equipment capacity by the end of the September

19

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quarter. Occasionally, this results in subsequent reductions in the December quarter. This annual seasonality can occasionally be overshadowed by effects of the broader semiconductor cycle. Macroeconomic factors also affect the industry, primarily through their effect on business and consumer demand for electronic devices, as well as other products that have significant electronic content such as automobiles, white goods, and telecommunication equipment.
Our Equipment segment is primarily affected by the industry's internal cyclical and seasonal dynamics in addition to broader macroeconomic factors which positively and negatively affect our financial performance. The sales mix of IDM and OSAT customers in any period also impacts financial performance, as this mix can affect our products' average selling prices and gross margins due to differences in volume purchases and machine configurations required by each customer type.
Our Expendable Tools segment is less volatile than our Equipment segment. Expendable Tools sales are more directly tied to semiconductor unit consumption rather than capacity requirements and production capability improvements. 
We continue to position our business to leverage our research and development leadership and innovation and to focus our efforts on mitigating volatility, improving profitability and ensuring longer-term growth. We remain focused on operational excellence, expanding our product offerings and managing our business efficiently throughout the business cycles. Our visibility into future demand is generally limited and forecasting is difficult and we may experience typical industry seasonality.
To limit potential adverse cyclical, seasonal and macroeconomic effects on our financial position, we have de-leveraged and strengthened our balance sheet. In fiscal 2012, we fully repaid our 0.875% Convertible Subordinated Notes (the “Notes”) with cash in the principal amount of $110.0 million at maturity. As of June 29, 2013, our total cash, cash equivalents and investments was $508.5 million, a $68.2 million increase from the prior fiscal year end. We believe this strong cash position will allow us to continue to invest in product development and improve our production capability throughout the semiconductor cycle.
Technology Leadership
We compete largely by offering our customers among the most advanced equipment and expendable tools available for the wire, wedge and die bonding processes. Our equipment is typically the most productive and has the highest levels of process capability, and as a result, has a lower cost of ownership compared to other equipment in its market. Our expendable tools are designed to optimize the performance of the equipment in which they are used. We believe our technology leadership contributes to the leading market share positions of our various wire bonder and expendable tools products. To maintain our competitive advantage, we invest in product development activities designed to produce a stream of improvements to existing products and to deliver next-generation products. These investments often focus as much on improvements in the semiconductor assembly process as on specific pieces of assembly equipment or expendable tools. In order to generate these improvements, we often work in close collaboration with customers, end users, and other industry members. In addition to producing technical advances, these collaborative development efforts strengthen customer relationships and enhance our reputation as a technology leader and solutions provider.
In addition to gold and aluminum wire, our leadership in the industry's use of copper wire for the bonding process is an example of the benefits of our collaborative efforts. By working with customers, material suppliers, and other equipment suppliers, we have developed a series of robust, high-yielding production processes that have made copper wire commercially viable, significantly reducing the cost of assembling an integrated circuit. During fiscal 2010, many of our customers began converting their bonding wire from gold to copper wire, and we believe the conversion was accelerated by fabless companies in the consumer segment. Gradually, the level of confidence and the reliability of data collected have enabled a larger segment of the customer base to increase copper capabilities. Since this initial conversion, a majority portion of our wire bonder sales are copper capable bonders. We expect this conversion process to continue throughout the industry for the next several years. This could potentially drive a significant wire bonder replacement cycle, as we believe much of the industries' installed base is not currently suitable for copper bonding. Based on our industry leading copper bonding processes and the continued high price of gold, we believe the total available market for copper configured wire bonders is likely to continue demonstrating solid growth.
Our leadership has allowed us to maintain a competitive position in the latest generations of gold and copper ball bonders, which enable our customers to handle the leading technologies in terms of pitch, silicon with the latest node and complex wire bonding requirement. We continue to see demand for our large bondable area (“LA”) configured machines. This LA option is now available on all of our Power Series (PS) models and allows our customers to gain added efficiencies and to reduce the cost of packaging.
We also leverage the technology leadership of our equipment by optimizing our bonder platforms, and we deliver variants of our products to serve emerging high-growth markets. For example, we have developed extensions of our main ball bonding platforms to address opportunities in LED assembly. The LED backlights for flat-screen displays have been the main driver of the LED market in the last few years where we have successfully competed in LED assembly equipment. We expect the next wave of growth in the LED market to be high brightness LED for general lighting, and we believe we are well positioned for this trend.

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Furthermore, we gain synergies by leveraging technologies between our unique platforms. Our leading technology for wedge bonder equipment uses aluminum ribbon or heavy wire as opposed to fine gold and fine copper wire used in ball bonders.  In March 2013, we launched a new line of high performance wedge bonder products, PowerFusionPS. The advanced interconnect capabilities of PowerFusionPS improves the processing of high-density power packages, due to an expanded bondable area, wider leadframe capability, superior indexing accuracy and teach mode. We intend to initiate design of our next power module wedge bonder. In both cases, we are making a concerted effort to develop commonality of subsystems and design practices, in order to improve performance and design efficiencies. We believe this will benefit us in maintaining our leadership position in the wedge bonding market and increase synergies between the various engineering product groups. Furthermore, we continually research adjacent market segments where our technologies could be used. Many of these initiatives are in the early stages of development and may become business opportunities in the future.
Another example of our developing equipment for high-growth niche markets is our ATPremier Plus. This machine utilizes a modified wire bonding process to mechanically place bumps on devices in a wafer format, for variants of the flip chip assembly process. Typical applications include complementary metal-oxide semiconductor (“CMOS”) image sensors, surface acoustical wave (“SAW”) filters and high brightness LEDs. These applications are commonly used in most, if not all, smartphones available today in the market. We also expanded the use of ATPremier Plus for wafer level wire bonding for micro-electro-mechanical systems (“MEMS”) and other sensors.
Our technology leadership and bonding process know-how are enabling us to develop highly function-specific equipment with the best-in-class throughput and accuracy. This forms the foundation for our advanced packaging equipment development. We have established a development team to develop advanced packaging bonders for the emerging three-dimensional integrated circuit (“3DIC”) market. 3DIC saves space and reduces form factor by stacking separate chips in a single package. It also improves performance while reducing power consumption. Mobile devices such as smartphones and tablets are the main drivers of this market.
We bring the same technology focus to our expendable tools business, driving tool design and manufacturing technology to optimize the performance and process capability of the equipment in which our tools are used. For all our equipment products, expendable tools are an integral part of their process capability. We believe our unique ability to simultaneously develop both equipment and tools is a core strength supporting our products' technological differentiation.
Products and Services
We supply a range of bonding equipment and expendable tools. The following tables reflect net revenue by business segment for the three and nine months ended June 29, 2013 and June 30, 2012, respectively:
 
 
Three months ended
 
 
June 29, 2013
 
June 30, 2012
(dollar amounts in thousands)
 
Net revenues
 
% of total net revenue
 
Net revenues
 
% of total net revenue
Equipment
 
$
125,103

 
88.6
%
 
$
237,095

 
92.8
%
Expendable Tools
 
16,078

 
11.4
%
 
18,430

 
7.2
%
 
 
$
141,181

 
100.0
%
 
$
255,525

 
100.0
%
 
 
 
Nine months ended
 
 
June 29, 2013
 
June 30, 2012
(dollar amounts in thousands)
 
Net revenues
 
% of total net revenue
 
Net revenues
 
% of total net revenue
Equipment
 
$
316,088

 
87.5
%
 
$
474,297

 
90.9
%
Expendable Tools
 
45,242

 
12.5
%
 
47,560

 
9.1
%
 
 
$
361,330

 
100.0
%
 
$
521,857

 
100.0
%
 







21

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Equipment Segment
We manufacture and sell a line of ball bonders, heavy wire wedge bonders and wafer level bonders that are sold to semiconductor device manufacturers, OSATs, other electronics manufacturers and automotive electronics suppliers. Ball bonders are used to connect very fine wires, typically made of gold or copper, between the bond pads of the semiconductor device, or die, and the leads on its package. Heavy wire wedge bonders use either aluminum wire or ribbon to perform the same function in packages that cannot use gold or copper wire because of either high electrical current requirements or other package reliability issues. Wafer level bonders mechanically apply bumps to die, typically while still in the wafer format, for some variants of the flip chip assembly process. We believe our equipment offers competitive advantages by providing customers with high productivity/throughput, superior package quality/process control, and as a result, a lower cost of ownership.
















































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Table of Contents

Our principal Equipment segment products include:
Business Unit
 
Product Name (1)
 
Typical Served Market
 
 
 
 
 
Ball bonders
 
IConnPS
 
Advanced and ultra fine pitch applications
 
 
 
 
 
 
 
IConnPS ProCu
 
High-end copper wire applications demanding advanced process capability and high productivity
 
 
 
 
 
 
 
IConnPS ProCu LA
 
Large area substrate and matrix applications for copper wire
 
 
 
 
 
 
 
IConnPS LA
 
Large area substrate and matrix applications
 
 
 
 
 
 
 
ConnXPS
 
High productivity bonder for low-to-medium pin count applications
 
 
 
 
 
 
 
ConnXPS Plus
 
High productivity bonder for low-to-medium pin count applications
 
 
 
 
 
 
 
ConnXPS LED
 
LED applications
 
 
 
 
 
 
 
ConnXPS VLED
 
Vertical LED applications
 
 
 
 
 
 
 
ConnXPS LA
 
Cost performance large area substrate and matrix applications
 
 
 
 
 
 
 
AT Premier
 
Wafer level bonding application
 
 
 
 
 
 
 
AT Premier Plus
 
Advanced wafer level bonding application
 
 
 
 
 
Wedge bonders
 
3600Plus
 
Power hybrid and automotive modules using either heavy aluminum wire or PowerRibbon®
 
 
 
 
 
 
 
3700Plus
 
Hybrid and automotive modules using thin aluminum wire
 
 
 
 
 
 
 
7200Plus
 
Power semiconductors using either aluminum wire or PowerRibbon®
 
 
 
 
 
 
 
7200HD
 
Smaller power packages using either aluminum wire or PowerRibbon®
 
 
 
 
 
 
 
7600HD
 
Power semiconductors including smaller power packages using either aluminum wire or PowerRibbon®
 
 
 
 
 
 
 
PowerFusionPS  TL
 
Power semiconductors using either aluminum wire or PowerRibbon®
 
 
 
 
 
 
 
PowerFusionPS  HL
 
Smaller power packages using either aluminum wire or PowerRibbon®
 
(1) Power Series (PS)
 



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Ball Bonders
Automatic ball bonders represent the largest portion of our semiconductor equipment business. Our main product platform for ball bonding is the Power Series - a family of assembly equipment that is setting new standards for performance, productivity, upgradeability, and ease of use. Our Power Series consists of our IConnPS high-performance ball bonders and our ConnXPS cost-performance ball bonders, both of which can be configured for either gold or copper wire. In addition, targeted specifically at the fast growing LED market, the Power Series includes our ConnXPS LED and our ConnXPS VLED. Targeted for large bondable area applications, the Power Series includes our IConnPS LA and ConnXPS LA. In November 2010 and January 2011, we introduced the IConnPS ProCu, IConnPS ProCu LA, respectively, which offer a significant new level of capability for customers transitioning from gold to copper wire bonding. In March 2012, we introduced ConnXPS Plus next-generation cost-performance ball bonders.
Our Power Series products are setting new standards in wire bonding.
Our ball bonders are capable of bonding advanced devices with very fine pitch, creating complex loop shapes needed in the assembly of advanced semiconductor packages as well as bonding on the latest silicon node-28nm.
Our gold wire ball bonders installed in the field can also be retrofitted for copper wire applications with kits, which we sell separately.
Our ATPremier machine utilizes a modified wire bonding process to mechanically place bumps on devices, while still in a wafer format for variants of the flip chip assembly process. Typical applications include CMOS image sensors, SAW filters, MEMS and high brightness LEDs. These applications are commonly used in most, if not all, smartphones available today in the market. In September 2012, we introduced ATPremier Plus, which offers advanced stud bumping capability for low temperature gold bumping.
Heavy Wire Wedge Bonders
We are the leaders in the design and manufacture of heavy wire wedge bonders for the power semiconductor and automotive power module markets. Heavy wire wedge bonders may use either aluminum wire or aluminum ribbon to connect semiconductor chips in power packages, power hybrids and automotive modules for products such as motor control modules or inverters for hybrid cars. In addition, we see some potential use for our wedge bonder products in select solar applications.
Our portfolio of wedge bonding products includes:
The 3600Plus:  high speed, high accuracy wire bonders designed for power modules, automotive packages and other heavy wire multi-chip module applications.
The 3700Plus: wire bonders designed for hybrid and automotive modules using thin aluminum wire.
The 7200Plus:  dual head wedge bonder designed specifically for power semiconductor applications.
The 7200HD: heavy wire wedge bonder designed for smaller power packages using either aluminum wire or ribbon.
The 7600HD:  heavy wire wedge bonder targeted for small power packages.
While wedge bonding traditionally utilizes aluminum wire, all of our heavy wire wedge bonders are also available to be modified to bond aluminum ribbon using our proprietary PowerRibbon® process. Aluminum ribbon offers device makers performance advantages over traditional round wire and is being increasingly used for high current packages and automotive applications.
In March 2013, we introduced PowerFusionPS, which is driven by new powerful direct-drive motion systems and expanded pattern recognition capabilities. The advanced interconnect capabilities of PowerFusionPS improves the processing of high-density power packages, due to an expanded bondable area, wider leadframe capability and superior indexing accuracy and teach mode.
Other Equipment Products and Services
We also sell manual wire bonders, and we offer spare parts, equipment repair, training services, and upgrades for our equipment through our Support Services business unit. In September 2012, we introduced a next-generation manual wire bonder series for use with gold, copper or aluminum wire.
In March 2013, we introduced K&S Care, a new professional service, designed to help customers operate their machines at an optimum level under the care our trained specialists. K&S Care has a range of programs, offering different levels of service depending on customer needs.




24

Table of Contents

Expendable Tools Segment
We manufacture and sell a variety of expendable tools for a broad range of semiconductor packaging applications. Our principal Expendable Tools segment products include:
Capillaries:  expendable tools used in ball bonders. Made of ceramic and other elements, a capillary guides the wire during the ball bonding process. Its features help control the bonding process. We design and build capillaries suitable for a broad range of applications, including for use on our competitors' equipment. In addition to capillaries used for gold wire bonding, we have developed capillaries for use with copper wire to achieve optimal performance in copper wire bonding.
Bonding wedges:  expendable tools used in heavy wire wedge bonders. Like capillaries, their specific features are tailored to specific applications. We design and build bonding wedges for use both in our own equipment and in our competitors' equipment.
Saw blades:  expendable tools used by semiconductor manufacturers to cut silicon wafers into individual semiconductor die and to cut semiconductor devices that have been moulded in a matrix configuration into individual units.
In March 2013, we introduced the Optoceramic and OptoPCB package singulation blades for the LED market. The blades enable an improvement on package singulation quality, precision and productivity by providing a significantly longer life blade, and improved stability.

RESULTS OF OPERATIONS
The following tables reflect our income from operations for the three and nine months ended June 29, 2013 and June 30, 2012:
 
 
 
Three months ended
 
 
 
 
(dollar amounts in thousands)
 
June 29, 2013
 
June 30, 2012
 
$ Change
 
% Change
Net revenue
 
$
141,181

 
$
255,525

 
$
(114,344
)
 
(44.7
)%
Cost of sales
 
75,267

 
133,082

 
(57,815
)
 
(43.4
)%
Gross profit
 
65,914

 
122,443

 
(56,529
)
 
(46.2
)%
Selling, general and administrative
 
31,264

 
30,149

 
1,115

 
3.7
 %
Research and development
 
15,783

 
16,018

 
(235
)
 
(1.5
)%
Operating expenses
 
47,047

 
46,167

 
880

 
1.9
 %
Income from operations
 
$
18,867

 
$
76,276

 
$
(57,409
)
 
(75.3
)%
 
 
 
Nine months ended
 
 
 
 
(dollar amounts in thousands)
 
June 29, 2013
 
June 30, 2012
 
$ Change
 
% Change
Net revenue
 
$
361,330

 
$
521,857

 
$
(160,527
)
 
(30.8
)%
Cost of sales
 
195,071

 
277,451

 
(82,380
)
 
(29.7
)%
Gross profit
 
166,259

 
244,406

 
(78,147
)
 
(32.0
)%
Selling, general and administrative
 
88,754

 
89,435

 
(681
)
 
(0.8
)%
Research and development
 
46,243

 
46,077

 
166

 
0.4
 %
Operating expenses
 
134,997

 
135,512

 
(515
)
 
(0.4
)%
Income from operations
 
$
31,262

 
$
108,894

 
$
(77,632
)
 
(71.3
)%
Net Revenue
Approximately 98.5% and 98.2% of our net revenue for the three months ended June 29, 2013 and June 30, 2012, respectively, was for shipments to customer locations outside of the U.S., primarily in the Asia/Pacific region. Likewise, approximately 97.2% and 98.0% of our net revenue for the nine months ended June 29, 2013 and June 30, 2012, respectively, was for shipments to customer locations outside of the U.S. We expect sales outside of the U.S. to continue to represent a substantial majority of our future revenue.






25

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The following tables reflect net revenue by business segment for the three and nine months ended June 29, 2013 and June 30, 2012
 
 
Three months ended
 
 
 
 
(dollar amounts in thousands)
 
June 29, 2013
 
June 30, 2012
 
$ Change
 
% Change
Equipment
 
$
125,103

 
$
237,095

 
$
(111,992
)
 
(47.2
)%
Expendable Tools
 
16,078

 
18,430

 
(2,352
)
 
(12.8
)%
Total net revenue
 
$
141,181

 
$
255,525

 
$
(114,344
)
 
(44.7
)%
 
 
 
Nine months ended
 
 
 
 
(dollar amounts in thousands)
 
June 29, 2013
 
June 30, 2012
 
$ Change
 
% Change
Equipment
 
$
316,088

 
$
474,297

 
$
(158,209
)
 
(33.4
)%
Expendable Tools
 
45,242

 
47,560

 
(2,318
)
 
(4.9
)%
Total net revenue
 
$
361,330

 
$
521,857

 
$
(160,527
)
 
(30.8
)%
Equipment
The following table reflects the components of Equipment net revenue change between the three and nine months ended June 29, 2013 and June 30, 2012
 
 
June 29, 2013 vs. June 30, 2012
 
 
Three months ended
 
Nine months ended
(in thousands)
 
Price
 
Volume
 
$ Change
 
Price
 
Volume
 
$ Change
Equipment
 
$
(2,020
)
 
$
(109,972
)
 
$
(111,992
)
 
$
(7,605
)
 
$
(150,604
)
 
$
(158,209
)
For the three and nine months ended June 29, 2013, the lower equipment net revenue as compared to the prior year period was primarily due to the lower volume from our ball bonders and heavy wire wedge bonders. The volume reduction in ball bonders and heavy wire wedge bonders was mainly attributable to the overall conservativeness in the market due to uncertainties around technology migration and the weakness in the discrete market. In addition to volume, pricing on our ball bonders was lower due to customer and product mix change.
Expendable Tools
The following table reflects the components of Expendable Tools net revenue change between the three and nine months ended June 29, 2013 and June 30, 2012
 
 
June 29, 2013 vs. June 30, 2012
 
 
Three months ended
 
Nine months ended
(in thousands)
 
Price
 
Volume
 
$ Change
 
Price
 
Volume
 
$ Change
Expendable Tools
 
$
(9
)
 
$
(2,343
)
 
$
(2,352
)
 
$
322

 
$
(2,640
)
 
$
(2,318
)
 
For the three and nine months ended June 29, 2013, the Expendable Tools net revenue decreased 12.8% and 4.9%, respectively, as compared to the prior year period was primarily due to the volume decrease in both our wire bonding tools business and wedge bonder tools businesses as a result of the overall conservativeness in the market due to uncertainties around technology migration and the weakness in the discrete market.
Gross Profit
The following tables reflect gross profit by business segment for the three and nine months ended June 29, 2013 and June 30, 2012
 
 
Three months ended
 
 
 
 
(dollar amounts in thousands)
 
June 29, 2013
 
June 30, 2012
 
$ Change
 
% Change
Equipment
 
$
57,471

 
$
111,203

 
$
(53,732
)
 
(48.3
)%
Expendable Tools
 
8,443

 
11,240

 
(2,797
)
 
(24.9
)%
Total gross profit
 
$
65,914

 
$
122,443

 
$
(56,529
)
 
(46.2
)%
 

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Table of Contents

 
 
Nine months ended
 
 
 
 
(dollar amounts in thousands)
 
June 29, 2013
 
June 30, 2012
 
$ Change
 
% Change
Equipment
 
$
140,884

 
$
216,566

 
$
(75,682
)
 
(34.9
)%
Expendable Tools
 
25,375

 
27,840

 
(2,465
)
 
(8.9
)%
Total gross profit
 
$
166,259

 
$
244,406

 
$
(78,147
)
 
(32.0
)%
 
The following tables reflect gross profit as a percentage of net revenue by business segment for the three and nine months ended June 29, 2013 and June 30, 2012
 
 
Three months ended
 
Basis Point
 
 
June 29, 2013
 
June 30, 2012
 
Change
Equipment
 
45.9
%
 
46.9
%
 
(100
)
Expendable Tools
 
52.5
%
 
61.0
%
 
(850
)
Total gross margin
 
46.7
%
 
47.9
%
 
(120
)
 
 
 
Nine months ended
 
Basis Point
 
 
June 29, 2013
 
June 30, 2012
 
Change
Equipment
 
44.6
%
 
45.7
%
 
(110
)
Expendable Tools
 
56.1
%
 
58.5
%
 
(240
)
Total gross margin
 
46.0
%
 
46.8
%
 
(80
)
Equipment
The following table reflects the components of Equipment gross profit change between the three and nine months ended June 29, 2013 and June 30, 2012
 
 
June 29, 2013 vs. June 30, 2012
 
 
Three months ended
 
Nine months ended
(in thousands)
 
Price
 
Cost
 
Volume
 
$ Change
 
Price
 
Cost
 
Volume
 
$ Change
Equipment
 
$
(2,019
)
 
$
3,454

 
$
(55,167
)
 
$
(53,732
)
 
$
(7,606
)
 
$
5,957

 
$
(74,033
)
 
$
(75,682
)
For the three and nine months ended June 29, 2013, the lower Equipment gross profit as compared to the prior year period was primarily due to the lower volume from our ball bonders and heavy wire wedge bonders. The volume reduction in ball bonders and heavy wire wedge bonders was mainly attributable to the overall conservativeness in the market due to uncertainties around technology migration and the weakness in the discrete market. In addition to volume, pricing on our ball bonders was lower due to customer and product mix change.
For the nine months ended June 29, 2013, the lower volume and less favorable pricing were partially offset by lower costs for our die bonders and heavy wire wedge bonders. The manufacturing costs were lower due to the continued consolidation of our production facilities and die bonder costs were lower due to sales of certain die bonders that were partially reserved, which resulted in lower costs of goods sold.
Expendable Tools
The following table reflects the components of Expendable Tools gross profit change between the three and nine months ended June 29, 2013 and June 30, 2012
 
 
June 29, 2013 vs. June 30, 2012
 
 
Three months ended
 
Nine months ended
(in thousands)
 
Price
 
Cost
 
Volume
 
$ Change
 
Price
 
Cost
 
Volume
 
$ Change
Expendable Tools
 
$
(10
)
 
$
(537
)
 
$
(2,250
)
 
$
(2,797
)
 
$
322

 
$
(319
)
 
$
(2,468
)
 
$
(2,465
)
For the three and nine months ended June 29, 2013, Expendable Tools gross profit decreased 24.9% and 8.9%, respectively, as compared to the prior year period primarily due to lower volume in both our wire bonding tools business and wedge bonder tools business. The lower volume resulted in increased manufacturing costs due to lower absorption of the fixed manufacturing costs.  



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Table of Contents

Operating Expenses
The following tables reflect operating expenses as a percentage of net revenue for the three and nine months ended June 29, 2013 and June 30, 2012:
 
 
Three months ended
 
Basis point
 
 
June 29, 2013
 
June 30, 2012
 
change
Selling, general & administrative
 
22.1
%
 
11.8
%
 
1,030
Research & development
 
11.2
%
 
6.3
%
 
490
Total
 
33.3
%
 
18.1
%
 
1,520
 
 
 
Nine months ended
 
Basis point
 
 
June 29, 2013
 
June 30, 2012
 
change
Selling, general & administrative
 
24.6
%
 
17.1
%
 
750
Research & development
 
12.8
%
 
8.8
%
 
400
Total
 
37.4
%
 
25.9
%
 
1,150
Selling, General and Administrative (“SG&A”)
SG&A increased $1.1 million during the three months ended June 29, 2013 as compared to the three months ended June 30, 2012. In the three months ending June 30, 2012, we released a reserve of $1.5 million for doubtful accounts due to subsequent customer collections. In the third quarter of fiscal 2013, depreciation and amortization expenses were higher by $0.5 million relating to equipment sent to customers for demonstration and evaluation. We also made a provision of $0.4 million for the ground lease expense relating to the Agreement to Develop and Lease (the "ADL"). This was partially offset by lower sales commissions and incentives of $1.4 million due to lower net revenue for the current fiscal quarter.
SG&A decreased $0.7 million during the nine months ended June 29, 2013 as compared to the nine months ended June 30, 2012 in which we recorded a gain of $1.8 million relating to the curtailment of our Swiss pension plan and we released a reserve of $0.9 million for doubtful accounts due to subsequent customer collections. In the nine months ended June 29, 2013, sales commissions and incentives decreased by $6.1 million driven by lower net revenue for the current fiscal period and a favorable variance of $1.1 million for severance expenses relating to the our continued consolidation of our operations. Offsetting this was an unfavorable variance of $2.9 million in foreign exchange rates due to the strengthening of the U.S. dollar against foreign currencies and $1.0 million higher depreciation and amortization expense mainly related to equipment sent to customers for demonstration and evaluation.
Research and Development (“R&D”)
R&D expense decreased $0.2 million for the three months ended June 29, 2013 as compared to the three months ended June 30, 2012 mainly due to $0.6 million lower staff costs as a result of the consolidation and reduction of headcount to further streamline our R&D technology centers partially offset by $0.4 million higher project based prototype material costs for development of new products and other R&D related activities.
R&D expense increased $0.2 million for the nine months ended June 29, 2013 as compared to the nine months ended June 30, 2012 mainly due to higher project based prototype material costs for new products development of $0.6 million. This was offset by $0.4 million reduction in staff costs as a result of the reduction of headcount in our Swiss operation.
Income from Operations
For the three months and nine months ended June 29, 2013, total income from operations was lower by $57.4 million and $77.6 million, respectively. This was primarily due to lower revenue and margin for equipment sales as explained above.







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Table of Contents

Interest Income and Expense
The following tables reflect interest income and interest expense for the three and nine months ended June 29, 2013 and June 30, 2012
 
 
Three months ended
 
 
 
 
(dollar amounts in thousands)
 
June 29, 2013
 
June 30, 2012
 
$ Change
 
% Change
Interest income
 
$
267

 
$
200

 
$
67

 
33.5
 %
Interest expense: cash
 
$

 
$
(149
)
 
$
149

 
(100.0
)%
Interest expense: non-cash
 
$

 
$
(1,306
)
 
$
1,306

 
(100.0
)%
 
 
 
Nine months ended
 
 
 
 
(dollar amounts in thousands)
 
June 29, 2013
 
June 30, 2012
 
$ Change
 
% Change
Interest income
 
$
629

 
$
651

 
$
(22
)
 
(3.4
)%
Interest expense: cash
 
$

 
$
(633
)
 
$
633

 
(100.0
)%
Interest expense: non-cash
 
$

 
$
(5,174
)
 
$
5,174

 
(100.0
)%
 
Non-cash interest expense for the three and nine months ended June 30, 2012 was attributable to the amortization of the debt discount relating to the Notes which matured on June 1, 2012. We repaid the entire principal balances of the Notes in cash in fiscal 2012. See Note 4 of Item 1 for additional details.
Provision for Income Taxes
The following table reflects the provision for income taxes and the effective tax rate for the nine months ended June 29, 2013 and June 30, 2012
 
 
Nine months ended
(in thousands)
 
June 29, 2013
 
June 30, 2012
Income from operations before income taxes
 
$
31,890

 
$
103,738

Provision for income taxes
 
2,063

 
10,440

Net income
 
$
29,827

 
$
93,298

Effective tax rate
 
6.5
%
 
10.1
%
 
For the nine months ended June 29, 2013 and June 30, 2012, the effective income tax rate differed from the federal statutory rate primarily due to tax from foreign operations at a lower effective tax rate than the U.S. statutory rate, the release of a prior year reserve and the impact of tax holidays, offset by an increase for deferred taxes on un-remitted earnings, other U.S. current and deferred taxes and additional domestic and foreign expenses or benefits related to returns filed in the current period.
For the nine months ended June 29, 2013, we recognized a benefit of $1.7 million related to the reversal of a reserve for uncertain tax positions based on administrative practices in a foreign jurisdiction and recognized income tax expense of $0.9 million due to a change in estimate upon filing tax returns in a foreign jurisdiction.
The effective tax rate for the nine months ended June 29, 2013 of 6.5% decreased from the effective rate for the fiscal period ended September 29, 2012 of 7.8% primarily due to a shift in foreign earnings to tax jurisdictions with lower effective tax rates and certain changes in estimate that were recorded upon filing tax returns in foreign jurisdictions, offset by the recording of a valuation allowance against certain deferred tax assets in foreign jurisdictions.
Our future effective tax rate would be affected if earnings were lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. We regularly assess the effects resulting from these factors to determine the adequacy of our provision for income taxes.







29

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES
The following table reflects total cash and investments as of June 29, 2013 and September 29, 2012:
 
 
As of
 
 
(dollar amounts in thousands)
 
June 29, 2013
 
September 29, 2012
 
Change
Cash and cash equivalents
 
$
508,493

 
$
440,244

 
$
68,249

Percentage of total assets
 
61.5
%
 
54.0
%
 
 

The following table reflects summary Consolidated Statement of Cash Flow information for the nine months ended June 29, 2013 and June 30, 2012:
 
 
Nine months ended
(in thousands)
 
June 29, 2013
 
June 30, 2012
Net cash provided by continuing operations
 
$
68,180

 
$
124,648

Net cash used in discontinued operations
 

 
(1,469
)
Net cash provided by operating activities
 
$
68,180

 
$
123,179

Net cash used in investing activities
 
(647
)
 
(13,629
)
Net cash (used in) provided by financing activities
 
868

 
(106,972
)
Effect of exchange rate changes on cash and cash equivalents
 
(152
)
 
(69
)
Changes in cash and cash equivalents
 
$
68,249

 
$
2,509

Cash and cash equivalents, beginning of period
 
440,244

 
378,188

Cash and cash equivalents, end of period
 
$
508,493

 
$
380,697

Nine months ended June 29, 2013
Continuing Operations
Net cash provided by operating activities was primarily the result of working capital changes, which provided $68.2 million driven by decreases in accounts receivables of $42.7 million due to cash collections in line with higher sales in the fourth quarter of fiscal 2012 due to variations in the timing of our customer orders within the seasonal cycle who tend to add or replace equipment capacity by the end of the September quarter, a reduction in inventories of $10.8 million partially offset by a decrease in accounts payable and accrued expenses of $31.3 million due to lower purchases and global shutdown in the first nine months of fiscal 2013 and decreases in income tax payable of $5.5 million. In addition, net income of $29.8 million plus non-cash adjustments of $22.1 million contributed to net cash provided by operating activities.
Net cash used by investing activities was primarily due to capital expenditure of $6.0 million offset by the disposal of a building of $5.3 million.
Net cash provided by financing activities relate to proceed from the exercise of stock options.
Nine months ended June 30, 2012
Continuing Operations
Net cash provided by operating activities was primarily the result of net income of $93.3 million plus non-cash adjustments of $25.4 million. In addition, working capital changes provided $6.0 million driven by decrease in inventories and increases in accounts payable, accrued expenses and other current liabilities and income taxes, which were partially offset by increases in accounts receivable.
Net cash used in investing activities of $13.6 million was due to one-time payment of $14.8 million related to our Earnout Agreement with Orthodyne Electronics Corporation in connection with its acquisition in October 2008 and capital expenditures of $5.1 million. This was partially offset by sale of short term investments of $6.4 million.
Net cash used in financing activities was a result of the repayment of our 0.875% Convertible Subordinate Notes of $110.0 million in June 2012 partially offset by proceeds from stock option exercises.
Discontinued Operations
Net cash used in operating activities was related to facility payments for our former Test business.


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Table of Contents

Fiscal 2013 Liquidity and Capital Resource Outlook
We expect our fiscal 2013 capital expenditures to be between $19.0 to $20.0 million, of which approximately $9.0 million is expected to relate to leasehold improvements for our Singapore facility under the ADL. Expenditures are anticipated to be used for R&D projects, enhancements to our manufacturing operations in Asia and improvements to our information technology infrastructure.
We believe that our existing cash and investments and anticipated cash flows from operations will be sufficient to meet our liquidity and capital requirements for at least the next twelve months. Our liquidity is affected by many factors, some based on normal operations of our business and others related to global economic conditions and industry uncertainties, which we cannot predict. We also cannot predict economic conditions and industry downturns or the timing, strength or duration of recoveries. We intend to continue to use our cash for working capital needs and for general corporate purposes.
We may seek, as we believe appropriate, additional debt or equity financing which would provide capital for corporate purposes, working capital funding, additional liquidity needs or to fund future growth opportunities. The timing and amount of potential capital requirements cannot be determined at this time and will depend on a number of factors, including our actual and projected demand for our products, semiconductor and semiconductor capital equipment industry conditions, competitive factors, and the condition of financial markets.
Other Obligations and Contingent Payments
Agreement to Develop and Lease
On May 7, 2012, Kulicke & Soffa Pte Ltd. (“Pte”), the Company's wholly owned subsidiary Pte entered into the ADL with DBS Trustee Limited as trustee of Mapletree Industrial Trust (the “Landlord”). Pursuant to the ADL, the Landlord agreed to develop a building at Lot 17622A Pt Mukim 18 at Serangoon North Avenue 5 (the “Building”) and Pte expects to lease from the Landlord 198,134 square feet (the “Initial Premises”) representing approximately 69% of the Building. The Building is estimated to be completed and ready for occupancy in the second half of 2013. Subject to approval from the relevant authorities, the Building will bear a name to be chosen by Pte. 
The facility is in the process of being constructed. In accordance with ASC No. 840, Leases, we are considered to be the owner of the building during the construction phase due to our involvement in the asset construction. The estimated construction costs incurred to date in relation to the relevant proportion of our lease are recognized on the Consolidated Balance Sheet as of June 29, 2013. Applicable ground lease expense was accrued. See Note 9 of Item 1 for additional details.
Other Obligations and Contingent Payments
In accordance with U.S. generally accepted accounting principles, certain obligations and commitments are not required to be included in the Consolidated Balance Sheets and Statements of Operations. These obligations and commitments, while entered into in the normal course of business, may have a material impact on our liquidity. Certain of the following commitments as of June 29, 2013 are appropriately not included in the Consolidated Balance Sheets and Statements of Operations included in this Form 10-Q; however, they have been disclosed in the table below for additional information.













31

Table of Contents

The following table reflects obligations and contingent payments under various arrangements as of June 29, 2013
  
 
 
 
 
Payments due by fiscal period 
(in thousands)
 
Total
 
Less than 1 year
 
1 - 3 years
 
3 - 5 years
 
More than 5 years
Current and long-term liabilities:
 
 

 
 

 
 

 
 

 
 

Pension plan obligations
 
$
4,056

 
$

 
$

 
$

 
$
4,056

Severance (1)
 
4,241

 
1,719

 
725

 

 
1,797

Obligations related to Chief Executive Officer transition  (2)
 
59

 
59

 

 

 

Operating lease retirement obligations
 
2,356

 
1,196

 
314

 
429

 
417

Long-term income taxes payable
 
182

 

 

 

 
182

Total Obligations and Contingent Payments reflected on the Consolidated Financial Statements
 
$
10,894

 
$
2,974

 
$
1,039

 
$
429

 
$
6,452

Contractual Obligations:
 
 

 
 

 
 

 
 

 
 

Inventory purchase obligations (3)
 
$
101,114

 
$
101,114

 
$

 
$

 
$

Operating lease obligations (4)
 
31,448

 
3,654

 
5,951

 
4,704

 
17,139

Total Obligations and Contingent Payments not reflected on the Consolidated Financial Statements
 
$
132,562

 
$
104,768

 
$
5,951

 
$
4,704

 
$
17,139


(1)
In accordance with regulations in some of our foreign subsidiaries, we are required to provide for severance obligations that are payable when an employee leaves the Company.
(2)
In connection with the September 2010 retirement of our former Chief Executive Officer, we entered into a three year consulting arrangement with him.
(3)
We order inventory components in the normal course of our business. A portion of these orders are non-cancelable and a portion may have varying penalties and charges in the event of cancellation.
(4)
We have minimum rental commitments under various leases (excluding taxes, insurance, maintenance and repairs, which are also paid by us) primarily for various facility and equipment leases, which expire periodically through 2018 (not including lease extension options, if applicable).
Under the ADL, Pte expects to enter into a lease agreement (the “Lease Agreement”) with the Landlord. The term for the rental of the Initial Premises is expected to be 10 years, (the “Initial Term”). Pte will have the option to renew for two additional ten-year terms. The combined annual rent and service charge for the Initial Term will range between approximately $4.0 to $5.0 million Singapore dollars. Subject to renting a minimum amount of space, Pte will have a right of first refusal for all space that becomes available in the Building, and the Landlord has agreed to make available a certain amount of additional space for rental at Pte's option which may be exercised at certain points during the second half of the Initial Term. Subject to renting a minimum amount of space for a certain period, Pte will have partial surrender rights. In addition, Pte will have termination rights after renting the Initial Premises for a certain period of time. The Lease Agreement is not in effect as of the date of this report and is not reflected in the above table.
We are considered the owner of the building during the construction phase of the ADL. As of June 29, 2013, we recorded a financing obligation of $14.1 million relating to the building and we are expecting to record an additional $14.4 million over the construction term, which is expected to be completed in the next twelve months. The financing obligation is not reflected in the table above.
Off-Balance Sheet Arrangements
On May 9, 2012, Pte obtained a Bank Guarantee from DBS Bank Ltd. in the amount of $3.4 million Singapore dollars. Pte furnished the Bank Guarantee to the Landlord in lieu of a cash deposit in connection with the building and leasing of a new facility in Singapore as discussed above. On May 9, 2013, the Bank Guarantee expired and Pte replaced the Bank Guarantee with a cash deposit of an equivalent amount which is included in our Consolidated Balance Sheet as part of prepaid expenses and other current assets.
We currently do not have any other off-balance sheet arrangements, such as derivatives, contingent interests or obligations associated with variable interest entities.

32

Table of Contents

Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our available-for-sale securities, if applicable, may consist of short-term investments in highly rated debt instruments of the U.S. Government and its agencies, financial institutions, and corporations. We continually monitor our exposure to changes in interest rates and credit ratings of issuers with respect to any available-for-sale securities and target an average life to maturity of less than 18 months. Accordingly, we believe that the effects to us of changes in interest rates and credit ratings of issuers are limited and would not have a material impact on our financial condition or results of operations. As of June 29, 2013, we had no available-for-sale investments.
Foreign Currency Risk
Our international operations are exposed to changes in foreign currency exchange rates due to transactions denominated in currencies other than the location's functional currency. Our international operations are also exposed to foreign currency fluctuations that impact the remeasurement of net monetary assets of those operations whose functional currency, the U.S. dollar, differs from their respective local currencies, most notably in Israel, Malaysia, Singapore and Switzerland. In addition to net monetary remeasurement, we have exposures related to the translation of subsidiary financial statements from their functional currency, the local currency, into its reporting currency, the U.S. dollar, most notably in China, Taiwan, Japan and Germany. Our U.S. operations also have foreign currency exposure due to net monetary assets denominated in currencies other than the U.S. dollar.
Based on our foreign currency exposure as of June 29, 2013, a 10.0% fluctuation could impact our financial position, results of operations or cash flows by $2.0 to $3.0 million. Our board of directors has granted management with limited authority to enter into foreign exchange forward contracts and other instruments designed to minimize the short term impact currency fluctuations have on our business. We may enter into foreign exchange forward contracts and other instruments in the future; however, our attempts to hedge against these risks may not be successful and may result in a material adverse impact on our financial results and cash flow. We had no foreign exchange forward contracts or other instruments as of June 29, 2013.

Item 4. - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 29, 2013. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 29, 2013 our disclosure controls and procedures were effective in providing reasonable assurance the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
Changes in internal control over financial reporting
In connection with the evaluation by our management, including with the participation of our Chief Executive Officer and Chief Financial Officer, of our internal control over financial reporting, no changes during the three months ended June 29, 2013 were identified to have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
During the third quarter of fiscal 2013, we upgraded our Enterprise Resource Planning system. There were no significant changes to the Company's internal controls over financial reporting and related processes.

33

Table of Contents

PART II. - OTHER INFORMATION 

Item 1A. - RISK FACTORS
Certain Risks Related to Our Business
Risks related to our business are detailed in our Annual Report on Form 10-K for the year ended September 29, 2012 filed with the Securities and Exchange Commission.


34

Table of Contents

Item 6. -    EXHIBITS
 
Exhibit No.
 
Description
 
 
 
31.1
 
Certification of Bruno Guilmart, Chief Executive Officer of Kulicke and Soffa Industries, Inc., pursuant to Rule 13a-14(a) or Rule15d-14(a).
 
 
 
31.2
 
Certification of Jonathan Chou, Chief Financial Officer of Kulicke and Soffa Industries, Inc., pursuant to Rule 13a-14(a) or Rule 15d-14(a).
 
 
 
32.1
 
Certification of Bruno Guilmart, Chief Executive Officer of Kulicke and Soffa Industries, Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
 
Certification of Jonathan Chou, Chief Financial Officer of Kulicke and Soffa Industries, Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 



















35

Table of Contents

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
KULICKE AND SOFFA INDUSTRIES, INC.
 
 
Date: July 31, 2013
By:
/s/ JONATHAN CHOU
 
Jonathan Chou
 
Senior Vice President, Chief Financial Officer and Principal Accounting Officer



36

Table of Contents

EXHIBIT INDEX

 
 
Exhibit No.
Description
 
 
31.1
Certification of Bruno Guilmart, Chief Executive Officer of Kulicke and Soffa Industries, Inc., pursuant to Rule 13a-14(a) or Rule15d-14(a).
 
 
31.2
Certification of Jonathan Chou, Chief Financial Officer of Kulicke and Soffa Industries, Inc., pursuant to Rule 13a-14(a) or Rule 15d-14(a).
 
 
32.1
Certification of Bruno Guilmart, Chief Executive Officer of Kulicke and Soffa Industries, Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
Certification of Jonathan Chou, Chief Financial Officer of Kulicke and Soffa Industries, Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS
XBRL Instance Document.
 
 
101.SCH
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
 



37