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EX-10.33 - KULICKE & SOFFA INDUSTRIES INCv168525_ex10xxxiii.htm
EX-10.34 - KULICKE & SOFFA INDUSTRIES INCv168525_ex10xxxiv.htm

  

  

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



 

FORM 10-K



 

 
x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 3, 2009

OR

 
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  to .

Commission file number 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 or organization)
  (IRS Employer
Identification No.)

 
1005 Virginia Drive,
Fort Washington, Pennsylvania
  19034
(Address of principal executive offices)   (Zip Code)

(215) 784-6000

(Registrants telephone number,
including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)



 

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, WITHOUT PAR VALUE

(Title of Each Class)



 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.Yes o No x

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 x No o

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 o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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 o   Accelerated Filer x   Non-Accelerated Filer o   Smaller Reporting Company o
          (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 o No x

As of March 28, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $154,570,908 based on the closing sale price as reported on The NASDAQ Global Market (Reference is made to Part II, Item 5 herein for a statement of assumptions upon which this calculation is based).

As of December 10, 2009 there were 69,724,817 shares of the registrant’s common stock, without par value, outstanding.

Documents Incorporated by Reference

Portions of the registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders to be filed on or about December 31, 2009 are incorporated by reference into Part II, Item 5 and Part III, Items 10, 11, 12, 13 and 14 herein of this Report. Such Proxy Statement, except for the parts therein which have been specifically incorporated by reference, shall not be deemed “filed” for the purposes of this Report on Form 10-K.

 

 


 
 

TABLE OF CONTENTS

KULICKE AND SOFFA INDUSTRIES, INC.
2009 Annual Report on Form 10-K

TABLE OF CONTENTS

 
  Page
Part I
 

Item 1.

Business

    1  

Item 1A.

Risks Related to Our Business and Industry

    10  

Item 2.

Properties

    21  

Item 3.

Legal Proceedings

    21  

Item 4.

Submission of Matters to a Vote of Security Holders

    21  
Part II
 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    22  

Item 6.

Selected Consolidated Financial Data

    23  

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    25  

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

    48  

Item 8.

Financial Statements and Supplementary Data

    49  

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    88  

Item 9A.

Controls and Procedures

    88  

Item 9B.

Other Information

    89  
Part III
 

Item 10.

Directors, Executive Officers and Corporate Governance

    89  

Item 11.

Executive Compensation

    89  

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    90  

Item 13.

Certain Relationships and Related Transactions and Director Independence

    90  

Item 14.

Principal Accounting Fees and Services

    90  
Part IV
 

Item 15.

Exhibits and Financial Statement Schedules

    91  
Signatures     96  

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PART I

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 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, statements that relate to our future revenue, product development, demand forecasts, competitiveness, operating expenses, cash flows, profitability, gross margins, and benefits expected 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” within our 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.

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.

Item 1. BUSINESS

Unless otherwise indicated, amounts provided throughout this Form 10-K relate to continuing operations only and accordingly do not include amounts attributable to our Wire business, which we sold on September 29, 2008. In fiscal 2009, our Packaging Materials segment was renamed Expendable Tools.

Kulicke & Soffa Industries, Inc. (the “Company” or “K&S”) designs, manufactures and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits, high and low powered discrete devices, LEDs, and power modules. We also service, maintain, repair and upgrade our equipment. Our customers primarily consist of semiconductor device manufacturers, their subcontract assembly suppliers, 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 lowest cost supplier 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 operations, moving manufacturing to Asia, moving our supply chain to lower cost suppliers and designing higher performing, lower cost equipment. Cost reduction efforts are an important part of our normal ongoing operations, and are expected to generate savings without compromising overall product quality and service levels.

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On September 29, 2008, we completed the sale of our Wire business for net proceeds of $149.9 million to W.C. Heraeus GmbH (“Heraeus”). The financial results of the Wire business have been included in discontinued operations in the consolidated financial statements for all periods presented.

On October 3, 2008, we completed the acquisition of substantially all of the assets and assumption of certain liabilities of Orthodyne Electronics Corporation (“Orthodyne”). In connection with the Orthodyne acquisition, we issued 7.1 million common shares with an estimated value on that date of $46.2 million and paid $87.0 million in cash including capitalized acquisition costs. Orthodyne is the leading supplier of both heavy wire wedge bonders and heavy wire wedges (the expendable tools used in wedge bonding) for the power semiconductor and hybrid module markets.

K&S was incorporated in Pennsylvania in 1956. Our principal offices are located at 1005 Virginia Drive, Fort Washington, Pennsylvania 19034 and our telephone number is (215) 784-6000. We maintain a website with the address www.kns.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this filing. We make available free of charge (other than an investor’s own Internet access charges) on or through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports, as soon as reasonably practicable after the material is electronically filed with or otherwise furnished to the Securities and Exchange Commission (“SEC”). Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are also available on the SEC website at www.sec.gov.

Our fiscal year end for fiscal 2007, 2008 and 2009 was September 29, 2007, September 27, 2008, and October 3, 2009, respectively.

Business Environment

The semiconductor business environment is highly volatile, driven by both internal, cyclical, dynamics as well as 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 (“IDM”) and their subcontractors, periodically aggressively invest in latest generation capital equipment. This buying pattern often leads to periods of excess supply and reduced capital spending — the so called 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 reflects the industry’s cyclical dynamics and is therefore also highly volatile. The financial performance of this segment is affected, both positively and negatively, by semiconductor manufacturers’ expectations of capacity requirements and their plans for upgrading their production capabilities. Volatility of this segment is further influenced by the relative mix of IDM and subcontract customers in any period, since changes in the mix of sales to IDMs and subcontractors can affect our products’ average selling prices due to differences in volume purchases and machine configurations required by each type of customer.

Our Expendable Tools segment is less volatile than our Equipment Segment, since sales of expendable tools are directly tied to semiconductor unit consumption rather than their expected growth rate.

Though the semiconductor industry’s cycle can be independent of the general economy, global economic conditions may have direct impact on demand for semiconductor units and ultimately demand for semiconductor capital equipment and expendable tools. In the first half of fiscal 2009, conditions in the global economy deteriorated dramatically, leading to a sharp contraction in consumer and business electronics spending, which in turn reduced demand throughout the semiconductor supply chain. Business conditions began to improve near the end of our second fiscal quarter and continued to improve through the remainder of fiscal 2009. Customer orders have remained strong during the first quarter of fiscal 2010. However, our visibility into future demand is generally limited, and forecasting is difficult. There can be no assurances regarding levels of demand for our products, and we believe historic industry-wide volatility will persist.

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To mitigate possible negative effects of this industry-wide volatility on our financial position, we are de-leveraging and have strengthened our balance sheet. During fiscal 2009, we reduced our debt by $88.4 million to $159.0 million. We also completed a public equity offering of 8.0 million common shares which raised $38.7 million of net proceeds. We ended fiscal 2009 with cash and cash equivalents totaling $144.8 million. We believe a strong cash position allows us to continue making longer term investments in product development and in cost reduction activities throughout the semiconductor cycle.

Technology Leadership

We compete, largely by offering our customers the most advanced equipment and expendable tools available for both the wire and die bonding process. Our equipment is typically the fastest and has the highest levels of process control available in their respective categories. 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 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.

The rise of copper wire bonding technology as an alternative to gold wire is an example of our technology leadership and reflects the benefits of collaboration. Over the last several years, we led an informal working-group of customers and materials suppliers tasked with solving the technical challenges involved in substituting copper for gold in the ball bonding process. Working with customers and suppliers of equipment used upstream and downstream of the wire bonding process, we developed a robust, high-yielding production process that makes copper wire bonding commercially viable.

Driven by the rising cost of gold, conversion to copper wire bonding for a wide range of packaging applications has become a major focus of many semiconductor manufacturers. We believe this conversion process has the potential to drive a significant wire bonder replacement cycle, since we believe a significant portion of the industry’s installed base is not suitable for copper bonding. Through our research and development efforts, we are well positioned with both leading products and the process expertise to capitalize on this potential replacement cycle.

We also maintain the technology leadership of our equipment by optimizing our products to serve high growth niches. For example, over the last two years we have developed extensions of our main ball bonding platforms to address opportunities in LED assembly. Industry analysts have estimated the annual growth rate for total shipments of LED devices to be approximately 15% annually through 2013, driven by the adoption of LED backlights for flat-screen displays as well as other LED applications in general lighting. In fiscal 2009, we launched two products optimized for these applications. These products represent our first product offerings specifically aimed at this high growth market, and since their introduction we have captured significant market share.

Our focus on technology leadership also extends to die bonding. In fiscal 2009, we launched a new die bonding platform, our state of the art iStackPSTM die bonder for advanced stacked die applications. iStack offers best-in-class throughput and accuracy, and we believe the product is positioned to lead the market for its targeted applications.

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 one of the reasons for our technology leadership position.

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Products and Services

We supply a range of bonding equipment and expendable tools. The following table reflects net revenue by business segment for fiscal 2007, 2008 and 2009:

     
  Fiscal
(in thousands)   2007   2008   2009
Equipment   $ 316,718     $ 271,019     $ 170,536  
Expendable Tools     53,808       57,031       54,704  
Total   $ 370,526     $ 328,050     $ 225,240  

  
See Note 13 to our Consolidated Financial Statements included in Item 8 of this report for our financial results by business segment.

Equipment

We manufacture and sell a line of ball bonders, heavy wire wedge bonders and die bonders that are sold to semiconductor device manufacturers, their subcontract assembly suppliers, 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. 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. Die bonders are used to attach a die to the substrate or lead frame which will house the semiconductor device. We believe our equipment offers competitive advantages by providing customers with high productivity/throughput and superior package quality/process control.

Our principal Equipment segment products include:

   
Business Unit   Product Name   Served Market
Ball bonders   IConn-Power Series   Advanced, copper bonding and ultra fine pitch applications
     ConnX-Power Series   Cost performance, low pin count and copper applications
     ConnX-LED Power Series   Horizontal formatted LED applications
     ConnX-VLED Power Series   Vertical LED applications
  AT Premier   Stud bumping applications
            
Wedge bonders   3600 Plus   Power hybrid and automotive modules
     7200 Plus   Power semiconductors
  7600 Series   Smaller power packages
            
Die bonders   iStack Power Series   Advanced stack die and ball grid array applications

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. Launched in 2008, the Power Series initially consisted of the IConnPS high-performance and ConnXPSTM cost-performance ball bonders.

In fiscal 2009, we launched two extensions of our ConnX automatic ball bonder aimed specifically at LED applications — ConnX-LEDPSTM and ConnX-VLEDPSTM. Traditionally, we had not targeted the LED market with our product portfolio but through the technology leadership of ConnXPSTM and its variants, we now offer excellent cost performance bonding solutions in an area of the market where some of our competitors were once dominant.

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Our Power Series products have advanced industry performance standards. Our ball bonders are capable of performing very fine pitch bonding, as well as creating the sophisticated wire loop shapes needed in the assembly of advanced semiconductor packages. Our ball bonders can also be converted for use to copper applications through kits we sell separately, a capability that is increasingly important as bonding with copper continues to grow as an alternative to gold.

Heavy Wire Wedge Bonders

Through the acquisition of Orthodyne, we are now the leaders in the design and manufacture of heavy wire wedge bonders for the power semiconductor and automotive power module markets. Wedge bonders 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. Wedge bonders also attach large-diameter wire or ribbon to semiconductors when high electrical current requirements or reliability constraints do not allow the use of ball bonds.

Our portfolio of wedge bonding products includes:

The 3600 Plus wedge bonders:  high speed, high accuracy wire bonders designed for power modules, automotive packages and other large wire multi-chip module applications.
The 7200 Plus wedge bonders:  dual head wedge bonder designed specifically for power semiconductor applications.
The 7600 series wedge bonder:  first introduced in March of 2009, the 7600 is targeted primarily at the market for small power packages and will also extend our product portfolio to include reel-to-reel type applications.

We have also developed an advanced process for bonding power packages that utilizes ribbon rather than a round wire. Sold under the trade name PowerRibbon®, the process offers performance advantages over traditional round wire and is gaining acceptance in the market for power packages and automotive high current applications. This process is available on new wedge bonders or as a retrofit kit for some existing wedge bonders. We expect that our ribbon bonding capability will open new packaging opportunities for our customers.

Die Bonders

We entered the die bonder market through the fiscal 2007 acquisition of Alphasem. Our die bonder strategy included continuing to sell the existing Alphasem products while developing a family of next-generation die bonders. The first of those new machines, the iStack, was launched in March of 2009. We are currently putting iStack qualification machines in customers’ factories, and expect first purchase orders in the March 2010 fiscal quarter.

iStack is targeted at stacked die and high end BGA applications. In these applications, we expect up to 30% to 50% productivity increases compared to current generation machines. In addition, iStack has demonstrated superior accuracy and process control. We believe iStack represents a significant opportunity for us to expand our die bonder business.

During fiscal 2009 we announced the end of life of our older Alphasem die bonder products.

Other Equipment Products and Services

We also sell other equipment products, including manual wire bonders and stud bump bonders.

We also offer spare parts, equipment repair, training services, and upgrades for our equipment through our Support Services business unit.

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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, 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.
Bonding wedges:  expendable tools used in 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 molded in a matrix configuration into individual units.

Customers

Our major customers include IDM and subcontract assembly companies, industrial manufacturers and automotive electronics suppliers. Revenue from our customers may vary significantly from year-to-year based on their capital investments, operating expense budgets, and overall industry trends.

The following chart reflects our top ten customers, based on net revenue, for each of the last three fiscal years:

Fiscal 2007

1. Advanced Semiconductor
Engineering*
2. Siliconware Precision
Industries, Ltd.
3. Amkor Technology Inc.
4. Samsung
5. Hynix Semiconductor Inc.
6. STATS ChipPAC
7. Texas Instruments
8. Sandisk Semiconductor
9. ST Microelectronics
10. Chipmos Technology Inc.
 

Fiscal 2008

1. Advanced Semiconductor
Engineering
2. STATS ChipPac
3. Amkor Technology Inc.
4. Siliconware Precision
Industries, Ltd.
5. Sandisk Semiconductor
6. Texas Instruments
7. ST Microelectronics
8. Samsung
9. NXP Semiconductors
10. King Yuan Electronics
Company
 

Fiscal 2009

1. Advanced Semiconductor
Engineering*
2. Amkor Technology Inc.*
3. Siliconware Precision
Industries, Ltd.
4. Texas Instruments, Inc.
5. First Technology
China, Ltd.**
6. Techno Alpha Co.**
7. ST Microelectronics
8. Samsung
9. Micron Technology
Incorporated
10. Intel Corporation

* Accounted for more than 10% of fiscal year net revenue.
** First Technology China, Ltd. and Techno Alpha Co. are our distributors of wedge bonders and wedge bonding consumables in China and Japan, respectively.

  
Approximately 96.8%, 95.6% and 97.0% of our net revenue for fiscal 2007, 2008 and 2009, respectively, were for shipments to customer locations outside of the United States, primarily in the Asia/Pacific region, and we expect sales outside of the United States to continue to represent a substantial majority of our future revenue.

For a discussion of our financial information about geographic areas, see our Consolidated Financial Statements and corresponding Notes included in Item 8 of this report.

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Sales and Customer Support

We believe maintaining long term customer relationships is critical to our success, and comprehensive sales and customer support are an important means of establishing those relationships. To maintain these relationships, we utilize multiple distribution channels using either our own employees, manufacturers’ representatives, distributors, or a combination of the three, depending on the product, region, or application. In all cases, our goal is to position our sales and customer support resources near our customers’ facilities so as to provide support for customers in their own language and consistent with local customs. Our sales and customer support resources are located primarily in China, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand, the United States, and in Germany. Supporting these local resources, we have application labs in China, Israel, Japan, Singapore and Switzerland that offer additional process expertise.

By establishing relationships with semiconductor manufacturers, their subcontract assembly suppliers, and vertically integrated manufacturers of electronic systems, we gain insight into our customers’ future semiconductor packaging strategies. These insights assist us in our efforts to develop products and processes that address our customers’ future assembly requirements.

Backlog

We organize and manage our business to maintain a low backlog. Because of the volatility of customer demand, customer changes in delivery schedules, or cancellations and potential delays in product shipments, our backlog as of any particular date may not be indicative of revenue for any succeeding period. Our backlog consists of customer orders that are scheduled for shipment within the next 12 months. A majority of our orders are subject to cancellation or deferral by our customers with limited or no penalties.

The following table reflects our backlog as of September 27, 2008 and October 3, 2009:

   
  As of
(in thousands)   September 27,
2008
  October 3,
2009
Backlog   $ 49,508     $ 42,181  

  

Manufacturing

We believe excellence in manufacturing can create a competitive advantage, both from producing at lower costs and by providing superior responsiveness to changes in customer demand. To achieve these goals, we manage our manufacturing operations through a single organization and believe that fewer, larger factories allow us to capture economies of scale and generate cost savings through lower manufacturing costs.

Equipment

Our equipment manufacturing activities consist primarily of integrating outsourced parts and subassemblies and testing finished products to customer specifications. Our outsource model allows us to minimize our fixed costs and capital expenditures. Just-in-time inventory management has reduced our manufacturing cycle times and lowered our on-hand inventory requirements.

Our ball bonder and die bonder manufacturing and assembly is performed at our facility in Singapore. During fiscal 2009, we announced plans to move manufacturing of wedge bonders from Irvine, California to Singapore. This transition is underway and is expected to be completed in 2011. During the year, we also began investing in a subassembly manufacturing and supply management facility in Malaysia that will manufacture subassemblies currently manufactured in the U.S. and Singapore. We expect this facility to be fully operational in the second half of fiscal 2010. When these projects are completed, we will manufacture all of our equipment in Asia.

We have ISO 9001 certification for our equipment manufacturing facilities in Singapore, Switzerland (legacy model die bonders and spares manufacturing) and Irvine, California. In addition, we have ISO 14001 certifications for our equipment manufacturing facilities in Singapore and Irvine, California.

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Expendable Tools

We manufacture saw blades and capillaries at our facility in Suzhou, China. The capillaries are made using blanks produced at our facility in Yokneam, Israel. Historically, we also made a small percentage of capillaries in Yokneam; however, in fiscal 2009, we announced a plan to consolidate all capillary manufacturing in Suzhou, leaving only blank manufacturing in Yokneam. We outsource the production of our bonding wedges. Both the Suzhou and Yokneam facilities are ISO 9001 and ISO 14001 certified.

Research and Product Development

Many of our customers generate technology roadmaps describing their projected manufacturing technology requirements. Our research and product development activities are focused on delivering robust production solutions to those projected requirements. We accomplish this by regularly introducing improved versions of existing products or by developing next-generation products. We follow this product development methodology in all our major product lines. Research and development expense was $49.1 million, $59.9 million and $53.5 million during fiscal 2007, 2008 and 2009 respectively.

Intellectual Property

Where circumstances warrant, we apply for patents on inventions governing new products and processes developed as part of our ongoing research, engineering, and manufacturing activities. We currently hold a number of United States patents, many of which have foreign counterparts. We believe the duration of our patents generally exceeds the life cycles of the technologies disclosed and claimed in the patents. Additionally, we believe much of our important technology resides in our trade secrets and proprietary software.

Competition

The market for semiconductor equipment and packaging materials products is intensely competitive. Significant competitive factors in the semiconductor equipment market include price, speed/throughput, production yield, process control, delivery time and customer support, each of which contribute to lower the overall cost per package being manufactured. Our major equipment competitors include:

Ball bonders:  ASM Pacific Technology and Shinkawa
Wedge bonders:  F&K Delvotec, Hesse & Knipps and Cho-Onpa
Die bonders:  ASM Pacific Technology, BE Semiconductor Industries N.V., Renesas and Shinkawa

Significant competitive factors in the semiconductor packaging materials industry include performance, price, delivery, product life, and quality. Our significant expendable tools competitors include:

Capillaries:  PECO and Small Precision Tools, Inc.
Saw blades:  Disco Corporation
Bonding wedges:  Micro-Mechanics, Small Precision Tool and CoorsTek

In each of the markets we serve, we face competition and the threat of competition from established competitors and potential new entrants, some of which may have greater financial, engineering, manufacturing, and marketing resources.

Environmental Matters

We are subject to various federal, state, local and foreign laws and regulations governing, among other things, the generation, storage, use, emission, discharge, transportation and disposal of hazardous materials and the health and safety of our employees. In addition, we are subject to environmental laws which may require investigation and cleanup of any contamination at facilities we own or operate or at third party waste disposal sites we use or have used.

We have in the past, and will in the future, incur costs to comply with environmental laws. We are not, however, currently aware of any material costs or liabilities relating to environmental matters, including any claims or actions under environmental laws or obligations to perform any cleanups at any of our facilities or

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any third party waste disposal sites, that we expect to have a material adverse effect on our business, financial condition or operating results. However, it is possible that material environmental costs or liabilities may arise in the future.

Employees

As of October 3, 2009, we had 2,132 regular full-time employees and 35 temporary workers worldwide.

Executive Officers of the Company

The following table reflects certain information regarding our executive officers as of October 3, 2009. Our executive officers are appointed by, and serve at the discretion of, the Board of Directors.

     
Name   Age   First Became
an Officer
(calendar year)
  Position
C. Scott Kulicke   60   1976   Chairman of the Board of Directors and
Chief Executive Officer
Christian Rheault   44   2005   Senior Vice President, Marketing
Charles Salmons   54   1992   Senior Vice President, Engineering
Shay Torton   48   2005   Senior Vice President, Worldwide Operations
Ran Bareket   43   2009   Vice President and
interim Principal Accounting Officer
Jason Livingston   39   2009   Vice President,
Wedge Bonding business unit
Tek Chee (“TC”) Mak   55   2006   Vice President, Worldwide Sales
Michael J. Morris   40   2009   Vice President and
interim Chief Financial Officer

  

C. Scott Kulicke has served as Chief Executive Officer since 1980 and Chairman of the Board of Directors since 1984. His present term as a director expires in 2011. Mr. Kulicke holds a Bachelor of Science degree in Economics from the Wharton School of Business of the University of Pennsylvania.

Christian Rheault has served as Senior Vice President, Marketing since November 2007 after serving as Vice President, Equipment segment since 2006. Prior to that time, he served as Vice President and General Manager of our Ball Bonder Business Unit and Director of Strategic Marketing and Vice President, General Manager of the Microelectronics Business Unit. Mr. Rheault holds an Electrical Engineering degree from Laval University, Canada and a DSA (Business Administration Diploma) from Sherbrooke University, Canada.

Charles Salmons has served as Senior Vice President, Engineering since March 2008, after serving as Senior Vice President, Acquisition Integration (September 2006-March 2008), Senior Vice President, Wafer Test (November 2004-September 2006), Senior Vice President, Product Development (September 2002-November 2004), Senior Vice President Operations (1999 to 2004), General Manager, Ball Bonder operations (1998-1999), and Vice President of Operations (1994-1998). Mr. Salmons holds a Bachelor of Arts degree in Economics from Temple University and a Master of Business Administration degree from LaSalle University.

Shay Torton has served as Senior Vice President, Worldwide Operations since 2009 after serving as Vice President, Worldwide Operations and Supply Chain (2005-2009), Vice President, China Operations and K&S Suzhou General Manager (2002-2005), Vice President and General Manager, Materials Business Unit (2001-2002), K&S Bonding Wire Business Unit Managing Director-Singapore (1997) and General Manager, K&S Bonding Wire-U.S. (1996). Mr. Torton holds a Bachelor of Science degree in Industrial Engineering and Management from the Israel Institute of Technology.

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Ran Bareket was appointed interim Principal Accounting Officer in August 2009. Prior to this appointment, Mr. Bareket served as our Vice President and Corporate Controller since July 2006. In addition, he served as Vice President of Financial Operations since 2005. Prior to 2005, Mr. Bareket served as our Director of Worldwide Financial Operations. Mr. Bareket holds a Bachelor of Arts degree in Accounting/Management from Tel Aviv Management College in Israel and a Master of Business Administration from Pennsylvania State University.

Jason Livingston was appointed Vice President of the K&S Wedge Bonding Business Unit in October 2009, after serving as Vice President of Finance for the Wedge Bonding Business Unit. Mr. Livingston joined K&S through the acquisition of Orthodyne Electronics, where he served as Chief Financial Officer since April 1998. Prior to joining Orthodyne Electronics, Mr. Livingston was with McGladrey & Pullen, LLP. Mr. Livingston is a CPA and holds a Bachelor of Arts degree in Accounting from California State University.

Tek Chee (“TC”) Mak has served as Vice President of Worldwide Sales since September 2006 after serving as Vice President of Sales for the Equipment and Expendable Tools businesses since November 2004. Prior to that time, he served as Vice President of Asia Sales since February 2001. Mr. Mak holds a Higher Diploma of Electronic Engineering from Hong Kong Polytechnic University.

Michael J. Morris was appointed interim Chief Financial Officer (“CFO”) in August 2009. Mr. Morris previously served as Vice President of Finance and Treasurer. Before joining K&S in October 2006, Mr. Morris was Assistant Treasurer at Constellation Energy Group. Prior to joining Constellation in 2005, Mr. Morris held various positions of increasing responsibility at the Treasurer’s Office of General Motors. Mr. Morris holds a Bachelor of Arts degree in Economics from the University of Pennsylvania and a Master of Business Administration from the University of Michigan.

Item 1A. RISKS RELATED TO OUR BUSINESS AND INDUSTRY

Our operating results and financial condition are adversely impacted by volatile worldwide economic conditions.

Global economic conditions affect demand for semiconductor capital equipment and expendable tools. Accordingly, our business and financial performance is impacted, both positively and negatively, by fluctuations in the macroeconomic environment. Conditions in the global economy deteriorated dramatically in the first half of our fiscal 2009, leading to a sharp contraction in consumer and business electronics spending, which reduced demand throughout the semiconductor supply chain. Though industry conditions improved significantly in the second half of the fiscal year, visibility continues to be limited and forecasting in the current business environment remains extremely difficult. We cannot predict the duration or strength of an economic recovery. If the economy or markets in which we operate experience further weakness, our business, financial condition and results of operations will be materially and adversely affected.

The semiconductor industry is volatile with sharp periodic downturns and slowdowns. Cyclical industry downturns are made worse by volatile global economic conditions.

Our operating results are significantly affected by the capital expenditures of semiconductor manufacturers, both IDMs and subcontractors. Expenditures by our customers depend on the current and anticipated market demand for semiconductors and products that use semiconductors, including personal computers, telecommunications equipment, consumer electronics and automotive goods. Significant downturns in the market for semiconductor devices or in general economic conditions reduce demand for our products and materially and adversely affect our business, financial condition and operating results.

The semiconductor industry is volatile, with periods of rapid growth followed by industry-wide retrenchment. These periodic downturns and slowdowns have adversely affected our business, financial condition and operating results. Downturns have been characterized by, among other things, diminished product demand, excess production capacity, and accelerated erosion of selling prices. Historically these downturns have severely and negatively affected the industry’s demand for capital equipment, including the assembly equipment and, to a lesser extent, the expendable tools that we sell. The sharp deterioration in global economic conditions that occurred in the first half of fiscal 2009 made the industry downturn during that same period more severe than recent industry downturns. There can be no assurances regarding levels of demand

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for our products, especially in light of uncertain global economic conditions. In any case, we believe the historical volatility of our business, both upward and downward, will persist.

We may experience increasing price pressure.

Typically our average selling prices have declined over time. We seek to offset this decline by continually reducing our cost structure by consolidating operations in lower cost areas, reducing other operating costs, and by pursuing product strategies focused on product performance, and customer service. These efforts may not be able to fully offset price declines; therefore, our financial condition and operating results may be materially and adversely affected.

Our quarterly operating results fluctuate significantly and may continue to do so in the future.

In the past, our quarterly operating results have fluctuated significantly. We expect quarterly results will continue to fluctuate. Although these fluctuations are partly due to the volatile nature of the semiconductor industry, they also reflect other factors, many of which are outside of our control.

Some of the factors that may cause our net revenue and operating margins to fluctuate significantly from period to period are:

market downturns;
the mix of products we sell because, for example:
º certain lines of equipment within our business segments are more profitable than others; and
º some sales arrangements have higher gross margins than others;
cancelled or deferred orders;
competitive pressures may force us to reduce prices;
higher than anticipated costs of development or production of new equipment models;
the availability and cost of the components for our products;
delays in the development and manufacture of our new products and upgraded versions of our products and market acceptance of these products when introduced;
customers’ delay in purchasing our products due to anticipation that we or our competitors may introduce new or upgraded products; and
our competitors’ introduction of new products.

Many of our expenses, such as research and development, selling, general and administrative expenses, and interest expense, do not vary directly with our net revenue. Our research and development efforts include long-term projects lasting a year or more, which require significant investments. In order to realize the benefits of these projects, we believe that we must continue to fund them during periods when our revenue has declined. As a result, a decline in our net revenue would adversely affect our operating results as we continue to make these expenditures. In addition, if we were to incur additional expenses in a quarter in which we did not experience comparable increased net revenue, our operating results would decline. In a downturn, we may have excess inventory, which could be written off. Some of the other factors that may cause our expenses to fluctuate from period-to-period include:

timing and extent of our research and development efforts;
severance, resizing, and other costs of relocating facilities;
inventory write-offs due to obsolescence; and
an increase in the cost of labor or materials.

Because our net revenue and operating results are volatile and difficult to predict, we believe consecutive period-to-period comparisons of our operating results may not be a good indication of our future performance.

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We may not be able to rapidly develop, manufacture and gain market acceptance of new and enhanced products required to maintain or expand our business.

We believe our continued success depends on our ability to continuously develop and manufacture new products and product enhancements on a timely and cost-effective basis. We must introduce these products and product enhancements into the market in a timely manner in response to customers’ demands for higher performance assembly equipment and leading-edge materials customized to address rapid technological advances in integrated circuits, and capital equipment designs. Our competitors may develop new products or enhancements to their products that offer improved performance and features, or lower prices which may render our products less competitive. The development and commercialization of new products requires significant capital expenditures over an extended period of time, and some products we seek to develop may never become profitable. In addition, we may not be able to develop and introduce products incorporating new technologies in a timely manner that will satisfy our customers’ future needs or achieve market acceptance.

Substantially all of our sales and manufacturing operations are located outside of the United States, and we rely on independent foreign distribution channels for certain product lines; all of which subject us to risks, including risks from changes in trade regulations, currency fluctuations, political instability and war.

Approximately 96.8%, 95.6% and 97.0% of our net revenues for fiscal 2007, 2008 and 2009, respectively, were to customers located outside of the United States, primarily in the Asia/Pacific region. Our future performance will depend on our ability to continue to compete in foreign markets, particularly in the Asia/Pacific region. Some of these economies have been highly volatile, resulting in significant fluctuation in local currencies, and political and economic instability. These conditions may continue or worsen, which may materially and adversely affect our business, financial condition and operating results.

We also rely on non-United States suppliers for materials and components used in our products, and most of our manufacturing operations are located in countries other than the United States. We manufacture our ball bonders in Singapore, bonding tools in Israel and China, die bonders in Singapore, and certain bonder subassemblies in Malaysia. In addition, we have sales, service and support personnel in China, Japan, Korea, Malaysia, the Philippines, Singapore, Switzerland, Taiwan, Thailand, United States and Germany. We also rely on independent foreign distribution channels for certain of our product lines. As a result, a major portion of our business is subject to the risks associated with international, and particularly Asia/Pacific, commerce, such as:

risks of war and civil disturbances or other events that may limit or disrupt manufacturing and markets;
seizure of our foreign assets, including cash;
longer payment cycles in foreign markets;
international exchange restrictions;
restrictions on the repatriation of our assets, including cash;
significant foreign and United States taxes on repatriated cash;
difficulties of staffing and managing dispersed international operations;
possible disagreements with tax authorities regarding transfer pricing regulations;
episodic events outside our control such as, for example, outbreaks of influenza;
tariff and currency fluctuations;
changing political conditions;
labor conditions and costs;
foreign governments’ monetary policies and regulatory requirements;
less protective foreign intellectual property laws; and
legal systems which are less developed and may be less predictable than those in the United States.

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Because most of our foreign sales are denominated in U.S. dollars, an increase in value of the U.S. dollar against foreign currencies will make our products more expensive than those offered by some of our foreign competitors. In addition, a weakening of the U.S. dollar against foreign currencies could make our costs in non-U.S. locations more expensive to fund. Our ability to compete overseas may be materially and adversely affected by changes in the value of the U.S. dollar against foreign currencies.

Our international operations also depend upon favorable trade relations between the United States and those foreign countries in which our customers, subcontractors and materials suppliers have operations. A protectionist trade environment in either the United States or those foreign countries in which we do business, such as a change in the current tariff structures, export compliance or other trade policies, may materially and adversely affect our ability to sell our products in foreign markets.

We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows.

Because nearly all of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency exchange rates which could have a material adverse impact on our financial results and cash flows. Historically, our primary exposures have related to net working capital exposures denominated in currencies other than the foreign subsidiaries’ functional currency, and remeasurement of our foreign subsidiaries’ net monetary assets from the subsidiaries’ local currency into the subsidiaries’ functional currency. In general, an increase in the value of the U.S. dollar could require certain of our foreign subsidiaries to record translation and remeasurement gains. Conversely, a decrease in the value of the U.S. dollar could require certain of our foreign subsidiaries to record losses on translation and remeasurement. An increase in the value of the U.S. dollar could increase the cost to our customers of our products in those markets outside the United States where we sell in U.S. dollars, and a weakened U.S. dollar could increase the cost of local operating expenses and procurement of raw materials, both of which could have an adverse effect on our cash flows. Our primary exposures include the Swiss Franc, Chinese Yuan, Euro, Singapore Dollar, Israeli Shekel and Japanese Yen. 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 currently have no foreign exchange forward contracts in place but may enter into foreign exchange forward contracts or other instruments in the future. 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 flows.

We may not be able to consolidate manufacturing and other facilities without incurring unanticipated costs and disruptions to our business.

As part of our ongoing efforts to further reduce our cost structure, we continue to migrate manufacturing and other facilities to Asia. We may incur significant and unexpected costs, delays and disruptions to our business during this process. Because of unanticipated events, including the actions of governments, suppliers, employees or customers, we may not realize the synergies, cost reductions and other benefits of any consolidation to the extent or within the timeframe we currently expect.

Our business depends on attracting and retaining management, marketing and technical employees as well as on the succession of senior management.

Our future success depends on our ability to hire and retain qualified management, marketing and technical employees, primarily in Asia. If we are unable to continue to attract and retain the managerial, marketing and technical personnel we require, and if we are unable to effectively provide for the succession of senior management, our business, financial condition and operating results may be materially and adversely affected.

In December 2009, we announced plans for the succession of C. Scott Kulicke, our Chairman and Chief Executive Officer. Mr. Kulicke’s planned retirement date is June 30, 2011. Our Board of Directors will conduct a search for a new Chief Executive Officer to succeed Mr. Kulicke. Our Board of Directors is taking steps to ensure an orderly succession, but we may not be able to identify and hire a suitable successor in the anticipated time period and the succession process may cause disruptions to our business.

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Difficulties in forecasting demand for our product lines may lead to periodic inventory shortages or excesses.

We typically operate our business with limited visibility of future demand. As a result, we sometimes experience inventory shortages or excesses. We generally order supplies and otherwise plan our production based on internal forecasts for demand. We have in the past, and may again in the future, fail to accurately forecast demand for our products. This has led to, and may in the future lead to, delays in product shipments or, alternatively, inventory obsolescence and contractual commitments to purchase excess inventory. If we fail to accurately forecast demand for our products, our business, financial condition and operating results may be materially and adversely affected.

Alternative packaging technologies may render some of our products obsolete.

Alternative packaging technologies have emerged that may improve device performance or reduce the size of an integrated circuit package, as compared to traditional die bonding. These technologies include flip chip and chip scale packaging. Some of these alternative technologies eliminate the need for wires to establish the electrical connection between a die and its package. The semiconductor industry may, in the future, shift a significant part of its volume into alternative packaging technologies, such as those discussed above, which do not employ our products. If a significant shift to alternative packaging technologies were to occur, demand for our equipment and related packaging materials may be materially and adversely affected.

Because a small number of customers account for most of our sales, our net revenue could decline if we lose a significant customer.

The semiconductor manufacturing industry is highly concentrated, with a relatively small number of large semiconductor manufacturers and their subcontract assemblers and vertically integrated manufacturers of electronic systems purchasing a substantial portion of our semiconductor assembly equipment and packaging materials. Sales to a relatively small number of customers account for a significant percentage of our net revenue. Sales as a percent of net revenue to our largest customer were 10.7%, 9.9%, and 17.7% for fiscal 2007, 2008, and 2009, respectively.

We expect a small number of customers will continue to account for a high percentage of our net revenue for the foreseeable future. Thus, our business success depends on our ability to maintain strong relationships with our customers. Any one of a number of factors could adversely affect these relationships. If, for example, during periods of escalating demand for our equipment, we were unable to add inventory and production capacity quickly enough to meet the needs of our customers, they may turn to other suppliers making it more difficult for us to retain their business. Similarly, if we are unable for any other reason to meet production or delivery schedules, particularly during a period of escalating demand, our relationships with our key customers could be adversely affected. If we lose orders from a significant customer, or if a significant customer reduces its orders substantially, these losses or reductions may materially and adversely affect our business, financial condition and operating results.

We depend on a small number of suppliers for raw materials, components and subassemblies. If our suppliers do not deliver their products to us, we would be unable to deliver our products to our customers.

Our products are complex and require raw materials, components and subassemblies having a high degree of reliability, accuracy and performance. We rely on subcontractors to manufacture many of these components and subassemblies and we rely on sole source suppliers for many components and raw materials. As a result, we are exposed to a number of significant risks, including:

decreased control over the manufacturing process for components and subassemblies;
changes in our manufacturing processes, in response to changes in the market, which may delay our shipments;
our inadvertent use of defective or contaminated raw materials;

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the relatively small operations and limited manufacturing resources of some of our suppliers, which may limit their ability to manufacture and sell subassemblies, components or parts in the volumes we require and at acceptable quality levels and prices;
the reliability or quality issues with certain key subassemblies provided by single source suppliers as to which we may not have any short term alternative;
shortages caused by disruptions at our suppliers and subcontractors for a variety of reasons, including work stoppage or fire, earthquake, flooding or other natural disasters;
delays in the delivery of raw materials or subassemblies, which, in turn, may delay shipments to our customers;
loss of suppliers as a result of consolidation of suppliers in the industry; and
loss of suppliers because of their bankruptcy or insolvency.

If we are unable to deliver products to our customers on time for these or any other reasons, or we are unable to meet customer expectations as to cycle time, or we are unable to maintain acceptable product quality or reliability, our business, financial condition and operating results may be materially and adversely affected.

We may acquire or divest businesses or enter into joint ventures or strategic alliances, which may materially affect our business, financial condition and operating results.

We continually evaluate our portfolio of businesses and may decide to buy or sell businesses or enter into joint ventures or other strategic alliances. During fiscal 2007, we acquired Alphasem, a manufacturer of die bonders. During fiscal 2009, we both acquired the assets of Orthodyne, a manufacturer of heavy wire wedge bonders and heavy wire wedges, and sold our Wire business to Heraeus, a precious metals and technology group. We may be unable to successfully integrate Orthodyne with our existing businesses and successfully implement, improve and expand our systems, procedures and controls to accommodate the acquisition. In addition, we may not ultimately achieve anticipated benefits or cost reductions from the divestiture of our Wire business. These transactions may place additional constraints on our management and current labor force. Additionally, these transactions may require significant resources from our legal, finance and business teams. If we fail to successfully manage the risks associated with these transactions, our business, financial condition and operating results may be materially and adversely affected.

We may from time to time in the future seek to acquire or divest other businesses or enter into alliances with other companies. Significant acquisitions and alliances may increase demands on management, engineering, and financial resources, and information and internal control systems. Our success with respect to acquisitions and alliances will depend, in part, on our ability to manage and integrate acquired businesses and alliances with our existing businesses and to successfully implement, improve and expand our systems, procedures and controls. In addition, we may divest existing businesses, which would cause a decline in revenues and may make our financial results more volatile. If we fail to integrate and manage acquired businesses successfully or to manage the risks associated with divestitures, joint ventures or other alliances, our business, financial condition and operating results may be materially and adversely affected.

The market price of our common shares and our earnings per share may decline as a result of any acquisitions or divestitures.

The market price of our common shares may decline as a result of any acquisitions or divestitures made by us, including among other things, the acquisition of Orthodyne, if we do not achieve the perceived benefits of such acquisitions or divestitures as rapidly or to the extent anticipated by financial or industry analysts or if the effect on our financial results is not consistent with the expectations of financial or industry analysts. In addition, the failure to achieve expected benefits and unanticipated costs relating to our acquisitions could reduce our future earnings per share.

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We may be unable to continue to compete successfully in the highly competitive semiconductor equipment and packaging materials industries.

The semiconductor equipment and packaging materials industries are very competitive. In the semiconductor equipment industry, significant competitive factors include performance, quality, customer support and price. In the semiconductor packaging materials industry, competitive factors include price, delivery and quality.

In each of our markets, we face competition and the threat of competition from established competitors and potential new entrants. In addition, established competitors may combine to form larger, better capitalized companies. Some of our competitors have or may have significantly greater financial, engineering, manufacturing and marketing resources. Some of these competitors are Asian and European companies that have had, and may continue to have, an advantage over us in supplying products to local customers who appear to prefer to purchase from local suppliers, without regard to other considerations.

We expect our competitors to improve their current products’ performance, and to introduce new products and materials with improved price and performance characteristics. Our competitors may independently develop technology similar to or better than ours. New product and material introductions by our competitors or by new market entrants could hurt our sales. If a particular semiconductor manufacturer or subcontract assembler selects a competitor’s product or materials for a particular assembly operation, we may not be able to sell products or materials to that manufacturer or assembler for a significant period of time. Manufacturers and assemblers sometimes develop lasting relationships with suppliers and assembly equipment providers in our industry and often go years without requiring replacement. In addition, we may have to lower our prices in response to price cuts by our competitors, which may materially and adversely affect our business, financial condition and operating results. If we cannot compete successfully, we could be forced to reduce prices and could lose customers and experience reduced margins and profitability.

Our success depends in part on our intellectual property, which we may be unable to protect.

Our success depends in part on our proprietary technology. To protect this technology, we rely principally on contractual restrictions (such as nondisclosure and confidentiality provisions) in our agreements with employees, subcontractors, vendors, consultants and customers and on the common law of trade secrets and proprietary “know-how.” We also rely, in some cases, on patent and copyright protection. We may not be successful in protecting our technology for a number of reasons, including the following:

employees, subcontractors, vendors, consultants and customers may violate their contractual agreements, and the cost of enforcing those agreements may be prohibitive, or those agreements may be unenforceable or more limited than we anticipate;
foreign intellectual property laws may not adequately protect our intellectual property rights; and
our patent and copyright claims may not be sufficiently broad to effectively protect our technology; our patents or copyrights may be challenged, invalidated or circumvented; or we may otherwise be unable to obtain adequate protection for our technology.

In addition, our partners and alliances may have rights to technology developed by us. We may incur significant expense to protect or enforce our intellectual property rights. If we are unable to protect our intellectual property rights, our competitive position may be weakened.

Third parties may claim we are infringing on their intellectual property, which could cause us to incur significant litigation costs or other expenses, or prevent us from selling some of our products.

The semiconductor industry is characterized by rapid technological change, with frequent introductions of new products and technologies. Industry participants often develop products and features similar to those introduced by others, creating a risk that their products and processes may give rise to claims they infringe on the intellectual property of others. We may unknowingly infringe on the intellectual property rights of others and incur significant liability for that infringement. If we are found to have infringed on the intellectual property rights of others, we could be enjoined from continuing to manufacture, market or use the affected product, or be required to obtain a license to continue manufacturing or using the affected product. A license

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could be very expensive to obtain or may not be available at all. Similarly, changing or re-engineering our products or processes to avoid infringing the rights of others may be costly, impractical or time consuming.

Occasionally, third parties assert that we are, or may be, infringing on or misappropriating their intellectual property rights. In these cases, we defend, and will continue to defend, against claims or negotiate licenses where we consider these actions appropriate. Intellectual property cases are uncertain and involve complex legal and factual questions. If we become involved in this type of litigation, it could consume significant resources and divert our attention from our business.

We may be materially and adversely affected by environmental and safety laws and regulations.

We are subject to various federal, state, local and foreign laws and regulations governing, among other things, the generation, storage, use, emission, discharge, transportation and disposal of hazardous material, investigation and remediation of contaminated sites and the health and safety of our employees. Increasingly, public attention has focused on the environmental impact of manufacturing operations and the risk to neighbors of chemical releases from such operations.

Proper waste disposal plays an important role in the operation of our manufacturing plants. These facilities operate under permits that must be renewed periodically. A violation of those permits may lead to revocation of the permits, fines, penalties or the incurrence of capital or other costs to comply with the permits, including potential shutdown of operations.

Compliance with existing or future, land use, environmental and health and safety laws and regulations may: (1) result in significant costs to us for additional capital equipment or other process requirements, (2) restrict our ability to expand our operations and/or (3) cause us to curtail our operations. We also could incur significant costs, including cleanup costs, fines or other sanctions and third-party claims for property damage or personal injury, as a result of violations of or liabilities under such laws and regulations. Any costs or liabilities to comply with or imposed under these laws and regulations could materially and adversely affect our business, financial condition and operating results.

We may be unable to generate enough cash to repay our debt.

Our ability to make payments on our indebtedness and to fund planned capital expenditures and other activities will depend on our ability to generate cash in the future. If our Subordinated Convertible Notes are not converted to shares of our common stock, we will be required to make annual cash interest payments of $1.5 million in fiscal 2010 and $1.0 million in fiscal 2011 and fiscal 2012 (assuming we do not purchase any additional outstanding Subordinated Convertible Notes). As of October 3, 2009, principal payments of $48.9 million and $110.0 million on the Subordinated Convertible Notes are due in fiscal 2010 and 2012, respectively. Our ability to make payments on our indebtedness is affected by the volatile nature of our business, and general economic, competitive and other factors that are beyond our control, including deteriorating global economic conditions. Our indebtedness poses risks to our business, including that:

insufficient cash flow from operations to repay our outstanding indebtedness when it becomes due may force us to sell assets, or seek additional capital, which we may be unable to do at all or on terms favorable to us; and
our level of indebtedness may make us more vulnerable to economic or industry downturns.

We may not generate cash in an amount sufficient to enable us to service interest, principal and other payments on our debt, including the Subordinated Convertible Notes, or to fund our other liquidity needs. We are not restricted under the agreements governing our existing indebtedness from incurring additional debt in the future. If new debt is added to our current levels, our leverage and our debt service obligations would increase and the related risks described above could intensify.

We have the ability to issue additional equity securities, which would lead to dilution of our issued and outstanding common shares.

The issuance of additional equity securities or securities convertible into equity securities will result in dilution of our existing shareholders’ equity interests in us. Our board of directors has the authority to issue,

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without vote or action of shareholders, preferred shares in one or more series, and has the ability to fix the rights, preferences, privileges and restrictions of any such series. Any such series of preferred shares could contain dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences or other rights superior to the rights of holders of our common shares. In addition, we are authorized to issue, without shareholder approval, up to an aggregate of 200 million common shares, of which approximately 69.4 million shares were outstanding as of October 3, 2009. We are also authorized to issue, without shareholder approval, securities convertible into either common shares or preferred shares.

Weaknesses in our internal controls and procedures could result in material misstatements in our financial statements.

Pursuant to the Sarbanes-Oxley Act, management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal controls over financial reporting are processes designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected.

Our internal controls may not prevent all potential errors or fraud, because any control system, no matter how well designed and implemented, can only provide reasonable and not absolute assurance that the objectives of the control system will be achieved. We or our independent registered public accountants may identify material weaknesses in our internal controls which could adversely affect our ability to ensure proper financial reporting and could affect investor confidence in us and the price of our common shares.

Accounting methods, including but not limited to the accounting method for convertible debt securities with net share settlement, such as our 0.875% Subordinated Convertible Notes, are subject to change.

In calculating our diluted earnings per share, we recognize interest expense at the stated coupon rate, and shares potentially issuable upon conversion of our 0.875% Subordinated Convertible Notes are excluded from the calculation of diluted earnings per share until the market price of our common shares exceeds the conversion price (i.e., the conversion price is “in the money”). Once the conversion price is in the money, the shares that we would issue upon assumed conversion of the debt would be included in the calculation of fully diluted earnings per share using the “treasury stock” method. No separate value is attributed to the conversion feature of the debt at the time of issuance.

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) No. 470.20, Debt, Debt With Conversion Options (“ASC 470.20”), which is effective for fiscal years beginning after December 15, 2008. ASC 470.20 specifies that issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.

As compared to the current accounting method, ASC 470.20 would reduce the amount recognized as debt and increase the amount recognized as shareholders’ equity at the time of issuance. The amount of debt recognized at time of issuance would increase over the life of the notes, with a corresponding increase in non-cash interest expense and reduction of net income and earnings per share (net of tax), for the amortization of the original issue discount. We will adopt ASC 470.20 beginning fiscal 2010, with retrospective application to financial statements for periods prior to the date of adoption.

This change in the accounting method for convertible debt securities will have an adverse impact on our reported and future results of operations, and could adversely affect the trading price of our common shares or the trading price of the Subordinated Convertible Notes.

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Other Risks

Our ability to recognize tax benefits on future domestic U.S. tax losses and our existing U.S. net operating loss position may be limited.

We have generated net operating loss carryforwards and other tax attributes for U.S. tax purposes (“Tax Benefits”) that can be used to reduce our future federal income tax obligations. Under the Tax Reform Act of 1986, the potential future utilization of our Tax Benefits for U.S. tax purposes may be limited following an ownership change. An ownership change is generally defined as a greater than 50% point increase in equity ownership by 5% shareholders in any three-year period under Section 382 of the Internal Revenue Code. An ownership change may significantly limit our ability to fully utilize our net operating losses which could materially and adversely affect our financial condition and operating results.

Potential changes to U.S. and foreign tax laws could increase our income tax expense.

We are subject to income taxes in the United States and many foreign jurisdictions. There have been proposals to reform U.S. tax laws that would significantly impact how U.S. multinational corporations, such as us, are taxed on foreign earnings. It is unclear whether these proposed tax revisions will be enacted, or, if enacted, what the scope of the revisions will be. Changes in U.S. and foreign tax laws, if enacted, could materially and adversely affect our financial condition and operating results.

Anti-takeover provisions in our articles of incorporation and bylaws, and under Pennsylvania law may discourage other companies from attempting to acquire us.

Some provisions of our articles of incorporation and bylaws as well as Pennsylvania law may discourage some transactions where we would otherwise experience a fundamental change. For example, our articles of incorporation and bylaws contain provisions that:

classify our board of directors into four classes, with one class being elected each year;
permit our board to issue “blank check” preferred shares without shareholder approval; and
prohibit us from engaging in some types of business combinations with a holder of 20% or more of our voting securities without super-majority board or shareholder approval.

Further, under the Pennsylvania Business Corporation Law, because our shareholders approved bylaw provisions that provide for a classified board of directors, shareholders may remove directors only for cause. These provisions and some other provisions of the Pennsylvania Business Corporation Law could delay, defer or prevent us from experiencing a fundamental change and may adversely affect our common shareholders’ voting and other rights.

Terrorist attacks, or other acts of violence or war may affect the markets in which we operate and our profitability.

Terrorist attacks may negatively affect our operations. There can be no assurance that there will not be further terrorist attacks against the United States or United States businesses, or in any other country we do business. Terrorist attacks or armed conflicts may directly impact our physical facilities or those of our suppliers or customers. Our primary facilities include administrative, sales and research and development facilities in the United States and manufacturing facilities in the United States, Singapore, China, Malaysia and Israel. We also have an administrative office in Malaysia. Additional terrorist attacks may disrupt the global insurance and reinsurance industries with the result that we may not be able to obtain insurance at historical terms and levels for all of our facilities. Furthermore, additional attacks may make travel and the transportation of our supplies and products more difficult and more expensive and ultimately affect the sales of our products in the United States and overseas. Additional attacks or any broader conflict, could negatively impact our domestic and international sales, our supply chain, our production capability and our ability to deliver products to our customers. Political and economic instability in some regions of the world could negatively impact our business. The consequences of terrorist attacks or armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business.

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Provisions of our Subordinated Convertible Notes could discourage an acquisition of us by a third party.

Certain provisions of our outstanding Subordinated Convertible Notes could make it more difficult or more expensive for a third party to acquire us. Upon the occurrence of certain transactions constituting a fundamental change as defined in our Subordinated Convertible Notes, holders of the Subordinated Convertible Notes will have the right, at their option, to require us to repurchase all of their notes at a price equal to 100% of the principal amount of notes to be repurchased, plus accrued and unpaid interest, plus a premium, if applicable. In addition, pursuant to the terms of the 0.875% Subordinated Convertible Notes, we may not enter into certain mergers unless, among other things, the surviving entity assumes all of our obligations under the indenture and the Subordinated Convertible Notes.

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Item 2. PROPERTIES

The following table reflects our major operating facilities:

       
Facility   Approximate Size   Function   Products Manufactured   Lease
Expiration Date
Fort Washington, Pennsylvania   88,000 sq. ft.(1)   Corporate headquarters, technology center, sales and service   Not applicable   September 2028(3)
Suzhou, China   136,386 sq. ft.(1)   Manufacturing, technology center   Capillaries, dicing blades   October 2022(4)
Irvine, California   121,805 sq. ft.(1)   Manufacturing, technology center   Wedge bonders   September 2013
Singapore   77,500 sq. ft.(1)   Manufacturing, technology center   Wire and die bonders   August 2011
Berg,
Switzerland
  61,896 sq. ft.(2)   Manufacturing, technology center   Die bonder sub-assembly and spares   N/A
Yokneam, Israel   53,820 sq. ft.(2)   Manufacturing, technology center   Capillaries, wedges, die collets   N/A
Petaling Jaya, Malaysia   37,200 sq ft(1)   Subassembly manufacturing and supply chain management   Equipment subassembly(5)   August 2012

(1) Leased.
(2) Owned.
(3) Includes lease extension periods at the Company’s option. Initial lease expires September 2018.
(4) Includes lease extension periods at the Company’s option. Initial lease expires October 2017.
(5) Manufacturing began fiscal 2010.

  
In addition, we rent space for sales and service offices and administrative functions in: China, Germany, Japan, Korea, Malaysia, the Philippines, Taiwan, and Thailand. We believe our facilities are generally in good condition and suitable to the extent of utilization needed.

Item 3. LEGAL PROCEEDINGS

From time to time, we may be a plaintiff or defendant in cases arising out of our business. We cannot be assured of the results of any pending or future litigation, but we do not believe resolution of these matters will materially or adversely affect our business, financial condition or operating results.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on The Nasdaq Global Market (“Nasdaq”) under the symbol “KLIC.” The following table reflects the ranges of high and low sale prices for our common stock as reported on Nasdaq for the periods indicated:

       
  Fiscal year ended
     September 27, 2008   October 3, 2009
     High   Low   High   Low
First Quarter   $ 8.89     $ 6.47     $ 4.71     $ 1.11  
Second Quarter   $ 6.93     $ 4.55     $ 2.67     $ 1.15  
Third Quarter   $ 7.95     $ 4.66     $ 5.04     $ 2.11  
Fourth Quarter   $ 7.49     $ 4.53     $ 6.68     $ 3.00  

On December 10, 2009, there were approximately 406 holders of record of the shares of outstanding common stock. The payment of dividends on our common stock is within the discretion of our board of directors; however, we have not historically paid any dividends on our common stock. In addition, we do not expect to declare dividends on our common stock in the near future, since we intend to retain earnings to finance our business.

For the purpose of calculating the aggregate market value of shares of our common stock held by nonaffiliates, as shown on the cover page of this report, we have assumed all of our outstanding shares were held by nonaffiliates except for shares held by our directors and executive officers. However, this does not necessarily mean that all directors and executive officers of the Company are, in fact, affiliates of the Company, or there are no other persons who may be deemed to be affiliates of the Company. Further information concerning the beneficial ownership of our executive officers, directors and principal shareholders will be included in our Proxy Statement for the 2010 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission on or about December 31, 2009.

Equity Compensation Plan Information

The information required hereunder will appear under the heading “Equity Compensation Plans” in our Proxy Statement for the 2010 Annual Meeting of Shareholders which information is incorporated herein by reference.

Recent Sales of Unregistered Securities and Use of Proceeds

None.

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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table reflects selected historical consolidated financial data derived from the consolidated financial statements of Kulicke and Soffa Industries, Inc. and subsidiaries as of and for each of the five fiscal years ended 2005, 2006, 2007, 2008 and 2009. Fiscal 2009 includes Orthodyne which was acquired on October 3, 2008. In addition, all periods have been reclassified to reflect our Wire business as a discontinued operation. Due to this change, fiscal 2005, 2006, and 2007 financial data have been revised from our previously issued consolidated financial statements. This data should be read in conjunction with our consolidated financial statements, including notes and other financial information included elsewhere in this report or in annual reports or current reports on Form 8-K filed previously by us in respect of the fiscal years identified in the column headings of the tables below.

         
         
  Fiscal
(in thousands, except per share amounts)   2005   2006   2007   2008   2009
Statement of Operations Data:
                                            
Net revenue:
                                            
Equipment   $ 201,608     $ 319,788     $ 316,718     $ 271,019     $ 170,536  
Expendable Tools     58,394       60,508       53,808       57,031       54,704  
Total net revenue     260,002       380,296       370,526       328,050       225,240  
Cost of sales:
                                            
Equipment     115,645       178,599       188,055       165,499       111,103  
Expendable Tools     27,409       28,474       27,035       28,758       25,294  
Total cost of sales(1)     143,054       207,073       215,090       194,257       136,397  
Operating expenses:
                                            
Equipment     70,628       89,684       113,444       122,302       135,465  
Expendable Tools     22,578       23,316       24,480       26,971       24,193  
Impairment of goodwill                             2,709  
U.S. pension plan termination                       9,152        
Gain on sale of assets     (1,690 )      (4,544 )                   
Total operating expenses(1)     91,516       108,456       137,924       158,425       162,367  
Segment income (loss) from operations:
                                            
Equipment including U.S. pension plan termination of $9,152 in 2008     15,335       51,505       15,219       (25,934 )      (78,741)  
Expendable Tools     8,407       8,718       2,293       1,302       5,217  
Gain on sale of assets     1,690       4,544                    
Interest income (expense), net     (1,578 )      795       3,990       1,233       (1,495)  
Gain on extinguishment of debt           4,040       2,802       170       3,965  
Income (loss) from continuing operations before income taxes     23,854       69,602       24,304       (23,229 )      (71,054)  
Provision (benefit) for income taxes from continuing operations(2)     1,468       8,068       5,448       (3,610 )      (13,029)  
Income (loss) from continuing operations     22,386       61,534       18,856       (19,619 )      (58,025)  
Income (loss) from discontinued operations, net of tax(2)(3)     (126,468 )      (9,364 )      18,874       23,441       22,011  
Net income (loss)   $ (104,082 )    $ 52,170     $ 37,730     $ 3,822     $ (36,014)  
Per Share Data:
                                            
Income (loss) per share from continuing operations(4)
                                            
Basic   $ 0.43     $ 1.12     $ 0.34     $ (0.37 )    $ (0.93)  
Diluted   $ 0.36     $ 0.91     $ 0.29     $ (0.37 )    $ (0.93)  
Income (loss) per share from discontinued operations, net of tax:(4)
                                            
Basic   $ (2.45 )    $ (0.17 )    $ 0.33     $ 0.44     $ 0.35  
Diluted   $ (1.87 )    $ (0.14 )    $ 0.28     $ 0.44     $ 0.35  
Net income (loss) per share:(4)
                                            
Basic   $ (2.02 )    $ 0.95     $ 0.67     $ 0.07     $ (0.58)  
Diluted   $ (1.51 )    $ 0.78     $ 0.57     $ 0.07     $ (0.58)  
Weighted average shares outstanding:(4)
                                            
Basic     51,619       55,089       56,221       53,449       62,188  
Diluted     67,662       68,881       68,274       53,449       62,188  
Balance Sheet Data:
                                            
Cash, cash equivalents, investments and restricted cash   $ 95,369     $ 157,283     $ 169,910     $ 186,081     $ 144,841  
Working capital excluding discontinued operations     105,764       156,237       219,755       165,543       172,401  
Total assets excluding discontinued operations     241,134       261,109       384,713       336,270       413,076  
Long-term debt     270,000       195,000       251,412       175,000       110,000  
Shareholders’ equity (deficit)     (31,748 )      79,306       83,255       102,467       153,461  

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(1) During fiscal 2005, we recorded the following charges as operating expenses in continuing operations: severance charges of $0.9 million; China start-up costs of $1.2 million; and inventory write-downs of $1.0 million. We also recorded a gain on the sale of assets of $1.7 million within fiscal 2005 operating expenses.

During fiscal 2006, we recorded the following charges in continuing operations: $3.5 million in cost of sales and $0.8 million in operating expenses for the cumulative adjustment to correct immaterial errors in the consolidated financial statements; $8.4 million in operating expenses for incentive compensation and a gain on the sale of assets of $4.5 million in operating expenses.

During fiscal 2007, 2008 and 2009, we recorded $4.4 million, $2.2 million and $2.7 million, respectively, in operating expense for incentive compensation.

In addition, during fiscal 2009, we recorded $7.4 million in operating expense for severance.

(2) The following are the most significant factors which affect our provision for income taxes: implementation of our international restructuring plan in fiscal 2006, 2007 and 2008; volatility in our earnings each fiscal year and variation in earnings among various tax jurisdictions in which we operate; changes in assumptions regarding repatriation of earnings; and our provision for various tax exposure items.
(3) Reflects the operations of the Company’s Test business (sold March 2006) and Wire business (sold fiscal 2009).
(4) For fiscal 2005, 2006 and 2007 the exercise of dilutive stock options and expected vesting of performance-based restricted stock (fiscal 2007 only) and conversion of the convertible subordinated notes were assumed and $1.7 million, $1.4 million and $1.3 million, respectively, of after-tax interest expense related to our convertible subordinated notes was added to the Company’s net income to determine diluted earnings per share. Due to the Company’s net loss from continuing operations for fiscal 2008 and 2009, potentially dilutive shares were not assumed since the effect would have been anti-dilutive.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 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, statements that relate to our future revenue, product development, demand forecasts, competitiveness, operating expenses, cash flows, profitability, gross margins, and benefits expected 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 this Annual Report on Form 10-K for the year ended October 3, 2009 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.

Introduction

Unless otherwise indicated, amounts provided throughout this Form 10-K relate to continuing operations only and accordingly do not include amounts attributable to our Wire business, which we sold on September 29, 2008. In fiscal 2009, our Packaging Materials segment was renamed Expendable Tools.

Kulicke & Soffa Industries, Inc. (the “Company” or “K&S”) designs, manufactures and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits, high and low powered discrete devices, LEDs, and power modules. We also service, maintain, repair and upgrade our equipment. Our customers primarily consist of semiconductor device manufacturers, their subcontract assembly suppliers, 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 lowest cost supplier 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 operations, moving manufacturing to Asia, moving our supply chain to lower cost suppliers and designing higher performing, lower cost equipment. Cost reduction efforts are an important part of our normal ongoing operations, and are expected to generate savings without compromising overall product quality and service levels.

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On September 29, 2008, we completed the sale of our Wire business for net proceeds of $149.9 million to W.C. Heraeus GmbH (“Heraeus”). The financial results of the Wire business have been included in discontinued operations in the consolidated financial statements for all periods presented.

On October 3, 2008, we completed the acquisition of substantially all of the assets and assumption of certain liabilities of Orthodyne Electronics Corporation (“Orthodyne”). In connection with the Orthodyne acquisition, we issued 7.1 million common shares with an estimated value on that date of $46.2 million and paid $87.0 million in cash including capitalized acquisition costs. Orthodyne is the leading supplier of both heavy wire wedge bonders and heavy wire wedges (the expendable tools used in wedge bonding) for the power semiconductor and hybrid module markets.

Business Environment

The semiconductor business environment is highly volatile, driven by both internal, cyclical, dynamics as well as 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 (“IDM”) and their subcontractors, periodically aggressively invest in latest generation capital equipment. This buying pattern often leads to periods of excess supply and reduced capital spending — the so called 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 reflects the industry’s cyclical dynamics and is therefore also highly volatile. The financial performance of this segment is affected, both positively and negatively, by semiconductor manufacturers’ expectations of capacity requirements and their plans for upgrading their production capabilities. Volatility of this segment is further influenced by the relative mix of IDM and subcontract customers in any period, since changes in the mix of sales to IDMs and subcontractors can affect our products’ average selling prices due to differences in volume purchases and machine configurations required by each type of customer.

Our Expendable Tools segment is less volatile than our Equipment Segment, since sales of expendable tools are directly tied to semiconductor unit consumption rather than their expected growth rate.

Though the semiconductor industry’s cycle can be independent of the general economy, global economic conditions may have direct impact on demand for semiconductor units and ultimately demand for semiconductor capital equipment and expendable tools. In the first half of fiscal 2009, conditions in the global economy deteriorated dramatically, leading to a sharp contraction in consumer and business electronics spending, which in turn reduced demand throughout the semiconductor supply chain. Business conditions began to improve near the end of our second fiscal quarter and continued to improve through the remainder of fiscal 2009. Customer orders have remained strong during the first quarter of fiscal 2010. However, our visibility into future demand is generally limited and forecasting is difficult. There can be no assurances regarding levels of demand for our products, and we believe historic industry-wide volatility will persist.

To mitigate possible negative effects of this industry-wide volatility on our financial position, we are de-leveraging and have strengthened our balance sheet. During fiscal 2009, we reduced our debt by $88.4 million to $159.0 million. We also completed a public equity offering of 8.0 million common shares which raised $38.7 million of net proceeds. We ended fiscal 2009 with cash and cash equivalents totaling $144.8 million. We believe a strong cash position allows us to continue making longer term investments in product development and in cost reduction activities throughout the semiconductor cycle.

Technology Leadership

We compete, largely by offering our customers the most advanced equipment and expendable tools available for both the wire and die bonding process. Our equipment is typically the fastest and has the highest levels of process control available in their respective categories. Our expendable tools are designed to optimize the

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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 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.

The rise of copper wire bonding technology as an alternative to gold wire is an example of our technology leadership and reflects the benefits of collaboration. Over the last several years, we led an informal working-group of customers and materials suppliers tasked with solving the technical challenges involved in substituting copper for gold in the ball bonding process. Working with customers and suppliers of equipment used upstream and downstream of the wire bonding process, we developed a robust, high-yielding production process that makes copper wire bonding commercially viable.

Driven by the rising cost of gold, conversion to copper wire bonding for a wide range of packaging applications has become a major focus of many semiconductor manufacturers. We believe this conversion process has the potential to drive a significant wire bonder replacement cycle, since we believe a significant portion of the industry’s installed base is not suitable for copper bonding. Through our research and development efforts, we are well positioned with both leading products and the process expertise to capitalize on this potential replacement cycle.

We also maintain the technology leadership of our equipment by optimizing our products to serve high growth niches. For example, over the last two years we have developed extensions of our main ball bonding platforms to address opportunities in LED assembly. Industry analysts have estimated the annual growth rate for total shipments of LED devices to be approximately 15% annually through 2013, driven by the adoption of LED backlights for flat-screen displays as well as other LED applications in general lighting. In fiscal 2009, we launched two products optimized for these applications. These products represent our first product offerings specifically aimed at this high growth market, and since their introduction we have captured significant market share.

Our focus on technology leadership also extends to die bonding. In fiscal 2009, we launched a new die bonding platform, our state of the art iStackPSTM die bonder for advanced stacked die applications. iStack offers best-in-class throughput and accuracy, and we believe the product is positioned to lead the market for its targeted applications.

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 one of the reasons for our technology leadership position.

Products and Services

We supply a range of bonding equipment and expendable tools. The following table reflects net revenue by business segment for fiscal 2007, 2008 and 2009:

           
  Fiscal
     2007   2008   2009
(dollar amounts in thousands)   Net Revenue   % of Total
Revenue
  Net Revenue   % of Total
Revenue
  Net Revenue   % of Total
Revenue
Equipment   $ 316,718       85.5 %    $ 271,019       82.6 %    $ 170,536       75.7 % 
Expendable Tools     53,808       14.5 %      57,031       17.4 %      54,704       24.3 % 
     $ 370,526       100.0 %    $ 328,050       100.0 %    $ 225,240       100.0 % 

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Equipment

We manufacture and sell a line of ball bonders, heavy wire wedge bonders and die bonders that are sold to semiconductor device manufacturers, their subcontract assembly suppliers, 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. 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. Die bonders are used to attach a die to the substrate or lead frame which will house the semiconductor device. We believe our equipment offers competitive advantages by providing customers with high productivity/throughput and superior package quality/process control.

Our principal Equipment segment products include:

   
Business Unit   Product Name   Served Market
Ball bonders   IConn-Power Series   Advanced, copper bonding and ultra fine pitch applications
     ConnX-Power Series   Cost performance, low pin count and copper applications
     ConnX-LED Power Series   Horizontal formatted LED applications
     ConnX-VLED Power Series   Vertical LED applications
  AT Premier   Stud bumping applications
            
Wedge bonders   3600 Plus   Power hybrid and automotive modules
     7200 Plus   Power semiconductors
  7600 Series   Smaller power packages
            
Die bonders   iStack Power Series   Advanced stack die and ball grid array applications

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. Launched in 2008, the Power Series initially consisted of the IConnPS high-performance and ConnXPS cost-performance ball bonders.

In fiscal 2009, we launched two extensions of our ConnXPSTM automatic ball bonder aimed specifically at LED applications — ConnX-LEDPSTM and ConnX-VLEDPSTM. Traditionally, we had not targeted the LED market with our product portfolio but through the technology leadership of ConnXPSTM and its variants, we now offer excellent cost performance bonding solutions in an area of the market where some of our competitors were once dominant.

Our Power Series products have advanced industry performance standards. Our ball bonders are capable of performing very fine pitch bonding, as well as creating the sophisticated wire loop shapes needed in the assembly of advanced semiconductor packages. Our ball bonders can also be converted for use to copper applications through kits we sell separately, a capability that is increasingly important as bonding with copper continues to grow as an alternative to gold.

Heavy Wire Wedge Bonders

Through the acquisition of Orthodyne, we are now the leaders in the design and manufacture of heavy wire wedge bonders for the power semiconductor and automotive power module markets. Wedge bonders 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. Wedge bonders also attach large-diameter wire or ribbon to semiconductors when high electrical current requirements or reliability constraints do not allow the use of ball bonds.

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Our portfolio of wedge bonding products includes:

The 3600 Plus wedge bonders:  high speed, high accuracy wire bonders designed for power modules, automotive packages and other large wire multi-chip module applications.
The 7200 Plus wedge bonders:  dual head wedge bonder designed specifically for power semiconductor applications.
The 7600 series wedge bonder:  first introduced in March of 2009, the 7600 is targeted primarily at the market for small power packages and will also extend our product portfolio to include reel-to-reel type applications.

We have also developed an advanced process for bonding power packages that utilizes ribbon rather than a round wire. Sold under the trade name PowerRibbon®, the process offers performance advantages over traditional round wire and is gaining acceptance in the market for power packages and automotive high current applications. This process is available on new wedge bonders or as a retrofit kit for some existing wedge bonders. We expect that our ribbon bonding capability will open new packaging opportunities for our customers.

Die Bonders

We entered the die bonder market through the fiscal 2007 acquisition of Alphasem. Our die bonder strategy included continuing to sell the existing Alphasem products while developing a family of next-generation die bonders. The first of those new machines, the iStack, was launched in March of 2009. We are currently putting iStack qualification machines in customers’ factories, and expect first purchase orders in the March 2010 fiscal quarter.

iStack is targeted at stacked die and high end BGA applications. In these applications, we expect up to 30% to 50% productivity increases compared to current generation machines. In addition, iStack has demonstrated superior accuracy and process control. We believe iStack represents a significant opportunity for us to expand our die bonder business.

During fiscal 2009 we announced the end of life of our older Alphasem die bonder products.

Other Equipment Products and Services

We also sell other equipment products including manual wire bonders and stud bump bonders.

We also offer spare parts, equipment repair, training services, and upgrades for our equipment through our Support Services business unit.

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, 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.
Bonding wedges:  expendable tools used in 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 molded in a matrix configuration into individual units.

Critical Accounting Policies

The preparation of consolidated financial statements requires us to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. On an on-going basis, we evaluate

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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 unremitted foreign subsidiary earnings, equity-based compensation expense, resizing, and warranties. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable. As a result, we make judgments regarding the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued revised accounting guidance which establishes the FASB Accounting Standards Codification (“ASC”) as the authoritative source for accounting principles of non-governmental entities to conform to United States Generally Accepted Accounting Principles (“GAAP”) used in the preparation of financial statements. The ASC is not intended to change existing guidance for public companies. The new guidance is effective for interim and annual reporting periods ending after September 15, 2009.

We believe the following critical accounting policies, which have been reviewed with the Audit Committee, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

In accordance with ASC No. 605, Revenue Recognition, we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, the collectibility is reasonably assured, and we have completed the equipment installation obligations and received customer acceptance, when applicable, or is otherwise released from its installation or customer acceptance obligations. In the event 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. Our standard shipping terms are Ex Works (our factory), with title transferring to our customer at our loading dock or upon embarkation. We have 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. We do not provide price protection to our customers.

Our business is subject to contingencies related to customer orders as follows:

Right of Return:  A large portion of our revenue comes from the sale of machines used in the semiconductor assembly process. Other product sales relate to consumable products, which are sold in high-volume quantities, and are generally maintained at low stock levels at our customer’s facility. Customer returns have historically represented a very small percentage of customer sales on an annual basis. Our policy is to provide an allowance for customer returns based upon our historical experience and management assumptions.
Warranties:  Our equipment is generally shipped with a one-year warranty against manufacturer’s defects. We recognize a liability for estimated warranty expense when revenue for the related product is recognized. The estimated liability for warranty expense is based upon historical experience and our estimates of future expenses.
Conditions of Acceptance:  Sales of our consumable products generally do not have customer acceptance terms. In certain cases, sales of our equipment have customer acceptance clauses which may require the equipment to perform in accordance with customer specifications or when installed at the customer’s facility. In such cases, if the terms of acceptance are satisfied at our facility prior to shipment, the revenue for the equipment will be recognized upon shipment. If the terms of acceptance are satisfied at our customers’ facilities, the revenue for the equipment will be not be recognized until acceptance, which typically consists of installation and testing, is received from the customer.

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Shipping and handling costs billed to customers are recognized in net revenue. Shipping and handling costs are included in cost of sales.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from our customers’ failure to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We are also subject to concentrations of customers and sales to a few geographic locations, which could also impact the collectbility of certain receivables. If global economic conditions deteriorate or political conditions were to change in some of the countries where we do business, it could have a significant impact on the results of our operations, and our ability to realize the full value of our accounts receivable.

Inventories

Inventories are stated at the lower of cost (on a first-in first-out basis) or market value. We generally provide reserves for obsolete inventory and for inventory considered to be in excess of demand. In addition, we generally record as accrued expense inventory purchase commitments in excess of demand. Demand is generally defined as eighteen months forecasted consumption for non-Wedge bonder equipment, twenty-four months consumption for Wedge bonder equipment and all spare parts, and twelve months consumption for expendable tools. The forecasted demand is based upon internal projections, historical sales volumes, customer order activity and a review of consumable inventory levels at customers’ facilities. We communicate forecasts of our future demand to our suppliers and adjust commitments to those suppliers accordingly. If required, we reserve the difference between the carrying value of our inventory and the lower of cost or market value, based upon assumptions about future demand, market conditions and the next cyclical market upturn. If actual market conditions are less favorable than projections, additional inventory reserves may be required.

Valuation of Long-Lived Assets

Our long-lived assets are primarily property, plant and equipment, intangible assets and goodwill. In accordance with the provisions of ASC No. 350, Intangibles, Goodwill and Other (“ASC 350”) goodwill is not amortized. ASC 350 also requires that, at least annually, an impairment test be performed to support the carrying value of goodwill. In addition, whenever events occur that would more likely than not reduce the fair value of reporting unit below its carrying amount, a goodwill impairment test will be performed. The fair value of our goodwill is based upon estimates of future cash flows and other factors.

In accordance with ASC No. 360, Property, Plant & Equipment (“ASC 360”), our 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 if 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.

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Income Taxes

Deferred income taxes are determined using the liability method in accordance with ASC No. 740, Income Taxes. We record a valuation allowance to reduce our deferred tax assets to the amount we expect is more likely than not to be realized. While we have considered future taxable income and our ongoing tax planning strategies in assessing the need for the valuation allowance, if we were to determine that we would be able to realize a deferred tax asset 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 we determine we would not be able to realize all or part of a net deferred tax asset in the future, an adjustment to the deferred tax asset would decrease income in the period such determination was made.

Effective September 30, 2007, we adopted ASC No. 740 Topic 10, Income Taxes, General (“ASC 740.10”). ASC 740.10 prescribes, among other things, a recognition threshold and measurement attributes for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return. We utilize 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

We account 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 equity-based compensation in net income (loss). The fair value of our Company’s stock option awards are estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions and elections including expected stock price volatility and the estimated life of each award. In addition, the calculation of equity-based compensation costs requires us to 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 we elected to use the straight-line method for awards granted after the adoption of ASC 718.

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RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 to the consolidated financial statements in Item 8 for a description of certain recent accounting pronouncements including the expected dates of adoption and effects on our consolidated results of operations and financial condition.

Results of Operations for fiscal 2008 and 2009

Bookings and Backlog

A booking is recorded when a customer order is reviewed and it is determined that all specifications can be met, production (or service) can be scheduled, a delivery date can be set, and the customer meets our credit requirements. Our backlog consists of customer orders that are scheduled for shipment within the next 12 months. A majority of our orders are subject to cancellation or deferral by our customers with limited or no penalties. Also, customer demand for our products can vary dramatically without prior notice. Because of the volatility of customer demand, possibility of customer changes in delivery schedules or cancellations and potential delays in product shipments, our backlog as of any particular date may not be indicative of net revenue for any succeeding period.

The following table reflects our bookings in fiscal 2008 and 2009:

   
  Fiscal
(in thousands)   2008   2009
Bookings   $ 291,994     $ 208,234  

The following table reflects our backlog as of September 27, 2008 and October 3, 2009:

   
  As of
(in thousands)   September 27,
2008
  October 3,
2009
Backlog   $ 49,508     $ 42,181  

  

Net Revenue

Approximately 96.8%, 95.6% and 97.0% of our net revenue for fiscal 2007, 2008 and 2009, respectively, was for shipments to customer locations outside of the United States, primarily in the Asia/Pacific region, and we expect sales outside of the United States to continue to represent a substantial majority of our future revenue.

The following table reflects net revenue by business segment for fiscal 2008 and 2009:

       
  Fiscal
(dollar amounts in thousands)   2008   2009   $ Change   % Change
Equipment   $ 271,019     $ 170,536     $ (100,483 )      -37.1 % 
Expendable Tools     57,031       54,704       (2,327 )      -4.1 % 
Total   $ 328,050     $ 225,240     $ (102,810 )      -31.3 % 

  

Equipment

The following table reflects the components of Equipment net revenue change from fiscal 2008 to 2009:

       
  Fiscal 2008 vs. 2009
(in thousands)   Price   Volume   Orthodyne   $ Change
Equipment   $ (5,901 )    $ (120,824 )    $ 26,242     $ (100,483 ) 

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The decrease in net revenue from fiscal 2008 to fiscal year 2009 was mainly due to a 45.8% decrease in volume for Ball Bonders, 52.7% decrease in volume for Die Bonders and 31.8% decrease in Support Services. The fiscal 2009 decrease in volume was mainly due to a decline in global demand for assembly equipment during the first half of fiscal 2009 driven by the global economic downturn. As overall consumer demand for electronic equipment declined, so did factory utilization of our subcontractor and IDM customers. The overall volume decrease was partially offset by net revenue from our Wedge Bonder Equipment business acquired during fiscal year 2009.

Expendable Tools

The following table reflects the components of Expendable Tools net revenue variance from fiscal 2008 to 2009:

       
  Fiscal 2008 vs. 2009
(in thousands)   Price   Volume   Orthodyne   $ Change
Expendable Tools   $ 2     $ (17,764 )    $ 15,437     $ (2,327 ) 

The net decrease in Expendable Tools revenue from fiscal 2008 to 2009 was due to volume decreases in both our Tools and Blades businesses. Tools volumes decreased 31.0%, while Blades volumes decreased 30.6%. Our Expendable Tools products are consumables used for the connections of IC units; therefore, as overall consumer demand for electronic equipment declined in the first half of fiscal 2009 due to the economic downturn, the demand for integrated circuit (“IC”) units also declined. As a result, volume declined for our Expendable Tools segment. Offsetting this volume decrease was the net revenue from our newly acquired Wedge bonder Tools business.

Gross Profit

The following table reflects gross profit by business segment for fiscal 2008 and 2009:

       
  Fiscal
(dollar amounts in thousands)   2008   2009   $ Change   % Change
Equipment   $ 105,520     $ 59,433     $ (46,087 )      -43.7 % 
Expendable Tools     28,273       29,410       1,137       4.0 % 
Total   $ 133,793     $ 88,843     $ (44,950 )      -33.6 % 

The following table reflects gross profit as a percentage of net revenue by business segment for fiscal 2008 and 2009:

     
  Fiscal
     2008   2009   Basis Point
Change
Equipment     38.9 %      34.9 %      (408 ) 
Expendable Tools     49.6 %      53.8 %      419  
Total     40.8 %      39.4 %      (134 ) 

  

Equipment

The following table reflects the components of Equipment gross profit change from fiscal 2008 to 2009:

         
  Fiscal 2008 vs. 2009
(in thousands)   Price   Cost   Volume/Mix   Orthodyne   $ Change
Equipment   $ (5,901 )    $ 1,201     $ (49,298 )    $ 7,911     $ (46,087 ) 

The decrease in gross profit from fiscal 2008 to 2009 was mainly due to decrease in volume for Ball Bonders and Die Bonders as well as decline in Support Services. The fiscal 2009 decrease in volume was mainly due to a decline in global demand for assembly equipment during the first half of fiscal 2009 driven by the global economic downturn. As overall consumer demand for electronic equipment declined, so did the factory

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utilization of our subcontractor and IDM customers. The decrease in gross profit was partially offset by gross profit from our Wedge Bonder Equipment business acquired during fiscal 2009. The improvement in cost is primarily due to cost reduction efforts related to material purchases.

Expendable Tools

The following table reflects the components of Expendable Tools gross profit change from fiscal 2008 to 2009:

         
  Fiscal 2008 vs. 2009
(in thousands)   Price   Cost   Volume/Mix   Orthodyne   $ Change
Expendable Tools   $ 2     $ (970 )    $ (8,818 )    $ 10,923     $ 1,137  

The net increase in Expendable Tools gross profit from fiscal 2008 to 2009 was primarily due to the newly acquired Wedge Bonder Tools business, offset by volume decreases in both our Tools and Blades businesses. The decrease in both Tools and Blades volume in fiscal 2009 was due to the economic downturn during the first half of fiscal 2009, which decreased demand for IC units. The increase in cost was primarily due to fixed manufacturing costs not being fully absorbed by the lower volumes during fiscal 2009.

  

Operating Expenses

The following table reflects operating expenses for fiscal 2008 and 2009:

       
  Fiscal
(dollar amounts in thousands)   2008   2009   $ Change   % Change
Selling, general and administrative   $ 89,356     $ 106,175     $ 16,819       18.8 % 
Research and development     59,917       53,483       (6,434 )      -10.7 % 
Impairment of goodwill           2,709       2,709        
U.S. pension plan termination     9,152             (9,152 )       
Total   $ 158,425     $ 162,367     $ 3,942       2.5 % 

  

The following table reflects operating expenses as a percentage of net revenue for fiscal 2008 and 2009:

     
  Fiscal
     2008   2009   Basis Point Change
Selling, general and administrative     27.2 %      47.1 %      1,990  
Research and development     18.3 %      23.7 %      548  
Impairment of goodwill     0.0 %      1.2 %      120  
U.S. pension plan termination     2.8 %      0.0 %      (279 ) 
Total     48.3 %      72.0 %      2,379  

  

Selling, general and administrative (“SG&A”)

The SG&A increase of $16.8 million during fiscal 2009 as compared to fiscal 2008 was primarily due to:

$29.8 million of expense related to our Wedge bonder business acquired during fiscal 2009 of which $10.9 million related to amortization of intangible assets and $1.9 million was for severance;
$4.0 million of severance costs related to our fiscal 2009 plan to reduce our global workforce;
$2.7 million expense related to contractual commitments for former Test facilities;
$1.8 million of legal expense; and

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$1.7 million of factory transition expense related to moving additional production to Singapore, China and Malaysia.

These increases in SG&A were partially offset by:

$20.3 million of overall cost reductions due mainly to our fiscal 2009 global workforce reduction;
$2.3 million of lower foreign currency exchange losses;
$1.4 million curtailment of our Switzerland pension plan in fiscal 2009; and
$1.3 million lower incentive compensation and equity-based compensation expense.

Research and development (“R&D”)

The $6.4 million decrease of R&D expense during fiscal 2009 compared to 2008 was mostly attributable to:

$15.6 million of lower Equipment segment costs due to reduced headcount, and
$1.6 million less prototype spending with the releases of our latest ball bonder and die bonder product platforms.

These decreases were partially offset by $10.8 million of R&D costs related to our Wedge Bonder business acquired during fiscal 2009.

Impairment of goodwill

Due to the earlier than anticipated end of product life cycle for our EasyLine and SwissLine die bonders, during fiscal 2009, we recorded a non-cash goodwill impairment charge of $2.7 million which reduced the value of the die bonder goodwill to zero.

U.S. pension plan termination

Fiscal 2008 operating expenses included a one-time, non-cash expense of $9.2 million related to the termination of our U.S. pension plan.

Interest Income and Expense

The following table reflects interest income and interest expense for fiscal 2008 and 2009:

       
  Fiscal
(dollar amounts in thousands)   2008   2009   $ Change   % Change
Interest income   $ 4,732     $ 1,106     $ (3,626 )      -76.6 % 
Interest expense     (3,499 )      (2,601 )      898       -25.7 % 

The decline in interest income during fiscal 2009 was due to lower rates of return on invested cash balances and overall lower average cash balances. The decrease in interest expense during fiscal 2009 was attributable to the retirement of our 0.5% Convertible Subordinated Notes and repurchase of $16.0 million (face value) of our 1.0% Convertible Subordinated Notes.

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Gain on Extinguishment of Debt

The following table reflects purchases of our Convertible Subordinated Notes during fiscal 2008 and 2009:

   
  Fiscal
(in thousands)   2008   2009
0.5% Convertible Subordinated Notes(1):
                 
Face value purchased   $ 4,000     $ 43,050  
Net cash     3,815       42,839  
Deferred financing costs     15       18  
Recognized gain, net of deferred financing costs     170       193  
1.0% Convertible Subordinated Notes:(2)
                 
Face value purchased   $     $ 16,036  
Net cash           12,158  
Deferred financing costs           106  
Recognized gain, net of deferred financing costs           3,772  
Gain on extinguishment of debt   $ 170     $ 3,965  

(1) Fiscal 2009 repurchase transactions occurred prior to redemption on November 30, 2008.
(2) Activity during fiscal 2009 reflects repurchases pursuant to a tender offer.

Income (Loss) from Continuing Operations

The following table reflects income (loss) from continuing operations by business segment for fiscal 2008 and 2009:

       
  Fiscal
(dollar amounts in thousands)   2008   2009   $ Change   % Change
Equipment   $ (25,934 )    $ (78,741 )    $ (52,807 )      203.6 % 
Expendable Tools     1,302       5,217       3,915       300.7 % 
Total   $ (24,632 )    $ (73,524 )    $ (48,892 )      198.5 % 

Equipment

The higher net loss from continuing operations from fiscal 2008 to 2009 was mainly due to decreases in volume for Ball Bonders and Die Bonders as well as decline in Support Services. In addition, higher operating expenses for Wedge bonder amortization of intangibles and severance increased the Equipment net loss.

Expendable Tools

The net increase in Expendable Tools net income from fiscal 2008 to 2009 was primarily due to the newly acquired Wedge bonder Tools business partially offset by our Tools and Blades businesses. In addition, lower operating expenses due to overall cost reduction measures increased our Expendable Tools net income.

Provision (Benefit) for Income Taxes for fiscal 2009 and 2008

Our provision for income taxes from continuing operations for fiscal 2009 reflects an income tax benefit of $13.0 million which primarily consists of $12.4 million of net income tax benefit for the settlement of certain foreign income tax exposures and $0.6 million for income tax expense related to foreign operations and $0.4 million for the reduction in deferred tax liabilities related to potential repatriation of foreign earnings. These amounts are partially offset by $0.2 million for state tax expense, $0.1 million for foreign withholding tax expense and $0.1 million of other U.S. current and deferred taxes.

Our income tax benefit in fiscal 2008 reflects income tax expense on foreign income tax exposures, foreign withholding taxes, repatriation of foreign earnings, federal alternative minimum taxes and state taxes offset by income tax benefits related to the termination of the pension plan and income tax benefits on loses in foreign jurisdictions.

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Our effective tax rate of 18.3% for fiscal 2009 is lower than the U.S. statutory rate of 35% primarily due to settlements of certain foreign income tax exposures, losses in foreign jurisdictions with tax holidays, permanent items, state taxes, and increases in the valuation allowance. We continue to maintain a valuation allowance against certain deferred tax assets which, based on an analysis of positive and negative evidence are more likely than not to not be realized. This evidence includes analysis of past results, uncertainty with respect to the impact of restructuring of certain international operations, projections of future results and the significant historic volatility of our Equipment segment.

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.

Income from Discontinued Operations, net of tax

We committed to a plan of disposal for our Wire business in fiscal 2008, and on September 29, 2008, completed the sale of certain assets and liabilities associated with the Wire business. Included in discontinued operations for fiscal 2009 are net proceeds of $149.9 million and a net gain of $22.0 million, net of tax, related to the Wire sale.

The following table reflects operating results of the Wire business discontinued operations for fiscal 2008 and 2009:

   
  Fiscal
(in thousands)   2008   2009
Net revenue   $ 423,971     $  
Income (loss) before tax   $ 23,690     $ (319 ) 
Gain on sale of Wire business before tax           23,026  
Income from discontinued operations before tax     23,690       22,707  
Income tax expense     (249 )      (696 ) 
Income from discontinued operations, net of tax   $ 23,441     $ 22,011  

  

Results of Operations for fiscal 2007 and 2008

Bookings and Backlog

The following table reflects our bookings in fiscal 2007 and 2008:

   
  Fiscal
(in thousands)   2007   2008
Bookings   $ 412,199     $ 291,994  

The following table reflects our backlog as of September 29, 2007 and September 27, 2008:

   
  As of
(in thousands)   September 29,
2007
  September 27,
2008
Backlog   $ 85,563     $ 49,508  

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Net Revenue

The following table reflects net revenues by business segment for fiscal 2007 and 2008:

       
  Fiscal
(dollar amounts in thousands)   2007   2008   $ Change   % Change
Equipment   $ 316,718     $ 271,019     $ (45,699 )      -14.4 % 
Expendable Tools     53,808       57,031       3,223       6.0 % 
Total   $ 370,526     $ 328,050     $ (42,476 )      -11.5 % 

Approximately 96.8% and 95.6% of our net revenue for fiscal 2007 and 2008, respectively, was from shipments to customer locations outside of the United States, primarily in the Asia/Pacific region.

  

Equipment

The following table reflects the components of Equipment net revenue change from fiscal 2007 to 2008:

     
  Fiscal 2007 vs. 2008
(in thousands)   Price   Volume   $ Change
Equipment   $ (359 )    $ (45,340 )    $ (45,699 ) 

The decrease in net revenue from fiscal year 2007 to fiscal 2008 was mainly due to a 15.8% decrease in volume for IC bonders. The fiscal 2008 decrease in volume was mainly due to a decline in global demand for assembly equipment due to the global economic downturn. Fiscal 2007 was stronger due to increased demand for capacity for the memory market. Additionally, the capacity utilization rate of our customers was lower in the first half of fiscal 2008 than it was for any quarter in fiscal 2007. The small decrease in price is due to our IC ball bonders selling price falling by 0.9% as a result of the mix of sales to our subcontractors and IDMs in fiscal 2008 compared to fiscal 2007. Our selling prices to subcontractor customers are lower due to larger volume purchases. The lower IC ball bonder prices were partially offset by the higher price for our latest generation IC ball bonder machine introduced in March 2008.

Expendable Tools

The following table reflects the components of Expendable Tools net revenue variance from fiscal 2007 to 2008:

     
  Fiscal 2007 vs. 2008
(in thousands)   Price   Volume   $ Change
Expendable Tools   $ (3,003 )    $ 6,226     $ 3,223  

The net increase in Expendable Tools revenue from fiscal 2007 to 2008 was primarily due to volume increases in both our Tools and Blades businesses. Tools volumes increased 11.5%. The increase in both Tools and Blades volume was mainly due to an 11.9% increase in IC unit demand. From fiscal 2007 to fiscal 2008, Tools average selling price decreased by 6.3% due to normal price erosion as well as change in customer mix. This was slightly offset by a 3.4% increase in Blades average selling prices due to a change in product mix.

Gross Profit

The following table reflects gross profit by business segment for fiscal 2007 and 2008:

       
  Fiscal
(dollar amounts in thousands)   2007   2008   $ Change   % Change
Equipment   $ 128,663     $ 105,520     $ (23,143 )      -18.0 % 
Expendable Tools     26,773       28,273       1,500       5.6 % 
Total   $ 155,436     $ 133,793     $ (21,643 )      -13.9 % 

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The following table reflects gross profit as a percentage of net revenue by business segment for fiscal 2007 and 2008:

     
  Fiscal
     2007   2008   Basis Point
Change
Equipment     40.6 %      38.9 %      (170 ) 
Expendable Tools     49.8 %      49.6 %      (20 ) 
Total     42.0 %      40.8 %      (120 ) 

Equipment

The following table reflects the components of Equipment gross profit variance from fiscal 2007 to 2008:

       
  Fiscal 2007 vs. 2008
(in thousands)   Price   Cost   Volume   $ Change
Equipment   $ (359 )    $ (3,163 )    $ (19,621 )    $ (23,143 ) 

The decrease in gross profit from fiscal 2007 to fiscal 2008 was primarily due to decreased industry-wide demand for back-end semiconductor equipment as IC ball bonder volumes were 15.8% lower during fiscal 2008. The fiscal 2008 decrease in volume is mainly due to a decline in global demand for assembly equipment due to the global economic downturn. Fiscal 2007 was stronger due to increased demand for the memory market. Also, the capacity utilization rate of our customers was lower in the first half of fiscal 2008 than it was for any quarter in fiscal 2007. The increase in cost is primarily due to absorption costs from lower volumes in our IC ball bonders and IC die bonders with inventory excess and obsolete expense related to our specialty ball bonders.

Expendable Tools

The following table reflects the components of Expendable Tools gross profit change from fiscal 2007 to 2008:

       
  Fiscal 2007 vs. 2008
(in thousands)   Price   Cost   Volume   $ Change
Expendable Tools   $ (3,003 )    $ 1,404     $ 3,099     $ 1,500  

The net increase in Expendable Tools revenue from fiscal 2007 to 2008 was primarily due to volume increases in both our Tools and Blades businesses. Tools volumes increased 11.5%. The increase in both Tools and Blades volume was mainly due to an 11.9% increase in IC unit demand. From fiscal 2007 to fiscal 2008, Tools average selling price decreased by 6.3% due to normal price erosion as well as change in customer mix. This was slightly offset by a 3.4% increase in Blades average selling prices due to a change in product mix. The decrease in Tools costs were due to a higher mix of lower cost products. The decrease in Blades costs was due to in-house production of semi-finished products as well as manufacturing productivity improvements.

Operating Expenses

The following table reflects operating expenses for fiscal 2007 and 2008:

       
  Fiscal
(dollar amounts in thousands)   2007   2008   $ Change   % Change
Selling, general and administrative   $ 88,839     $ 89,356     $ 517       0.6 % 
Research and development     49,085       59,917       10,832       22.1 % 
U.S pension plan termination           9,152       9,152       0.0 % 
Total   $ 137,924     $ 158,425     $ 20,501       14.9 % 

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The following table reflects operating expenses as a percentage of net revenue for fiscal 2007 and 2008:

     
  Fiscal
     2007   2008   Basis Point Change
Selling, general and administrative     24.0 %      27.2 %      322  
Research and development     13.2 %      18.3 %      505  
U.S. pension plan termination     0.0 %      2.8 %      280  
Total     37.2 %      48.3 %      1,108  

Selling, general and administrative

The increase in SG&A expense of $0.5 million in fiscal 2008 compared to fiscal 2007 was due to an increase in foreign currency exchange expense of $1.6 million, additional marketing expense of $1.1 million and higher equipment selling, service and support cost of $0.7 million. These higher SG&A expenses were offset by lower incentive compensation costs of $2.2 million and lower die bonder integration cost of $0.8 million.

Research and development

R&D expense for fiscal 2008 increased $10.8 million compared to fiscal 2007. The increase was primarily due to $8.8 million of additional spending for our new die bonder platform and $1.8 million of costs to complete our recently released IConn and ConnX ball bonder products.

U.S. pension plan termination

Fiscal 2008 operating expenses included a one-time, non-cash expense of $9.2 million related to the termination of the U.S. pension plan.

Interest Income and Expense

The following table reflects interest income and interest expense for fiscal 2007 and 2008:

       
  Fiscal
(dollar amounts in thousands)   2007   2008   $ Change   % Change
Interest income   $ 6,866     $ 4,732     $ (2,134 )      -31.1 % 
Interest expense     (2,876 )      (3,499 )      (623 )      21.7 % 

Interest income during fiscal 2008 was lower than fiscal 2007 due to lower invested cash balances. Fiscal 2008 increase in interest expense of $0.6 million from fiscal 2007 was primarily due to in the issuance of our Convertible Subordinated Notes in fiscal 2007.

  

Gain on Extinguishment of Debt

The following table reflects purchases of our Convertible Subordinated Notes during fiscal 2007 and 2008:

   
  Fiscal
(in thousands)   2007   2008
0.5% Convertible Subordinated Notes:
                 
Face value purchased   $ 53,588     $ 4,000  
Net cash     50,433       3,815  
Deferred financing costs     353       15  
Recognized gain, net of deferred financing costs   $ 2,802     $ 170  

  

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Income (Loss) from Continuing Operations

The following table reflects income (loss) from continuing operations by business segment for fiscal 2007 and 2008:

       
  Fiscal
(dollar amounts in thousands)   2007   2008   $ Change   % Change
Equipment   $ 15,219     $ (25,934 )    $ (41,153 )      -270.4 % 
Expendable Tools     2,293       1,302       (991 )      -43.2 % 
Total   $ 17,512     $ (24,632 )    $ (42,144 )      -240.7 % 

  

Equipment

The main contributors to the fiscal 2008 increase in the loss from continuing operations for our Equipment segment were: $23.1 million lower gross profit due to decreased industry-wide demand for back-end semiconductor equipment as IC ball bonder volumes were 15.8% lower during fiscal 2008; a one-time, non-cash expense of $9.2 million related to the termination of the U.S. pension plan during fiscal 2008; higher fiscal 2008 R&D costs of $10.8 million primarily due to the development of our next generation IC die bonders and IC ball bonders; and, higher marketing, selling, service and support costs of $2.0 million, and; $1.9 million of lower incentive compensation costs.

  

Expendable Tools

Lower income from continuing operations for our Expendable Tools segment of $1.0 million during fiscal 2008 was primarily due to $2.2 million increase in foreign currency exchange losses offset by increased gross margin of $1.5 million due to volume increases in both our Tools and Blades businesses.

  

Provision for Income Taxes for fiscal 2008 and 2007

Our provision for income taxes from continuing operations for fiscal 2008 reflects an income tax benefit of $3.6 million which primarily consists of $2.2 million of income tax expense for additional foreign income tax exposures, $0.3 million for potential repatriation of foreign earnings, and $0.2 for foreign withholding taxes. These tax expense items were offset by tax benefits of $3.4 million for the termination of the pension plan and income tax benefits on losses in foreign jurisdictions of $2.9 million. Our tax expense in fiscal 2007 reflects income tax expense on foreign and domestic income tax exposures, foreign withholding taxes, repatriation of foreign earnings, federal alternative minimum taxes and state taxes.

Our effective tax rate of 15.5% for fiscal 2008 is lower than the U.S. statutory rate of 35.0% primarily due to losses in foreign jurisdictions with tax holidays, permanent items and state taxes offset in part by a release in the valuation allowance related to fiscal 2008. The reversal of the valuation allowance is limited to the deferred tax assets utilized in fiscal 2008, as we do not believe sufficient positive evidence exists with respect to our ability to generate sufficient future earnings to utilize these deferred tax assets. We continue to maintain a valuation allowance against our remaining deferred tax assets as we do not believe it is more likely than not that the remaining deferred tax assets will be realized due to the restructuring of international operations, projections of future earnings and the significant historic volatility of our Equipment segment, which will be the primary source for the U.S. in the future.

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.

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Income from Discontinued Operations, net of tax

The following table reflects operating results of the Wire business discontinued operations for fiscal 2007 and 2008:

   
  Fiscal
(in thousands)   2007   2008
Net revenue   $ 329,878     $ 423,971  
Income before tax   $ 18,934     $ 23,690  
Gain on sale of Wire business before tax            
Income from discontinued operations before tax     18,934       23,690  
Income tax expense     (60 )      (249 ) 
Income from discontinued operations, net of tax   $ 18,874     $ 23,441  

  

LIQUIDITY AND CAPITAL RESOURCES

Our working capital needs are generally funded through cash flows from operations, borrowings under credit arrangements, and sale of our common stock.

Our decrease in cash was primarily due to:

$87.0 million used for the purchase of Orthodyne;
$84.4 million used for the repurchase and redemption of our 0.5% and 1.0% Notes;
$34.7 million net loss from continuing operations and non-cash adjustments, and;
$16.7 million used to fund our working capital needs.

These uses of cash were partially offset by:

$149.9 million net proceeds received for the sale of our Wire business and;
$38.7 million net proceeds from the sale of our common stock.

  

The following table reflects cash, cash equivalents, restricted cash, and short-term investments as of September 27, 2008 and October 3, 2009:

     
  As of  
(dollar amounts in thousands)   September 27,
2008
  October 3,
2009
  $ Change
Cash and cash equivalents   $ 144,932     $ 144,560     $ (372 ) 
Restricted cash(1)     35,000       281       (34,719 ) 
Short-term investments     6,149             (6,149 ) 
Total cash and investments   $ 186,081     $ 144,841     $ (41,240 ) 
Percentage of total assets     55 %      35 %       

(1) As of September 27, 2008, restricted cash supported our gold financing arrangement, which was terminated and the restriction was lifted upon the sale of the Wire business. As of October 3, 2009, restricted cash related to customs requirements in China.

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The following table reflects summary Consolidated Statement of Cash Flow information for fiscal 2008 and 2009:

   
  Fiscal
(in thousands)   2008   2009
Cash flows provided by (used in):
                 
Operating activities, continuing operations   $ 26,936     $ (51,406 ) 
Operating activities, discontinued operations     1,126       (2,116 ) 
Operating activities     28,062       (53,522 ) 
Investing activities, continuing operations     (29,599 )      (51,453 ) 
Investing activities, discontinued operations     (193 )      149,857  
Investing activities     (29,792 )      98,404  
Financing activities     (3,282 )      (45,439 ) 
Effect of exchange rate on cash and cash equivalents     (627 )      185  
Changes in cash and cash equivalents     (5,639 )      (372 ) 
Cash and cash equivalents, beginning of period     150,571       144,932  
Cash and cash equivalents, end of period     144,932       144,560  
Restricted cash and short-term investments     41,149       281  
Total cash and investments   $ 186,081     $ 144,841  

Fiscal 2009

Continuing Operations

Net cash used in operating activities was primarily a result of a $58.0 million net loss partially offset by other non-cash adjustments and changes in net working capital. The net decrease in working capital were primarily driven by changes in income taxes payable, accounts receivable, and accounts payable.

Net cash used in investing activities of $51.5 million was primarily due to the purchase of Orthodyne for $87.0 million and capital purchases of $5.3 million partially offset by net changes in restricted cash of $34.7 million.

Net cash used in financing activities was due to the purchase and retirement of our convertible subordinated notes for $84.4 million partially offset by our sale of 8.0 million shares of our common stock for $38.7 million.

Discontinued Operations

Net cash used in discontinued operations was primarily facility payments related to our former Test business of $1.8 million and $0.3 million of shutdown activities for our former Wire business.

Net cash provided by investing activities of $149.9 million was the result of the sale of our Wire business.

Fiscal 2008

Continuing Operations

Net cash provided by operating activities was primarily a result of a $19.6 million net loss offset by $25.8 million of non-cash adjustments, and decreases in net working capital.

Net cash used in investing activities was primarily due to an increase in restricted cash of $35.0 million and $7.9 million of capital expenditures partially offset by $13.3 million net proceeds from the sale of short-term investments.

Net cash used in financing activities was primarily due to payments on debt of $3.8 million partially offset by $0.5 million of proceeds from option exercises.

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Fiscal 2010 Liquidity and Capital Resource Outlook

We expect our fiscal 2010 capital expenditures to be $7.0 to $8.0 million. Expenditures are expected to be primarily used for the expansion of our operations infrastructure in Asia.

We believe that our existing cash reserves 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 will continue to use our cash for working capital needs, general corporate purposes, and to repay and/or refinance our Convertible Subordinated Notes.

We may seek, as we believe appropriate, additional debt or equity financing which would provide capital for corporate purposes, working capital funding, and additional liquidity if current economic and industry conditions remain weak 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.

Convertible Subordinated Notes

The following table reflects debt, consisting of Convertible Subordinated Notes, as of September 27, 2008 and October 3, 2009:

         
        As of
Rate   Payment dates of each year   Conversion
price
  Maturity date   September 27,
2008
  October 3,
2009
                    (in thousands)
0.500%     May 30 and November 30     $ 20.33       Matured November 30, 2008     $ 72,412     $  
1.000%     June 30 and December 30     $ 12.84       June 30, 2010       65,000       48,964  
0.875%     June 1 and December 1     $ 14.36       June 1, 2012       110,000       110,000  
                       $ 247,412     $ 158,964  

  

The following table reflects additional information regarding our Convertible Subordinated Notes as of October 3, 2009:

       
Description   Maturity date   Par value
  Fair value as of
October 3, 2009(1)
  Standard &
Poor's rating(2)
          (in thousands)   (in thousands)     
1.000% Convertible Subordinated Notes     June 30, 2010     $ 48,964     $ 47,005       Not rated  
0.875% Convertible Subordinated Notes     June 1, 2012     $ 110,000     $ 90,266       Not rated  
           $ 158,964     $ 137,271        

(1) In accordance with ASC 820, we rely upon quoted market prices.
(2) As a result of our request, Standard & Poor’s withdrew its “B+” corporate credit rating on us as well as its “B+” issue-level rating on our 1.0% Convertible Subordinated Notes. Our 0.875% Convertible Subordinated Notes are not rated. We determined that maintenance of the corporate rating and the rating on our 1.0% Notes was not necessary.

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The following table reflects amortization expense related to issue costs from our Subordinated Convertible Notes for fiscal 2007, 2008 and 2009:

     
  Fiscal
(in thousands)   2007   2008   2009
Amortization expense related to issue costs   $ 1,275     $ 1,514     $ 1,006  

  

0.500% Convertible Subordinated Notes

During fiscal 2007 and 2008, we purchased in the open market $53.6 million (face value) and $4.0 million (face value), respectively, of the outstanding notes for net cash of $50.4 million and $3.8 million, respectively. During fiscal 2007 and 2008, we recognized a net gain of $2.8 million and $0.2 million, respectively, net of unamortized deferred financing costs related to these repurchases.

During fiscal 2009, we purchased in the open market $43.1 million (face value) of our 0.5% Convertible Subordinated Notes for net cash of $42.8 million. A net gain of $0.2 million was recognized during fiscal 2009 related to these repurchases. The remaining 0.5% Convertible Subordinated Notes matured November 2008 and were redeemed.

1.000% Convertible Subordinated Notes

During fiscal 2009, we repurchased $3.0 million (face value) of our 1.0% Convertible Subordinated Notes for net cash of $2.0 million and recognized a net gain of $1.0 million. In addition during fiscal 2009, we conducted a tender offer and purchased $13.0 million (face value) of our 1.0% Convertible Subordinated Notes for net cash of $10.1 million and recognized a net gain of $2.8 million, net of unamortized deferred financing costs. The conversion rights of these Convertible Subordinated Notes may be terminated if the closing price of our common stock has exceeded 140% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days.

0.875% Convertible Subordinated Notes

On June 6, 2007, we issued $110.0 million aggregate principal amount of 0.875% Convertible Subordinated Notes due 2012. Net proceeds from the issuance were $106.4 million. Debt issuance costs of $3.6 million were incurred in connection with the issuance of the 0.875% Convertible Subordinated Notes and are amortized to expense over 60 months.

Holders of the 0.875% Convertible Subordinated Notes may 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) only under specific circumstances. The initial conversion rate will be adjusted for certain events.

Other Obligations and Contingent Payments

Under GAAP, 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 October 3, 2009 are appropriately not included in the Consolidated Balance Sheets and Statements of Operations included in this Form 10-K; however, they have been disclosed in the following table for additional information.

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The following table identifies obligations and contingent payments under various arrangements as of October 3, 2009:

           
  Payments due by fiscal period
(in thousands)   Total   Less than
1 year
  1 – 3
years
  3 – 5
years
  More than
5 years
  Due date not
determinable
Contractual Obligations:
                                               &