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EX-32.2 - KULICKE & SOFFA INDUSTRIES INCv172995_ex32-2.htm
EX-31.1 - KULICKE & SOFFA INDUSTRIES INCv172995_ex31-1.htm
EX-10.2 - KULICKE & SOFFA INDUSTRIES INCv172995_ex10-2.htm
EX-10.3 - KULICKE & SOFFA INDUSTRIES INCv172995_ex10-3.htm
EX-31.2 - KULICKE & SOFFA INDUSTRIES INCv172995_ex31-2.htm
EX-10.1 - KULICKE & SOFFA INDUSTRIES INCv172995_ex10-1.htm
EX-10.7 - KULICKE & SOFFA INDUSTRIES INCv172995_ex10-7.htm
EX-10.6 - KULICKE & SOFFA INDUSTRIES INCv172995_ex10-6.htm
EX-10.4 - KULICKE & SOFFA INDUSTRIES INCv172995_ex10-4.htm
EX-32.1 - KULICKE & SOFFA INDUSTRIES INCv172995_ex32-1.htm
EX-10.5 - KULICKE & SOFFA INDUSTRIES INCv172995_ex10-5.htm

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

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended January 2, 2010

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 No.  0-121

KULICKE AND SOFFA INDUSTRIES, INC.
 (Exact name of registrant as specified in its charter)

PENNSYLVANIA
23-1498399
(State or other jurisdiction of incorporation)
(IRS Employer
 
Identification No.)

1005 VIRGINIA DRIVE, FORT WASHINGTON, PENNSYLVANIA 19034
(Address of principal executive offices and Zip Code)

(215) 784-6000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes 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 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 February 1, 2010, there were 69,782,345 shares of the Registrant's Common Stock, no par value, outstanding.

 
 

 

KULICKE AND SOFFA INDUSTRIES, INC.

FORM 10 – Q

January 2, 2010

Index

   
Page Number
     
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
FINANCIAL STATEMENTS (Unaudited)
 
     
 
Consolidated Balance Sheets as of October 3, 2009 and January 2, 2010
3
     
 
Consolidated Statements of Operations for the three months ended December 27, 2008 and
January 2, 2010
4
     
 
Consolidated Statements of Cash Flows for the three months ended December 27, 2008 and
January 2, 2010
5
     
 
Notes to the Consolidated Financial Statements
6
     
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
27
     
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
42
     
Item 4.
CONTROLS AND PROCEDURES
42
     
PART II.  
OTHER INFORMATION
 
     
Item 1A.
RISK FACTORS
43
     
Item 6.
EXHIBITS
43
     
 
SIGNATURES
44

 
 

 

PART I. - FINANCIAL INFORMATION
Item 1. – Financial Statements

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)

   
October 3, 2009 *
   
January 2, 2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 144,560     $ 175,207  
Restricted cash
    281       216  
Accounts and notes receivable, net of allowance for doubtful accounts of $1,378 and $1,009 respectively
    95,779       84,370  
Inventories, net
    41,489       49,784  
Prepaid expenses and other current assets
    11,566       13,475  
Deferred income taxes
    1,786       1,789  
Total current assets
    295,461       324,841  
                 
Property, plant and equipment, net
    36,046       35,054  
Goodwill
    26,698       26,698  
Intangible assets
    48,656       46,270  
Other assets
    5,774       7,369  
Total assets
  $ 412,635     $ 440,232  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Current portion of long-term debt
  $ 48,964     $ 48,964  
Accounts payable
    39,908       53,245  
Accrued expenses and other current liabilities
    32,576       29,480  
Income taxes payable
    1,612       1,341  
  Total current liabilities
    123,060       133,030  
                 
Long-term debt
    92,217       93,733  
Deferred income taxes
    16,282       16,329  
Other liabilities
    10,273       9,742  
  Total liabilities
    241,832       252,834  
                 
Commitments and contingencies (Note 13)
               
                 
Shareholders' equity:
               
Preferred stock, no par value:
               
Authorized 5,000 shares; issued - none
    -       -  
Common stock, no par value:
               
Authorized 200,000 shares; issued 74,370 and 74,686 respectively;
outstanding 69,415 and 69,731 shares, respectively
    413,092       414,462  
Treasury stock, at cost, 4,954 shares
    (46,356 )     (46,356 )
Accumulated deficit
    (197,812 )     (181,972 )
Accumulated other comprehensive income
    1,879       1,264  
  Total shareholders' equity
    170,803       187,398  
                 
  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 412,635     $ 440,232  

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.

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

 
3

 

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

   
Three Months Ended
 
   
December 27, 2008 *
   
January 2, 2010
 
Net revenue
  $ 37,416     $ 128,415  
Cost of sales
    23,488       72,042  
                 
Gross profit
    13,928       56,373  
                 
Selling, general and administrative
    29,852       25,226  
Research and development
    15,400       13,161  
                 
Operating expenses
    45,252       38,387  
                 
Income (loss) from operations
    (31,324 )     17,986  
                 
Interest income
    754       97  
Interest expense
    (2,079 )     (2,083 )
Gain on extinguishment of debt
    1,179       -  
                 
Income (loss) from continuing operations before taxes
    (31,470 )     16,000  
Provision (benefit) for income taxes from continuing operations
    (11,882 )     160  
                 
Income (loss) from continuing operations
    (19,588 )     15,840  
Income from discontinued operations, net of tax
    22,727       -  
                 
Net income
  $ 3,139     $ 15,840  
                 
Income (loss) per share from continuing operations:
               
Basic
  $ (0.32 )   $ 0.23  
Diluted
  $ (0.32 )   $ 0.21  
                 
Income per share from discontinued operations:
               
Basic
  $ 0.37     $ -  
Diluted
  $ 0.37     $ -  
                 
Net income per share:
               
Basic
  $ 0.05     $ 0.23  
Diluted
  $ 0.05     $ 0.21  
                 
Weighted average shares outstanding:
               
Basic
    60,451       69,684  
Diluted
    60,451       73,687  

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.

The accompanying notes are an integral part of these consolidated financial statements.
 
4

 
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
   
Three months ended
 
 
 
December 27, 2008 *
   
January 2, 2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net income
  $ 3,139     $ 15,840  
Less: Income from discontinued operations
    22,727       -  
Income (loss) from continuing operations
    (19,588 )     15,840  
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    5,308       4,509  
Amortization of debt discount and debt issuance costs
    1,634       1,712  
Equity-based compensation and employee benefits
    (468 )     1,393  
Provision for doubtful accounts
    1,121       (99 )
Gain on extinguishment of debt
    (1,179 )     -  
Provision for inventory valuation
    4,054       95  
Deferred taxes
    (6,239 )     111  
Changes in operating assets and liabilities, net of businesses acquired or sold:
               
Accounts and notes receivable
    37,710       9,864  
Inventory
    (4,127 )     (8,370 )
Prepaid expenses and other current assets
    7,330       (1,976 )
Accounts payable and accrued expenses
    (17,599 )     12,574  
Income taxes payable
    (8,238 )     (270 )
Other, net
    2,293       (1,258 )
Net cash provided by continuing operations
    2,012       34,125  
Net cash used in discontinued operations
    (779 )     (496 )
Net cash provided by operating activities
    1,233       33,629  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property, plant and equipment
    (2,433 )     (1,096 )
Proceeds from sales of investments classified as available-for-sale
    4,148       -  
Purchase of Orthodyne
    (85,595 )     -  
Changes in restricted cash, net
    35,000       65  
Net cash used in continuing operations
    (48,880 )     (1,031 )
Net cash provided by (used in) discontinued operations
    149,857       (1,838 )
Net cash provided by (used in) investing activities
    100,977       (2,869 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net costs from sale of common stock
    -       (29 )
Proceeds from exercise of common stock options
    3       6  
Payments on borrowings
    (74,190 )     -  
Net cash used in financing activities
    (74,187 )     (23 )
Effect of exchange rate changes on cash and cash equivalents
    91       (90 )
Changes in cash and cash equivalents
    28,114       30,647  
Cash and cash equivalents at beginning of period
    144,932       144,560  
Cash and cash equivalents at end of period
  $ 173,046     $ 175,207  
                 
CASH PAID FOR:
               
Interest
  $ 958     $ 726  
Income taxes
  $ 179     $ 755  

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.

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

 
5

 

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

NOTE 1 – BASIS OF PRESENTATION

Basis of Consolidation

These consolidated financial statements include the accounts of Kulicke and Soffa Industries, Inc. and its subsidiaries (the “Company”), with appropriate elimination of intercompany balances and transactions.

As of October 4, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 470.20, Debt, Debt With Conversion Options (“ASC 470.20”), which requires issuers of convertible debt instruments that may be settled in cash upon conversion to initially record the liability and equity components of the convertible debt separately. The Company adopted the provisions of ASC 470.20 on a retrospective basis for all prior periods presented (see Note 7).

Management has evaluated subsequent events through the date these financial statements were available to be issued which was February 4, 2010.

On September 29, 2008, the Company completed the sale of its 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 (see Note 2).
 
Fiscal Year

Each of the Company’s first three fiscal quarters ends on the Saturday that is 13 weeks after the end of the immediately preceding fiscal quarter. The fourth quarter of each fiscal year ends on the Saturday closest to September 30 th. The fiscal 2009 quarters ended on December 27, 2008, March 28, 2009, June 27, 2009 and October 3, 2009. The fiscal 2010 quarters end on January 2, 2010, April 3, 2010, July 3, 2010 and October 2, 2010. In fiscal years consisting of 53 weeks, the fourth quarter will consist of 14 weeks.

Nature of Business

The Company designs, manufactures and sells capital equipment and expendable tools as well as services, maintains, repairs and upgrades equipment, all used to assemble semiconductor devices. The Company’s operating results depend upon the capital and operating expenditures of semiconductor manufacturers and subcontract assemblers worldwide which, in turn, depend on the current and anticipated market demand for semiconductors and products utilizing semiconductors. The semiconductor industry is highly volatile and experiences downturns and slowdowns which have a severe negative effect on the semiconductor industry’s demand for semiconductor capital equipment, including assembly equipment manufactured and sold by the Company and, to a lesser extent, expendable tools such as those sold by the Company. These downturns and slowdowns have adversely affected the Company’s operating results. The Company believes such volatility will continue to characterize the industry and the Company’s operations in the future.

Management Estimates

The preparation of financial statements in conformity with United States Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas involving the use of estimates in these financial statements include, but are 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. The Company estimates using historical experience and various other assumptions that it believes to be reasonable. As a result, the Company makes judgments regarding the carrying values of its assets and liabilities which may not be readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 
6

 

Vulnerability to Certain Concentrations

Financial instruments which may subject the Company to concentrations of credit risk as of October 3, 2009 and January 2, 2010 consisted mainly of trade receivables. The Company’s trade receivables result primarily from the sale of semiconductor equipment, related accessories and replacement parts, and expendable tools to a relatively small number of large manufacturers in a highly concentrated industry. Write-offs of uncollectible accounts have historically not been significant; however, the Company closely monitors its customers’ financial strength to reduce the risk of loss.
 
The Company’s products are complex and require raw materials, components and subassemblies having a high degree of reliability, accuracy and performance. The Company relies on subcontractors to manufacture many of these components and subassemblies and it relies on sole source suppliers for some important components and raw material inventory.
 
The Company is also exposed to foreign currency fluctuations that impact the remeasurement of the net monetary assets of those operations whose functional currencies differ from their respective local currencies, most notably in Israel, Malaysia, Singapore and Switzerland. In addition, operations in these countries and in China have exposure related to the translation of their financial statements from their respective functional currencies to the U.S. dollar.
 
Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
 
Allowance for Doubtful Accounts

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

Inventories

Inventories are stated at the lower of cost (on a first-in first-out basis) or market value. The Company generally provides reserves for obsolete inventory and for inventory considered to be in excess of demand. In addition, the Company typically records 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. The Company communicates forecasts of its future demand to its suppliers and adjusts commitments to those suppliers accordingly. If required, the Company reserves the difference between the carrying value of its inventory and the lower of cost or market value, based upon assumptions about future demand, market conditions and the next cyclical market upturn. If actual market conditions are less favorable than projections, additional inventory reserves may be required.

 
7

 

Property, Plant and Equipment

Property, plant and equipment are carried at cost. The cost of additions and those improvements which increase the capacity or lengthen the useful lives of assets are capitalized while repair and maintenance costs are expensed as incurred. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives as follows: buildings 25 to 40 years; machinery and equipment 3 to 10 years; and leasehold improvements are based on the shorter of the life of lease or life of asset. Purchased computer software costs related to business and financial systems are amortized over a five year period on a straight-line basis.

Valuation of Long-Lived Assets

The Company’s long-lived assets are primarily property, plant, intangible assets and equipment 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 the Company’s goodwill is based upon estimates of future cash flows and other factors.
 
In accordance with ASC No. 360, Property, Plant & Equipment (“ASC 360”), the Company’s property, plant and equipment is tested for impairment based on undiscounted cash flows when triggering events occur, and if impaired, written-down to fair value based on either discounted cash flows or appraised values. ASC 360 also provides a single accounting model for long-lived assets to be disposed of by sale and establishes additional criteria that would have to be met to classify an asset as held for sale. The carrying amount of an asset or asset group is not recoverable 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.

Foreign Currency Translation

The majority of the Company’s business is transacted in U.S. dollars; however, the functional currencies of some of the Company’s subsidiaries are their local currencies. In accordance with ASC No. 830,  Foreign Currency Matters (“ASC 830”), for a subsidiary of the Company that has a functional currency other than the U.S. dollar, gains and losses resulting from the translation of the functional currency into U.S. dollars for financial statement presentation are not included in determining net income (loss), but are accumulated in the cumulative translation adjustment account as a separate component of shareholders’ equity (accumulated other comprehensive income (loss)). Under ASC 830, cumulative translation adjustments are not adjusted for income taxes if they relate to indefinite investments in non-U.S. subsidiaries. Gains and losses resulting from foreign currency transactions are included in the determination of net income (loss).

Revenue Recognition

In accordance with ASC No. 605, Revenue Recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, the collectibility is reasonably assured, and the Company has completed its 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. The Company’s standard terms are Ex Works (the Company’s factory), with title transferring to its customer at the Company’s loading dock or upon embarkation. The Company has a small percentage of sales with other terms, and revenue is recognized in accordance with the terms of the related customer purchase order. Revenue related to services is recognized upon performance of the services requested by a customer order. Revenue for extended maintenance service contracts with a term more than one month is recognized on a prorated straight-line basis over the term of the contract.

 
8

 

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

The Company charges research and development costs associated with the development of new products to expense when incurred. In certain circumstances, pre-production machines which the Company intends to sell are carried as inventory until sold.
 
Income Taxes

Deferred income taxes are determined using the liability method in accordance with ASC No. 740, Income Taxes (“ASC 740”). The Company records a valuation allowance to reduce its deferred tax assets to the amount it expects is more likely than not to be realized. While the Company has considered future taxable income and its ongoing tax planning strategies in assessing the need for the valuation allowance, if it were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax asset would decrease income in the period such determination was made.
 
In accordance with ASC No. 740 Topic 10, Income Taxes, General (“ASC 740.10”), the Company utilizes a two-step approach for evaluating uncertain tax positions. Step one or recognition, requires a company to determine if the weight of available evidence indicates a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two or measurement, is based on the largest amount of benefit, which is more likely than not to be realized on settlement with the taxing authority.
 
Earnings per Share

Earnings per share (“EPS”) are calculated in accordance with ASC No. 260, Earnings per Share. Basic EPS include only the weighted average number of common shares outstanding during the period. Diluted EPS include the weighted average number of common shares and the dilutive effect of stock options, restricted stock and share unit awards and subordinated convertible notes outstanding during the period, when such instruments are dilutive.

In accordance with ASC No. 260.10.55, Earnings per Share - Implementation & Guidance (“ASC 260.10.55”), the Company treats all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends as participating in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. The Company adopted ASC 260.10.55 on October 4, 2009 and, accordingly, has retrospectively adjusted prior period earnings per share (see Note 12).

Extinguishment of Debt

In accordance with ASC No. 470 Topic 50, Debt, Modifications and Extinguishments, gains and losses from the extinguishment of debt are included in income (loss) from continuing operations unless the extinguishment is both unusual in nature and infrequent in occurrence, in which case the gain or loss would be presented as an extraordinary item.
 
 
9

 

Equity-Based Compensation

The Company accounts for equity based compensation under the provisions of ASC No. 718, Compensation, Stock Compensation (“ASC 718”). ASC 718 requires the recognition of the fair value of equity-based compensation in net income. The fair value of the Company’s stock option awards are estimated using a Black-Scholes option valuation model. Compensation expense associated with time-based and performance-based restricted stock is determined based on the number of shares granted and the fair value on the date of grant. In addition, the calculation of equity-based compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. The fair value of equity-based awards is amortized over the vesting period of the award and the Company elected to use the straight-line method for awards granted after the adoption of ASC 718.
 
Recent Accounting Pronouncements

Certain Revenue Arrangements That Include Software Elements

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-14, Software, Certain Revenue Arrangements That Include Software Elements (“ASU 2009-14”). ASU 2009-14 clarifies the accounting model for revenue arrangements that include both tangible products and software elements. In accordance with ASU 2009-14, tangible products containing software components and non-software components that function together to deliver the tangible product's essential functionality are excluded from the software revenue guidance in ASC 605. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. The Company adopted ASU 2009-14 as of October 4, 2009 and the adoption did not have a material impact on its consolidated results of operations.

Participating Securities

In June 2008, the FASB issued ASC No. 260.10.55, Earnings per Share- Implementation & Guidance (“ASC 260.10.55”).  ASC 260.10.55 clarified that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. The Company adopted ASC 260.10.55 as of October 4, 2009 and the adoption did not have a material impact on its consolidated results of operations.

NOTE 2 – DISCONTINUED OPERATIONS
 
On September 29, 2008, the Company completed the sale of certain assets and liabilities associated with its Wire business. The Company recognized net proceeds of $149.9 million and a net gain of $22.7 million, net of tax, during the three months ended December 27, 2008. The Company did not recognize any income or loss from discontinued operations for the three months ended January 2, 2010.

 
10

 

The following table reflects operating results of the Wire business discontinued operations for the three months ended December 27, 2008:

   
Three months ended
 
(in thousands)
 
December 27, 2008
 
       
Net revenue
  $ -  
         
Loss before tax
  $ (319 )
Gain on sale of Wire business before tax
    23,524  
Income from discontinued operations before tax
    23,205  
Income tax expense
    (478 )
Income from discontinued operations, net of tax
  $ 22,727  

As of January 2, 2010, the Company has settled all working capital adjustments with Heraeus. The following table reflects cash flows associated with the Company’s discontinued operations for the three months ended December 27, 2008 and January 2, 2010:

   
Three months ended
 
(in thousands)
 
December 27, 2008
   
January 2, 2010
 
             
Cash flows provided by (used in):
           
Operating activities: Wire business
  $ (319 )   $ -  
Operating activities: Test business (sold in fiscal 2006) (1)
    (460 )     (496 )
Investing activities: Wire business
    149,857       (1,838 )
                 
Net cash provided by (used in) discontinued operations
  $ 149,078     $ (2,334 )

(1)  Represents facility-related costs associated with the Company’s former Test operations.

NOTE 3 – COST REDUCTION PLAN

During fiscal 2009 due to the global economic downturn, the Company reduced its global workforce by approximately 20% of total employees which minimized cash usage and reduced employee compensation costs. As business recovered during the first quarter of fiscal 2010, the Company began to increase its number of employees. In addition during fiscal 2009, the Company committed to a plan to reduce its Israel workforce by approximately 170 employees by the end of fiscal 2010. As part of this workforce reduction plan, substantially all of the Company’s Israel-based manufacturing will be transferred to the Company’s manufacturing facilities in Suzhou, China. The Company expects to incur approximately $0.6 million in additional severance costs and the amounts accrued are expected to be paid out over the next 12 months related to these cost reduction efforts.

 
11

 

The following table reflects severance activity for both plans during the three months ended December 27, 2008 and January 2, 2010:

   
For the three months ended
 
(in thousands)
 
December 27, 2008
   
January 2, 2010
 
             
Provision for severance, beginning of period
  $ -     $ 2,413  
Accrual for estimated severance and benefits (1)
    2,586       199  
Payment of severance and benefits
    (1,363 )     (419 )
Provision for severance, end of period (2)
  $ 1,223     $ 2,193  

(1) Estimated severance and benefits expense is the total amount expected to be incurred and is included within selling, general and administrative expenses on the Consolidated Statements of Operations. Of the $2.6 million severance expense for the three months ended December 27, 2008, $1.6 million was attributable to the Company’s Equipment segment and $1.0 million to the Company’s Expendable Tools segment. The $0.2 million severance expense for the three months ended January 2, 2010 was primarily attributable to the Company’s Expendable Tools segment.
(2) The provision for severance as of December 28, 2008 was included within accrued expenses and other current liabilities and other liabilities on the Consolidated Balance Sheet. The provision for severance as of January 2, 2010 was included within accrued expenses and other current liabilities on the Consolidated Balance Sheet.

The Company will continue to consolidate its operations from the United States and other areas to the Asia/Pacific region. As these consolidation efforts are finalized in the future, the Company will incur significant severance costs; however, it expects to realize future cost reduction benefits from these consolidation plans.
 
NOTE 4 – GOODWILL AND INTANGIBLE ASSETS
 
Goodwill

Intangible assets classified as goodwill are not amortized. The Company performs an annual impairment test of its goodwill during the fourth quarter of each fiscal year, which coincides with the completion of its annual forecasting process. The Company performed its annual impairment test in the fourth quarter of fiscal 2009 and no impairment charge was required. The Company also tests for impairment between annual tests if a “triggering” event occurs that may have the effect of reducing the fair value of a reporting unit below its respective carrying value.

The following table reflects goodwill as of October 3, 2009 and January 2, 2010:

(in thousands)
 
Equipment segment
   
Expendable Tools
segment
   
Total
 
As of October 3, 2009:
                 
Beginning of period
  $ 22,999     $ 6,408     $ 29,407  
Accumulated impairment losses (1)
    (2,709 )     -       (2,709 )
End of period
  $ 20,290     $ 6,408     $ 26,698  
                         
As of January 2, 2010:
                       
Beginning of period
  $ 22,999     $ 6,408     $ 29,407  
Accumulated impairment losses (1)
    (2,709 )     -       (2,709 )
End of period
  $ 20,290     $ 6,408     $ 26,698  

 
(1)
During the three months ended March 28, 2009, the Company recorded a $2.7 million impairment charge related to its die bonder goodwill.

 
12

 
 

Intangible Assets

Intangible assets with determinable lives are amortized over their estimated useful lives. The Company’s intangible assets consist primarily of wedge bonder developed technology and customer relationships.

The following table reflects the intangible asset balances as of October 3, 2009 and January 2, 2010:

   
As of
   
Average
estimated useful
 
(in thousands)
 
October 3, 2009
   
January 2, 2010
   
lives (in years)
 
Wedge bonder developed technology
  $ 33,200     $ 33,200       7.0  
Accumulated amortization
    (4,742 )     (5,928 )        
Net wedge bonder developed technology
    28,458       27,272          
                         
Wedge bonder customer relationships
    19,300       19,300       5.0  
Accumulated amortization
    (3,860 )     (4,825 )        
Net wedge bonder customer relationships
    15,440       14,475          
                         
Wedge bonder trade name
    4,600       4,600       8.0  
Accumulated amortization
    (575 )     (719 )        
Net wedge bonder trade name
    4,025       3,881          
                         
Wedge bonder other intangible assets
    2,500       2,500       1.9  
Accumulated amortization
    (1,767 )     (1,858 )        
Net wedge bonder other intangible assets
    733       642          
Net intangible assets
  $ 48,656     $ 46,270          

The following table reflects estimated annual amortization expense related to intangible assets as of January 2, 2010:

(in thousands)
     
Fiscal 2010 (remaining fiscal year)
  $ 7,159  
Fiscal 2011
    9,544  
Fiscal 2012
    9,178  
Fiscal 2013
    9,178  
Fiscal 2014-2016
    11,211  
         
    $ 46,270  
 
 
13

 

NOTE 5 – COMPREHENSIVE INCOME (LOSS)

The following table reflects the components of comprehensive income (loss) for the three months ended December 27, 2008 and January 2, 2010:

   
Three months ended
 
(in thousands)
 
December 27, 2008 *
   
January 2, 2010
 
Net income (1)
  $ 3,139     $ 15,840  
Loss from foreign currency translation adjustments
    (1,295 )     (653 )
Unrecognized actuarial net gain, Switzerland pension plan, net of tax
    285       38  
Other comprehensive loss
  $ (1,010 )   $ (615 )
Comprehensive income
  $ 2,129     $ 15,225  

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.

(1)  Includes continuing and discontinued operations.

The following table reflects accumulated other comprehensive income reflected on the Consolidated Balance Sheets as of October 3, 2009 and January 2, 2010:

   
As of
 
(in thousands)
 
October 3, 2009
   
January 2, 2010
 
Gain from foreign currency translation adjustments
  $ 746     $ 93  
Unrecognized actuarial net gain, Switzerland pension plan, net of taxes
    1,133       1,171  
Accumulated other comprehensive income
  $ 1,879     $ 1,264  

 
14

 

NOTE 6 – BALANCE SHEET ACCOUNTS

The following tables reflect significant balance sheet accounts:

   
As of
 
(in thousands)
 
October 3, 2009
   
January 2, 2010
 
Inventories, net:
           
Raw materials and supplies
  $ 30,048     $ 31,339  
Work in process
    10,788       14,007  
Finished goods
    13,170       16,222  
      54,006       61,568  
Inventory reserves
    (12,517 )     (11,784 )
    $ 41,489     $ 49,784  
                 
Property, plant and equipment, net:
               
Land  (1)
  $ 2,735     $ 2,735  
Buildings and building improvements  (1)
    14,351       17,302  
Leasehold improvements
    11,695       9,027  
Data processing and hardware equipment and software
    21,822       21,915  
Machinery and equipment
    40,600       39,740  
      91,203       90,719  
Accumulated depreciation
    (55,157 )     (55,665 )
    $ 36,046     $ 35,054  
                 
Accrued expenses and other current liabilities:
               
Wages and benefits
  $ 10,423     $ 10,200  
Severance  (2)
    3,264       3,008  
Accrued customer obligations (4)
    4,438       4,736  
Short-term facility accrual related to discontinued operations (Test)
    1,839       1,791  
Payable to Heraeus (3)
    1,857       -  
Other
    10,755       9,745  
    $ 32,576     $ 29,480  

(1) Subsequent to January 2, 2010 the Company entered into an agreement and sold its facility in Yokneam, Israel (see Note 15).
(2)  Total severance payable within the next twelve months includes the severance plan discussed in Note 3, and approximately $0.8 million of other severance obligations which were not part of the Company’s cost reduction plan.
(3) Fiscal 2009 amount related to certain open working capital adjustments with Heraeus, which were settled in fiscal 2010.
(4)  Represents customer advance payments, customer credit program, accrued warranty and accrued retrofit costs.

 
15

 

NOTE 7 – DEBT OBLIGATIONS

The following table reflects debt consisting of Convertible Subordinated Notes as of October 3, 2009 and January 2, 2010:
               
(in thousands)
 
               
As of
 
   
Payment Dates
 
Conversion
 
Maturity
           
Rate
 
of each year
 
Price
 
Date
 
October 3, 2009 *
   
January 2, 2010
 
1.000%
 
June 30 and December 30
  $ 12.84  
June 30, 2010
  $ 48,964     $ 48,964  
0.875%
 
June 1 and December 1
  $ 14.36  
June 1, 2012
    110,000       110,000  
Debt discount on 0.875% Convertible Subordinated Notes due June 2012
    (17,783 )     (16,267 )
                  $ 141,181     $ 142,697  

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.

0.875% Convertible Subordinated Notes

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. The Company presently intends to satisfy any conversion of the 0.875% Convertible Subordinated Notes with cash up to the principal amount of the 0.875% Convertible Subordinated Notes and, with respect to any excess conversion value, with shares of its common stock. The Company has the option to elect to satisfy the conversion obligations in cash, common stock or a combination thereof.

The 0.875% Convertible Subordinated Notes will not be redeemable at the Company’s option. Holders of the 0.875% Convertible Subordinated Notes will not have the right to require us to repurchase their 0.875% Convertible Subordinated Notes prior to maturity except in connection with the occurrence of certain fundamental change transactions. The 0.875% Convertible Subordinated Notes may be accelerated upon an event of default as described in the Indenture and will be accelerated upon bankruptcy, insolvency, appointment of a receiver and similar events with respect to the Company.
 
As of October 4, 2009, the Company adopted ASC 470.20, which requires that issuers of convertible debt that may be settled in cash upon conversion record the liability and equity components of the convertible debt separately. The Company estimated the liability component of its 0.875% Convertible Subordinated Notes by assessing the fair value of debt instruments without an associated equity component issued by companies with similar credit ratings and terms at the time the Company’s 0.875% Convertible Subordinated Notes were issued. The effective interest rate for non-convertible debt with similar credit ratings and terms was assumed to be 7.85%. The Company determined the fair value of the equity component of the embedded conversion option by deducting the fair value of the liability component from the initial proceeds of the convertible debt instrument. The debt discount will be amortized under the effective interest method from the original issue date. The Company determined the portion of issuance costs associated with the equity component of the 0.875% Convertible Subordinated Notes was $1.0 million. The issuance costs will be amortized under the effective interest method from the original issue date.
 
The liability component of the Company’s 0.875% Convertible Subordinated Notes will continue to be classified as long-term debt and the equity component of the 0.875% Convertible Subordinated Notes has been classified as common stock on the Company’s Consolidated Balance Sheets (see Note 8).

 
16

 

The following table reflects the effect of the change due to ASC 470.20 on the Consolidated Statements of Operations for the three months ended December 27, 2008 and January 2, 2010:
 
    Three months ended        
(in thousands)
 
December 27, 2008, 
as reported
   
December 27, 2008, 
as adjusted
   
Effect of 
change
 
Interest expense
  $ 734     $ 2,079     $ 1,345  
Loss from continuing operations before taxes
    (30,125 )     (31,470 )     (1,345 )
Benefit for income taxes
    (11,882 )     (11,882 )     -  
Loss from continuing operations
  $ (18,243 )   $ (19,588 )   $ (1,345 )
                         
Diluted loss per share from continuing operations
  $ (0.30 )   $ (0.32 )   $ (0.02 )
 
The following table reflects the effect of the change due to ASC 470.20 on the Consolidated Balance Sheets as of October 3, 2009:
 
   
As of
       
(in thousands)
 
October 3, 2009, as 
reported
   
October 3, 2009, as 
adjusted
   
Effect of
change
 
Other assets (debt issuance costs)
  $ 6,215     $ 5,774     $ (441 )
Total assets
    413,076       412,635       (441 )
Long-term debt
    110,000       92,217       (17,783 )
Total liabilities
    259,615       241,832       (17,783 )
Common stock
    383,417       413,092       29,675  
Accumulated deficit
    (185,479 )     (197,812 )     (12,333 )
Total shareholders' equity
    153,461       170,803       17,342  
Total liabilities and shareholders' equity
    413,076       412,635       (441 )
 
The following table reflects the effect of the change due to ASC 470.20 on the Consolidated Statements of Cash Flows for the three months ended December 27, 2008 and January 2, 2010:
 
   
For the three months ended
       
(in thousands)
 
December 27, 2008,
as reported
   
December 27, 2008,
as adjusted
   
Effect of 
change
 
Net income
  $ 4,484     $ 3,139     $ (1,345 )
Loss from continuing operations
    (18,243 )     (19,588 )     (1,345 )
Amortization of debt discount and debt issuance costs
    289       1,634       1,345  
Net cash provided by continuing operations
    2,012       2,012       -  
 
 
17

 

The following table reflects amortization expense related to issue costs from the Company’s Convertible Subordinated Notes for the three months ended December 27, 2008 and January 2, 2010:

   
Three months ended
 
(in thousands)
 
December 27, 2008 *
   
January 2, 2010
 
Amortization expense related to issue costs
  $ 233     $ 196  
 
* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.
 
The following table reflects the Company’s open market purchases of its Convertible Subordinated Notes for the three months ended December 27, 2008:

   
Three months ended
 
(in thousands)
 
December 27, 2008
 
0.5% Convertible Subordinated Notes (1):
     
Face value purchased
  $ 43,050  
Net cash
    42,838  
Deferred financing costs
    18  
Recognized gain, net of deferred financing costs
    194  
         
1.0% Convertible Subordinated Notes:
       
Face value purchased
  $ 3,000  
Net cash
    1,990  
Deferred financing costs
    25  
Recognized gain, net of deferred financing costs
    985  
Gain on extinguishment of debt
  $ 1,179  

(1)
Repurchase transactions occurred prior to redemption on November 30, 2008.

NOTE 8 – SHAREHOLDERS’ EQUITY
 
Common Stock
 
As of October 4, 2009, the Company adopted ASC 470.20 and accordingly common stock includes the equity component of the Company’s 0.875% Convertible Subordinated Notes (see Note 7).
 
On October 3, 2008, the Company 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, the Company 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.
 
 
18

 

401(k) Retirement Income Plan

The following table reflects the Company’s matching contributions to the 401(k) retirement income plan which were made in the form of issued and contributed shares of Company common stock during the three months ended December 27, 2008 and January 2, 2010:

   
Three months ended
 
(in thousands)
 
December 27, 2008
   
January 2, 2010
 
Number of common shares
    95       50  
Fair value based upon market price at date of distribution
  $ 204     $ 290  
 
Equity-Based Compensation

As of January 2, 2010, the Company had eight equity-based employee compensation plans (the “Employee Plans”) and three director compensation plans (the “Director Plans”) (collectively, the “Plans”). Under these Plans, stock options, performance-based share awards (collectively, “performance-based restricted stock”), time-based share awards (collectively, “time-based restricted stock”), market-based share awards (collectively, “market-based restricted stock”) or common stock have been granted at 100% of the market price of the Company’s common stock on the date of grant.

 
·
In general, stock options and time-based restricted stock awarded to employees vest annually over a three year period provided that the employee remains employed. The Company follows the non-substantive vesting method for stock options and recognizes compensation expense immediately for awards granted to retirement eligible employees, or over the period from the grant date to the date retirement eligibility is achieved.

 
·
Performance-based restricted stock entitles the employee to receive common shares of the Company on the three-year anniversary of the grant date (if employed by the Company) if return on invested capital and revenue growth targets set by the Management Development and Compensation Committee of the Board of Directors on the date of grant are met. If return on invested capital and revenue growth targets are not met, performance-based restricted stock does not vest.

 
·
Market-based restricted stock entitles the employee to receive common shares of the Company on the award vesting date, if market performance objectives which measure relative total shareholder return (“TSR”) are attained. Relative TSR is calculated based upon the 90-calendar day average price of the Company’s stock as compared to specific peer companies that comprise the Philadelphia Semiconductor Index. TSR is measured for the Company and each peer company over a performance period, which is generally three years. Vesting percentages range from 0% to 200% of awards granted. The provisions of the market-based restricted stock are reflected in the grant date fair value of the award; therefore, compensation expense is recognized regardless of whether or not the market condition is ultimately satisfied. Compensation expense is reversed if the award forfeits prior to the vesting date.

Equity-based compensation expense recognized in the Consolidated Statements of Operations for the three months ended December 27, 2008 and January 2, 2010 was based upon awards ultimately expected to vest. In accordance with ASC 718, forfeitures have been estimated at the time of grant and were based upon historical experience. The Company reviews the forfeiture rates periodically and makes adjustments as necessary.
 
 
19

 

The following table reflects stock options, restricted stock and common stock granted during the three months ended December 27, 2008 and January 2, 2010:

   
Three months ended
 
(number of shares, in thousands)
 
December 27, 2008
   
January 2, 2010
 
Market-based restricted stock
    -       398  
Performance-based restricted stock
    401       -  
Time-based restricted stock
    780       784  
Stock options
    139       -  
Common stock
    41       32  
Equity-based compensation in shares
    1,361       1,214  

The following table summarizes equity-based compensation expense (reversal of expense), by type of award, included in the Consolidated Statements of Operations during the three months ended December 27, 2008 and January 2, 2010:

   
Three months ended
 
(in thousands)
 
December 27, 2008
   
January 2, 2010
 
Market-based restricted stock
  $ -     $ 115  
Performance-based restricted stock
    (1,563 )     56  
Time-based restricted stock
    202       590  
Stock options
    509       163  
Common stock
    180       180  
Equity-based compensation expense
  $ (672 )   $ 1,104  

In connection with the global economic decline during the three months ended December 27, 2008, the Company determined performance objectives for the performance-based restricted stock issued in fiscal 2007 and 2008 would not be attained at the previous estimated levels. In accordance with ASC 718, by lowering estimated attainment percentages, total compensation expense for the performance-based restricted stock decreased and previously recorded compensation expense was reversed during fiscal 2009.

The following table reflects total equity-based compensation expense (reversal of expense), which includes stock options, restricted stock and common stock, included in the Consolidated Statements of Operations during the three months ended December 27, 2008 and January 2, 2010:

   
Three months ended
 
(in thousands)
 
December 27, 2008
   
January 2, 2009
 
Cost of sales
  $ (29 )   $ 46  
Selling, general and administrative
    (667 )     714  
Research and development
    24       344  
Equity-based compensation expense
  $ (672 )   $ 1,104  
 
 
20

 

The following table summarizes the unrecognized equity-based compensation expense, by type of award:

   
As of
   
Average remaining
 
(in thousands)
 
December 27, 2008
   
January 2, 2010
   
contractual life in years
 
Market-based restricted stock
  $ -     $ 2,583      
2.2
 
Performance-based restricted stock
    552       314      
1.2
 
Time-based restricted stock
    2,219       5,072      
2.4
 
Stock options
    2,721       617      
1.0
 
Unrecognized equity-based compensation expense
  $ 5,492     $ 8,586          

NOTE 9 – EMPLOYEE BENEFIT PLANS
 
U.S. Plan

The Company has a 401(k) retirement income plan for its employees. This plan allows for employee contributions and matching Company contributions in varying percentages, depending on employee age and years of service, ranging from 50% to 175% of the employees’ contributions.

The following table reflects the Company’s matching contributions to the 401(k) retirement income plan which were made in the form of issued and contributed shares of Company common stock during the three months ended December 27, 2008 and January 2, 2010:

   
Three months ended
 
(in thousands)
 
December 27, 2008
   
January 2, 2010
 
Number of common shares
    95       50  
Fair value based upon market price at date of distribution
  $ 204     $ 290  
 
In addition to the 401(k) retirement income plan discussed above, the Company has a 401(k) retirement income plan for its Wedge bonder employees. Effective January 2009, the Company suspended cash matching contributions to its Wedge bonder employees’ 401(k) retirement income plan. Cash matching contributions for the Company’s Wedge bonder retirement income plan were $0.1 million during the three months ended December 27, 2008.
 
 
21

 

NOTE 10 – INCOME TAXES

The following table reflects the total provision (benefit) for income taxes and the effective tax rate from continuing operations for the three months ended December 27, 2008 and January 2, 2010:

   
Three months ended
 
(in thousands)
 
December 27, 2008 *
   
January 2, 2010
 
Income (loss) from continuing operations before taxes
  $ (31,470 )   $ 16,000  
Provision (benefit) for income taxes
    (11,882 )     160  
                 
Income (loss) from continuing operations
  $ (19,588 )   $ 15,840  
                 
Effective tax rate
    37.8 %     1.0 %

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.

For the three months ended January 2, 2010, the effective income tax rate related to continuing operations differed from the federal statutory rate primarily due to: decreases in the valuation allowance, Federal alternative minimum taxes, state income taxes, tax from foreign operations, impact of tax holidays, an increase in deferred taxes for un-remitted earnings and other U.S. current and deferred taxes.

For the three months ended December 27, 2008, the effective income tax rate related to continuing operations differed from the federal statutory rate primarily due to: increases in the valuation allowance, federal alternative minimum taxes, state income taxes, tax from foreign operations, impact of tax holidays, decreases in deferred taxes for un-remitted earnings, and decreases in liabilities for unrecognized tax benefits as discussed further below.

In October 2007, the tax authority in Israel issued the Company a preliminary assessment of income tax, withholding tax and interest of $34.3 million (after adjusting for the impact of foreign currency fluctuations) for fiscal 2002 through 2004. The Company provided a non-current income tax liability for uncertain tax positions on its Consolidated Balance Sheet as of September 27, 2008 related to this assessment for fiscal years 2002 through 2007, as required under ASC 740. On December 24, 2008, the Company, through its Israel subsidiaries, entered into an agreement with the tax authority in Israel settling the tax dispute for approximately $12.5 million, which represented withholding taxes, income taxes, and interest related to fiscal 2002 through 2004. The settlement of $12.5 million was made net of a $4.5 million reimbursement resulting in a net cash payment of $7.8 million during the second quarter of fiscal 2009. Following the payment and settlement of the audit for fiscal 2002 through 2004, the tax authorities in Israel examined the fiscal years 2005 and 2006. In addition during fiscal 2009, the Company made a payment of approximately $1.9 million related to income taxes and interest to settle the fiscal September 30, 2005 and 2006. As a result of the Israel tax settlements, the Company recognized a $12.5 million benefit from income taxes for fiscal 2009. The $12.5 million benefit was a result of reversing the liability for unrecognized tax benefits on the Consolidated Balance Sheet as of September 27, 2008 that was in excess of the $14.4 million for which the matter was settled. The entire amount of the reversal impacted the Company’s effective tax rate as indicated above.

The Company is currently under audit by the U.S. Internal Revenue Service (“IRS”) for the period ended September 30, 2006. The Company has responded to various information requests from the IRS and is in the closing stages of the audit. The IRS has not proposed any adjustment that would result in a significant adjustment to income tax expense; however, the audit is still in process.

 
22

 

NOTE 11 - SEGMENT INFORMATION

The Company operates two segments: Equipment and Expendable Tools. The Equipment segment manufactures and markets a line of ball bonders, wedge bonders and die bonders. The Expendable Tools segment designs, manufactures, and markets consumable packaging materials for use on the Company’s equipment as well as on competitors’ equipment. The following table reflects segment information for the continuing operations of the Company:

         
Expendable
       
(in thousands)
 
Equipment
   
Tools
       
Three months ended December 27, 2008:  
Segment
   
Segment
   
Consolidated
 
Net revenue
  $ 23,659     $ 13,757     $ 37,416  
Cost of sales
    16,657       6,831       23,488  
Gross profit
    7,002       6,926       13,928  
Operating expenses
    38,733       6,519       45,252  
Income (loss) from operations
  $ (31,731 )   $ 407     $ (31,324 )
                         
           
Expendable
         
   
Equipment
   
Tools
         
Three months ended January 2, 2010  
Segment
   
Segment
   
Consolidated
 
Net revenue
  $ 111,597     $ 16,818     $ 128,415  
Cost of sales
    65,145       6,897       72,042  
Gross profit
    46,452       9,921       56,373  
Operating expenses
    31,605       6,782       38,387  
Income from operations
  $ 14,847     $ 3,139     $ 17,986  
                         
           
Expendable
         
   
Equipment
   
Tools
         
(in thousands)
 
Segment
   
Segment
   
Consolidated
 
                         
Segment Assets as of October 3, 2009*
  $ 303,835     $ 108,800     $ 412,635  
                         
Segment Assets as of January 2, 2010
  $ 349,821     $ 90,411     $ 440,232  

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.

NOTE 12 - EARNINGS PER SHARE

Basic income (loss) per share is calculated using the weighted average number of shares of common stock outstanding during the period. Diluted income per share is calculated using the weighted average number of shares of common stock outstanding during the period and, if there is net income during the period, the dilutive impact of common stock equivalents outstanding during the period. In computing diluted income per share, if convertible debt is assumed to be converted to common shares, the after-tax amount of interest expense recognized in the period associated with the convertible debt is added back to net income.

The Company’s 0.875% Convertible Subordinated Notes would not result in the issuance of any dilutive shares, since the conversion option was not “in the money” as of December 27, 2008 or January 2, 2010. Accordingly, diluted EPS excludes the effect of the conversion of the 0.875% Convertible Subordinated Notes.

 
23

 

The following table reflects a reconciliation of the shares used in the basic and diluted net income (loss) per share computation:

   
Three months ended
 
(in thousands)
 
December 27, 
2008 *
   
December 27,
2008 *
   
January 2, 
2010
   
January 2,
2010
 
   
Basic
   
Diluted
   
Basic
   
Diluted
 
NUMERATOR:                        
Income (loss) from continuing operations
  $ (19,588 )   $ (19,588 )   $ 15,840     $ 15,840  
Less: Income applicable to participating securities
    -       -  (1)     (172 )     (172 )
After-tax interest expense
    -       -  (1)     -       122  
                                 
Income (loss) applicable to common shareholders
  $ (19,588 )   $ (19,588 )   $ 15,668     $ 15,790  
                                 
DENOMINATOR:
                               
Weighted average shares outstanding - Basic
    60,451       60,451       69,684       69,684  
Stock options
            -  (1)             149  
Time-based restricted stock
            -  (1)             41  
0.500 % Convertible Subordinated Notes
            -  (1)             n/a  
1.000 % Convertible Subordinated Notes
            -  (1)             3,813  
0.875 % Convertible Subordinated Notes
            -  (1)             -  
Weighted average shares outstanding - Diluted (2)
            60,451               73,687  
                                 
EPS:
                               
Income (loss) per share from continuing operations - Basic
  $ (0.32 )   $ (0.32 )   $ 0.23     $ 0.23  
                                 
Effect of dilutive shares
            -  (1)           $ (0.02 )
                                 
Income (loss) per share from continuing operations – Diluted
          $ (0.32 )           $ 0.21  

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.

(1)  Due to the Company’s loss from continuing operations for the period, the effect of participating securities was excluded from the computation of basic and diluted EPS, and the conversion of Convertible Subordinated Notes and the related after-tax interest expense was not assumed since the effect would have been anti-dilutive. In addition, due to the Company’s loss from continuing operations, potentially dilutive shares were not assumed since the effect would have been anti-dilutive.
 
(2)  Excludes 167 dilutive participating securities as the income attributable to these shares was not included in EPS.

 
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The following table reflects the number of potentially dilutive shares which were excluded from diluted EPS, as their inclusion was anti-dilutive:

   
Three months ended
 
   
December 27, 2008
   
Janaury 2, 2010
 
(in thousands)
           
Potentially dilutive shares related to:
           
Stock options, out of the money
    6,922       4,388  
Convertible Subordinated Notes
    6,363       -  
                 
      13,285       4,388  

NOTE 13 –
 GUARANTOR OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

 The following table reflects guarantees under standby letters of credit as of January 2, 2010:

       
(in thousands)
 
       
Maximum obligation
 
Nature of guarantee
  
Term of guarantee
 
under guarantee
 
Security of employee worker compensation benefit programs
 
Expires October 2011
  $ 95  
Security for customs bond
 
Expires July 2010
    100  
        $ 195  

 
Guarantor Obligations

The Company has issued standby letters of credit for security of employee worker compensation benefit programs and a customs bond.

Warranty Expense

The Company’s equipment is generally shipped with a one-year warranty against manufacturing defects; however, Wedge bonder equipment is generally shipped with a two-year warranty. The Company does not offer extended warranties in the normal course of its business. The Company establishes reserves for estimated warranty expense when revenue for the related equipment is recognized. The reserve for estimated warranty expense is based upon historical experience and management’s estimate of future expenses.
 
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The following table reflects the reserve for product warranty activity for the three months ended December 27, 2008 and January 2, 2010:
 
   
Three months ended
 
(in thousands)
 
December 27, 2008
   
January 2, 2010
 
             
Reserve for product warranty, beginning of period
  $ 918     $ 1,003  
Provision for product warranty
    684       791  
Product warranty costs paid
    (820 )     (401 )
Reserve for product warranty, end of period
  $ 782     $ 1,393  

 
Concentrations

The following table reflects significant customer concentrations for the three months ended December 27, 2008 and January 2, 2010:

   
Three months ended
 
   
December 27, 2008
   
Janaury 2, 2010
 
Customer net revenue as a percentage of Net Revenue
           
Advanced Semiconductor Engineering
    *       34.5 %
                 
Customer accounts receivable as a percentage of Total Accounts Receivable
               
Advanced Semiconductor Engineering
    *       22.9 %
Haoseng Industrial Company Limited
    *       12.6 %
First Technology China Limited
    14.4 %     *  

 
*  Represents less than 10% of net revenue or total accounts receivable, as applicable.

NOTE 14 – RELATED PARTY TRANSACTIONS

In connection with the Company’s acquisition of Orthodyne, a subsidiary of the Company entered into a real property lease agreement with OE Holdings, Inc. which, with Jason Livingston and its other stockholders, is a more than 5% stockholder of the Company. Mr. Livingston is the Vice President of the Company’s wedge bonding division. The lease agreement dated as of October 3, 2008, has a five-year term with a five-year renewal option. Rent is $124,369 per month in the first year and increases 3.0% per year thereafter. If exercised, rent during the renewal term will be at fair market value. The Company is guaranteeing the obligations of its subsidiaries under the lease agreement.

NOTE 15 – SUBSEQUENT EVENT

Subsequent to January 2, 2010, the Company entered into an agreement and sold its facility in Yokneam, Israel for approximately $4.5 million. Simultaneous with the sale, the Company entered into an agreement to leaseback a portion of the building for five years with an option to extend the lease. The Company will record a $0.7 million gain on the sale which will be recognized over the five year lease term.
 
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Item 2. 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS

Forward-Looking Statements

In addition to historical information, this filing contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of 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 our 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.
 
OVERVIEW

Introduction

Kulicke and 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, light-emitting diodes (“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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Certain prior year amounts have been retrospectively adjusted to comply with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 470.20, Debt, Debt With Conversion Options (“ASC 470.20”).
 
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.
 
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. Following dramatic deterioration in the global economy in the first half of our fiscal 2009, business conditions in the semiconductor industry began a recovery that continued through the end of our fiscal 2009. Demand for our core products continued to improve in the beginning of fiscal 2010 and demand is projected to remain strong at least through March 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 have de-leveraged and strengthened our balance sheet. During fiscal 2009, we reduced our debt by $88.4, and we completed a public equity offering of 8.0 million common shares which raised $38.7 million of net proceeds. We ended the first quarter of fiscal 2010 with cash and cash equivalents totaling $175.2 million, $30.6 million higher than our fiscal year end. 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 capability 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.
 
28

 
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 substantial 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 iStackPS TM 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 the three months ended December 27, 2008 and January 2, 2010, respectively:

   
Three months ended
 
   
December 27, 2008
   
January 2, 2010
 
(dollar amounts in
thousands)
 
Net Revenues
   
% of total
net revenue
   
Net Revenues
   
% of total
net revenue
 
Equipment
  $ 23,659       63.2 %   $ 111,597       86.9 %
Expendable Tools
    13,757       36.8 %     16,818       13.1 %
    $ 37,416