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EX-10.XLI - KULICKE & SOFFA INDUSTRIES INCv204562_ex10-xli.htm

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

FORM 10-K
(Mark One)
x     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 2, 2010
 
OR
 
¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the transition period from ______ to ______.

Commission file 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.)
   
6 Serangoon North Avenue 5
#03-16
Singapore
 
554910
(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 ¨    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 ¨   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 ¨

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 ¨   No ¨

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.  ¨

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 ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
   
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No x

As of April 2, 2010, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $507.8 million 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 5, 2010 there were 70,984,802 shares of the registrant's common stock, without par value, outstanding.

Documents Incorporated by Reference

Portions of the registrant's Proxy Statement for the 2011 Annual Meeting of Shareholders to be filed on or about December 30, 2010 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.

 
 

 

KULICKE AND SOFFA INDUSTRIES, INC.
2010 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
11
     
Item 1B.
Unresolved Staff Comments
20
     
Item 2.
Properties
21
     
Item 3.
Legal Proceedings
21
     
Item 4.
[Removed and Reserved]
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
22
     
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
25
     
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
55
     
Item 8.
Financial Statements and Supplementary Data
55
     
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
93
     
Item 9A.
Controls and Procedures
93
     
Item 9B.
Other Information
94
     
Part III
     
Item 10.
Directors, Executive Officers and Corporate Governance
94
     
Item 11.
Executive Compensation
94
     
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
95
     
Item 13.
Certain Relationships and Related Transactions and Director Independence
95
     
Item 14.
Principal Accounting Fees and Services
95
     
Part IV
     
Item 15.
Exhibits and Financial Statement Schedules
96
     
 
Signatures
102

 
 

 

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, cost reductions, operational flexibility, 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 this Annual Report on Form 10-K for the fiscal year ended October 2, 2010 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 this 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.

Item 1.  BUSINESS

Unless otherwise indicated, the amounts and discussion contained in 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.

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 (“IC”), high and low powered discrete devices, light-emitting diodes (“LEDs”), and power modules. We also service, maintain, repair and upgrade our equipment. Our customers primarily consist of semiconductor device manufacturers, outsourced semiconductor assembly and test providers (“OSAT”), 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.

 
1

 
 
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. The Orthodyne wedge bonding business is the leading supplier of both heavy wire wedge bonders and wedges (the expendable tools used in wedge bonding) for the power semiconductor and hybrid module markets.

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.

K&S was incorporated in Pennsylvania in 1956. Our principal offices are located at 6 Serangoon North Avenue 5, #03-16, Singapore 554910 and our telephone number in the United States 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 and at the SEC’s Public Reference Room at 100 F Street NE Washington DC 20549.

Our year end for fiscal 2010, 2009 and 2008 was October 2, 2010, October 3, 2009, and September 27, 2008, 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 (“IDMs”) and OSATs, 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 OSAT customers in any period, since changes in the mix of sales to IDMs and OSATs can affect our products’ average selling prices and gross margins 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.

 
2

 

Though the semiconductor industry’s cycle can be independent of the general economy, global economic conditions may have a direct impact on demand for semiconductor units and ultimately demand for semiconductor capital equipment and expendable tools. Business conditions in the semiconductor industry improved significantly during fiscal 2010 after a dramatic deterioration in the global economy and a corresponding reduction in semiconductor production activity during fiscal 2009. We expect overall demand to be lower during the first quarter of fiscal 2011 as compared to the fourth quarter of fiscal 2010. Our visibility into future demand beyond that 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 2010, we reduced our debt by $49.0 million, and ended fiscal 2010 with cash and investments totaling $181.3 million. As of October 2, 2010, our total cash, cash equivalents and investments exceeded the face value of our total debt by $71.3 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 the wire, wedge and die bonding processes. Our equipment is typically the most productive, has the highest levels of process capability, and as a result, has the lowest cost of ownership available in their respective markets. 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.

K&S’s leadership in the industry’s use of copper wire, instead of gold, for the wire bonding process is an example of the benefits of collaborative efforts. By working with customers, material suppliers, and suppliers of equipment used around the wire bonding process, we have developed a series of robust, high yielding production processes that have made copper wire commercially viable, significantly reducing the cost of assembling an integrated circuit. Many of our customers started large scale conversion of their output to copper wire in fiscal 2010. We expect this conversion process to continue throughout the industry for the next several years, potentially driving a significant wire bonder replacement cycle as we believe much of the industries’ installed base is not suitable for copper bonding. Based on our industry leading copper bonding processes, we believe the market share for wire bonders configured for copper wire is much higher than our already leading market share for ball bonders in general.

We also maintain the technology leadership of our equipment by optimizing variants of our products to serve high growth niche markets. For example, over the last two years we have developed extensions of our main ball bonding platforms to address opportunities in LED assembly. We estimate the LED device market to be 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.

Another example of our developing equipment for high growth niche markets is our AT Premier. This machine utilizes a modified wire bonding process to mechanically place bumps on devices, while still in a wafer format, for variants of the flip chip assembly process. Typical applications include complimentary metal-oxide semiconductor (“CMOS”) image sensors, surface acoustical wave (“SAW”) filters and high brightness LEDs.
 
Our focus on technology leadership also extends to die bonding. We offer a new die bonding platform, our state of the art iStackPS die bonder for advanced stacked die applications. iStackPS offers best-in-class throughput and accuracy, and we believe iStackPS is positioned to lead the market for its targeted applications.

 
3

 
 
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 2010, 2009 and 2008:

(dollar amounts in
thousands)
 
Fiscal 2010
   
% of Fiscal
2010 Net
Revenue
   
Fiscal 2009
   
% of Fiscal
2009 Net
Revenue
   
Fiscal 2008
   
% of Fiscal
2008 Net
Revenue
 
Equipment
  $ 691,988       90.7 %   $ 170,536       75.7 %   $ 271,019       82.6 %
Expendable Tools
    70,796       9.3 %     54,704       24.3 %     57,031       17.4 %
Total
  $ 762,784       100.0 %   $ 225,240       100.0 %   $ 328,050       100.0 %

See Note 12 to our Consolidated Financial Statements included in Item 8 of this report for our financial results by business segment.
 
Equipment Segment

We manufacture and sell a line of ball bonders, heavy wire wedge bonders, stud bumpers, and die bonders that are sold to semiconductor device manufacturers, OSATs, other electronics manufacturers and automotive electronics suppliers. Ball bonders are used to connect very fine wires, typically made of gold or copper, between the bond pads of the semiconductor device, or die, and the leads on its package. 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. Stud bumpers mechanically apply bumps to die, typically while still in the wafer format, for some variants of the flip chip assembly process. 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, superior package quality/process control, and as a result, a lower cost of ownership.

 
4

 

Our principal Equipment segment products include:
 
Business Unit
 
Product Name
 
Typical Served Market
Ball bonders
 
IConnPS
 
Advanced and ultra fine pitch applications using either gold or copper wire
   
    IConnPS ProCu
 
  Advanced copper wire applications demanding high productivity
   
    IConnPS LA
 
  Large area applications
   
ConnXPS
 
Cost performance, low pin count applications using either gold or copper wire
   
    ConnXPS LED
 
  LED applications
   
    ConnXPS VLED
 
  Vertical LED applications
   
    ConnXPS LA
 
  Large area applications
   
AT Premier
 
Stud bumping applications (high brightness LED and image sensor)
         
Wedge bonders
3600Plus
 
Power hybrid and automotive modules using either aluminum wire or ribbon
   
7200Plus
 
Power semiconductors using either aluminum wire or ribbon
   
7200HD
 
Smaller power packages using either aluminum wire or ribbon
   
7600HD
 
Power semiconductors including smaller power packages using either aluminum wire or ribbon
         
Die bonder
 
iStackPS
 
Advanced stacked 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 (PS) — a family of assembly equipment that is setting new standards for performance, productivity, upgradeability, and ease of use. Our Power Series consists of our IConnPS high-performance ball bonders, and our ConnXPS cost-performance ball bonders, both of which can be configured for either gold or copper wire. In addition, targeted specifically at the fast growing LED market, the Power Series includes our ConnX PS LED and our ConnX PS VLED.  Targeted for large area applications, the Power Series includes our IConnPS LA and ConnXPS LA. In November 2010, we introduced the IConnPS ProCu which offers a significant new level of capability for customers transitioning from gold to copper wire bonding.
 
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.

 
5

 

Heavy Wire Wedge Bonders

We are the leaders in the design and manufacture of heavy wire wedge bonders for the power semiconductor and automotive power module markets. Wedge bonders may use either aluminum wire or aluminum ribbon to connect semiconductor chips in power packages, power hybrids and automotive modules for products such as motor control modules or inverters for hybrid cars. In addition, we see some potential use for our wedge bonder products in select solar applications.

Our portfolio of wedge bonding products includes:

 
·
The 3600Plus:   high speed, high accuracy wire bonders designed for power modules, automotive packages and other large wire multi-chip module applications.
 
·
The 7200Plus:   dual head wedge bonder designed specifically for power semiconductor applications.
 
·
The 7200HD:    wedge bonder designed for smaller power packages using either aluminum wire or ribbon.
 
·
The 7600HD:    wedge bonder targeted for small power packages.

While wedge bonding traditionally utilized aluminum wire, all of our wedge bonders are also available modified to bond aluminum ribbon using our proprietary PowerRibbon® process. Ribbon offers device makers performance advantages over traditional round wire and is being increasingly used for high current packages and automotive applications.

Die Bonders

Our die bonder, the iStackPS, was launched in March of 2009 and focuses on stacked die applications for both memory and subcontract assembly customers.
 
iStackPS is targeted at stacked die and high end ball grid array (“BGA”) applications. In these applications, we expect up to 40% productivity increases compared to current generation machines. In addition, iStackPS has demonstrated superior accuracy and process control.

Other Equipment Products and Services

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

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. In addition, our capillaries are used with both gold and copper wire.

 
·
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.

 
6

 

Customers

Our major customers include IDMs and OSAT 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 table reflects our top ten customers, based on net revenue, for each of the last three fiscal years:

Fiscal 2010
 
Fiscal 2009
 
Fiscal 2008
1.
Advance Semiconductor Engineering *
 
1.
Advance Semiconductor Engineering *
 
1.
Advance Semiconductor Engineering
2.
Siliconware Precision Industries, Ltd. *
 
2.
Amkor Technology, Inc.
 
2.
STATS ChipPAC
3.
Haoseng Industrial Co., Ltd.  **
 
3.
Siliconware Precision Industries, Ltd.
 
3.
Haoseng Industrial Co., Ltd.  **
4.
Amkor Technology, Inc.
 
4.
Haoseng Industrial Co., Ltd.  **
 
4.
Amkor Technology, Inc.
5.
Texas Instruments, Inc.
 
5.
Texas Instruments, Inc.
 
5.
Siliconware Precision Industries, Ltd.
6.
Untited Test And Assembley Center
 
6.
First Technology China, Ltd. **
 
6.
Sandisk Semiconductor
7.
First Technology China, Ltd. **
 
7.
Techno Alpha Co. **
 
7.
Immmex Company, Ltd.  **
8.
ST Microelectronics
 
8.
ST Microelectronics
 
8.
Texas Instruments
9.
HANA Micron
 
9.
Samsung
 
9.
ST Microelectronics
10.
Renesas Semiconductor
 
10.
Micron Technology Incorporated
 
10.
Samsung

*   Represents more than 10% of net revenue for the applicable fiscal year.
** Distributor of our products.

Approximately 98.6%, 97.0%, and 95.6% and of our net revenue for fiscal 2010, 2009 and 2008, 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 net revenue.

See Note 12 to our Consolidated Financial Statements included in Item 8 of this report for sales to customers by geographic location.

Sales and Customer Support

We believe long-term customer relationships are 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 end-use 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 Taiwan, China, Korea, Malaysia, the Philippines, Japan, Singapore, Thailand, the United States, and Germany. Supporting these local resources, we have technology centers offering additional process expertise in China, Singapore, Japan, Israel, the United States, and Switzerland.

By establishing relationships with semiconductor manufacturers, OSATs, 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.

 
7

 

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 October 2, 2010 and October 3, 2009:

(in thousands)
 
As of
 
   
October 2, 2010
   
October 3, 2009
 
Backlog
  $ 252,459     $ 42,181  

Manufacturing

We believe excellence in manufacturing can create a competitive advantage, both by 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 mainly of integrating outsourced parts and subassemblies and testing finished products to customer specifications. While we largely utilize an outsource model, allowing us to minimize our fixed costs and capital expenditures, for certain low-volume, high customization parts, we manufacture subassemblies ourselves. 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. In addition, we operate a subassembly manufacturing and supply management facility in Malaysia. 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. When the transition from California to Singapore is complete, we will manufacture all of our equipment in Asia.

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

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. We outsource the production of our bonding wedges. Both the Suzhou and Yokneam facilities are ISO 9001 and ISO 14001 certified.

 
8

 

Research and Product Development

Many of our customers generate technology roadmaps describing their projected packaging 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 $56.7 million, $53.5 million, and $59.9 million during fiscal 2010, 2009 and 2008 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 often 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., Hitachi, Shinkawa and Canon

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: Small Precision Tools, Inc.

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 expect to 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 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.

 
9

 
 
Employees
 
As of October 2, 2010, we had approximately 2,250 regular full-time employees and 700 temporary workers worldwide.

Executive Officers of the Company

The following table reflects certain information regarding our executive officers as of October 2, 2010. 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
Bruno Guilmart
 
49
 
2010
 
President and Chief Executive Officer
C. Scott Kulicke
 
61
 
1980
 
Retired Chief Executive Officer
Christian Rheault
 
45
 
2005
 
Senior Vice President, Business Operations
Charles Salmons
 
55
 
1992
 
Senior Vice President, Engineering
Shay Torton
 
49
 
2005
 
Senior Vice President, Worldwide Operations
Ran Bareket
 
44
 
2009
 
Vice President and interim Principal Accounting Officer
Jason Livingston
 
40
 
2009
 
Former Vice President of Wedge Bonder business unit
Tek Chee ("TC") Mak
 
56
 
2006
 
Vice President, Worldwide Sales
Michael J. Morris
 
41
 
2009
 
Vice President and Chief Financial Officer

Bruno Guilmart joined the Company as President and Chief Executive Officer (“CEO”) and a member of the Company’s Board of Directors on October 1, 2010. Mr. Guilmart is located at the Company’s headquarters in Singapore. Before joining K&S, Mr. Guilmart was CEO of Lattice Semiconductor. Prior to joining Lattice in June 2008, Mr. Guilmart was CEO of Unisem group. Mr. Guilmart was, until his appointment with Unisem, President and CEO of Advanced Interconnect Technologies (“AIT”), a company acquired by Unisem in July 2007. Prior to AIT, Mr. Guilmart was senior vice president for worldwide sales and marketing at Chartered Semiconductor Manufacturing. Mr. Guilmart holds a Master’s degree in Electronics and Business Management and a Bachelor degree in Electrical Engineering from the Paris XI Institute of Technology in France.

C. Scott Kulicke served as Chief Executive Officer and a member of the Company’s Board of Directors from 1980 until his retirement on October 9, 2010. In addition, he served as Chairman of the Board of Directors from 1984 until May 2010.

Christian Rheault was appointed Senior Vice President, Business Operations in November 2010 after serving as Senior Vice President, Marketing since November 2007. In addition, Mr. Rheault served as Vice President, Equipment segment during 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.

 
10

 

Ran Bareket was appointed interim Principal Accounting Officer in July 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 and Director of Worldwide Financial Operations since 2005. In connection with the relocation of the Company’s headquarters from the U.S. to Singapore, the Corporate Controller position will be transitioned to Singapore and Mr. Bareket is expected to leave the Company on January 1, 2011. 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 served as Vice President of the K&S Wedge Bonder business unit from October 2009 until his resignation on October 31, 2010, 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 has served as Vice President and Chief Financial Officer (“CFO”) since August 2009. In connection with the relocation of the Company’s headquarters from the U.S. to Singapore, the CFO position will be transitioned to Singapore and Mr. Morris is expected to leave the Company on January 21, 2011. 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.

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. Accordingly, our business and financial performance is impacted, both positively and negatively, by fluctuations in the macroeconomic environment. During the first half of fiscal 2009, we saw a dramatic deterioration in the global economy and a corresponding reduction in semiconductor production activity; however, business conditions in the semiconductor industry began to improve by the end of fiscal 2009 and continued to accelerate through most of fiscal 2010. We expect demand to soften, at least in early fiscal 2011. Our visibility into future demand beyond that 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.
 
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 OSATs. 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.

 
11

 
 
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 assembly equipment and, to a lesser extent, expendable tools. There can be no assurances regarding levels of demand for our products. 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 pricing 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, restructuring, and other costs of relocating facilities;
 
·
inventory write-offs due to obsolescence; and
 
·
an increase in the cost of labor or materials.

 
12

 
 
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.
 
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 98.6%, 97.0%, and 95.6% of our net revenue for fiscal 2010, 2009 and 2008, respectively, were for shipments 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 substantially all of our manufacturing operations are located in countries other than the United States. We manufacture our ball and die bonders in Singapore, our saw blades and capillaries in China, certain bonder subassemblies in Malaysia and capillary blanks in Israel. We manufacture wedge bonder components in California, Singapore and Malaysia. In addition, we have sales, service and support personnel in China, Israel, 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;

 
13

 

·
changing political conditions;

·
labor work stoppages and strikes in our factories or the factories of our suppliers;

·
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.
 
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 a strengthening 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 a adverse effect on our cash flows. Our primary exposures include the Japanese Yen, Singapore Dollar, Malaysian Ringgit, Chinese Yuan, Swiss Franc, Philippine Peso, Taiwan Dollar, South Korean Won, Israeli Shekel and Euro. 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 have not entered into foreign exchange forward contracts 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.

 
14

 

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, finance, accounting and technical employees, including senior management, primarily in Asia. In September 2010, as previously announced, C. Scott Kulicke retired from his position as CEO and Bruno Guilmart succeeded Mr. Kulicke as CEO on October 1, 2010. Additionally on November 16, 2010, we appointed Jonathan H. Chou as Senior Vice President and CFO effective December 13, 2010 and notified Michael J. Morris, our current CFO that in connection with the relocation of our headquarters to Singapore, Mr. Chou has been hired to serve as our CFO. Both Mr. Guilmart and Mr. Chou have not been previously affiliated with us; thus, if we are not successful in effectively transitioning the CEO and CFO responsibilities to them, our business could be adversely impacted. We may decide to move additional senior management positions to Singapore. We also plan to move additional finance and accounting positions to Singapore. We may experience unanticipated costs and disruptions to our business as we continue to move management, finance and accounting positions from the U.S. to Asia. If we are unable to continue to attract and retain the managerial, marketing, finance, accounting 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.
 
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, an increased risk of inventory obsolescence. 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 IC package, as compared to traditional wire 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 23.0%, 17.7%, and 9.9%, for fiscal 2010, 2009, and 2008, 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.
 
 
15

 
 
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;
·
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. We may be unable to successfully integrate acquired businesses with our existing businesses and successfully implement, improve and expand our systems, procedures and controls to accommodate these acquisitions. These transactions place additional constraints on our management and current labor force. Additionally, these transactions require significant resources from our legal, finance and business teams. In addition, we may divest existing businesses, which would cause a decline in revenue 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  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.

 
16

 
 
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 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.

 
17

 
 
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. In many of our facilities we maintain wastewater treatment systems that remove metals and other contaminants from process wastewater. 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 0.875% Subordinated Convertible Notes are not converted to shares of our common stock, we will be required to make annual cash interest payments of $1.0 million in each fiscal 2011 and 2012 (assuming we do not purchase any outstanding 0.875% Subordinated Convertible Notes). As of October 2, 2010, a principal payment of $110.0 million on the 0.875% Subordinated Convertible Notes is due in June 2012. 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 volatile 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 0.875% 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.

 
18

 
 
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, 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 70.5 million shares were outstanding as of October 2, 2010. 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% Convertible Subordinated 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% Convertible Subordinated 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.
 
Beginning fiscal 2010, we implemented the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 470.20, Debt, Debt With Conversion Options (“ASC 470.20”). 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.

This change in the accounting method for convertible debt securities has and will continue to have an adverse impact on our reported and future results of operations.

 
19

 

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 carry-forwards 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 U. S. 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. 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. 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.

Item 1B.  UNRESOLVED STAFF COMMENTS

None.
 
20

 
Item 2.  PROPERTIES

The following table reflects our major facilities as of October 2, 2010:

Facility
 
Approximate Size
 
Function
 
Products Manufactured
 
Lease Expiration Date 
                 
Singapore
 
129,944 sq. ft. (1)
 
Corporate headquarters, manufacturing, technology center
 
Wire and die bonders
 
July 2013
                 
Suzhou, China
 
151,891 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
                 
Fort Washington, Pennsylvania
 
88,000 sq. ft. (1)
 
Technology center, sales and service, corporate finance
 
Not applicable
 
September 2028  (3)
                 
Berg, Switzerland
 
71,344 sq. ft. (2)
 
Manufacturing, technology center
 
Die bonder sub-assembly and spares
 
N/A
                 
Yokneam, Israel
 
53,820 sq. ft. (1)
 
Manufacturing, technology center
 
Capillary blanks (semi-finish)
 
January 2013
                 
Petaling Jaya, Malaysia
 
37,200 sq ft (1)
 
Subassembly manufacturing and supply chain management
 
Equipment subassembly
 
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.

In addition, we rent space for sales and service offices and administrative functions in: Taiwan, China, Korea, Malaysia, the Philippines, Japan, Singapore, Thailand, and Germany. 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.  [REMOVED AND RESERVED]

 
21

 

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 2010
   
Fiscal 2009
 
   
High
   
Low
   
High
   
Low
 
First Quarter
  $ 6.30     $ 4.03     $ 4.71     $ 1.11  
Second Quarter
  $ 7.67     $ 4.55     $ 2.67     $ 1.15  
Third Quarter
  $ 9.58     $ 6.13     $ 5.04     $ 2.11  
Fourth Quarter
  $ 8.87     $ 5.27     $ 6.68     $ 3.00  

On December 5, 2010, there were approximately 380 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 non-affiliates, as shown on the cover page of this report, we have assumed all of our outstanding shares were held by non-affiliates 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 2011 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission on or about December 30, 2010.

Equity Compensation Plan Information

The information required hereunder will appear under the heading “Equity Compensation Plans” in our Proxy Statement for the 2011 Annual Meeting of Shareholders which information is incorporated herein by reference.

Recent Sales of Unregistered Securities and Use of Proceeds

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

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 2010, 2009, 2008, 2007 and 2006.

As of October 4, 2009, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 470.20, Debt, Debt With Conversion Options (“ASC 470.20”) on a retrospective basis for all prior periods. Fiscal 2009 includes the assets of Orthodyne which were acquired on October 3, 2008. Our Wire business was sold on September 29, 2008; therefore, fiscal 2008, 2007 and 2006 have been reclassified to reflect our Wire business as a discontinued operation.

This data should be read in conjunction with our consolidated financial statements, including notes and other financial information included elsewhere in this report 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.

 
22

 

   
Fiscal
 
(in thousands, except per share amounts)
 
2010
     
2009 *
     
2008 *
     
2007 *
     
2006 *
 
Statement of Operations Data:
                                     
Net revenue:
                                     
Equipment
  $ 691,988     $ 170,536     $ 271,019     $ 316,718     $ 319,788  
Expendable Tools
    70,796       54,704       57,031       53,808       60,508  
Total net revenue
    762,784       225,240       328,050       370,526       380,296  
Cost of sales:
                                       
Equipment
    399,042       111,103       165,499       188,055       178,599  
Expendable Tools
    28,069       25,294       28,758       27,035       28,474  
Total cost of sales (1)
    427,111       136,397       194,257       215,090       207,073  
Operating expenses:
                                       
Equipment
    155,625       135,465       122,302       113,444       89,684  
Expendable Tools
    32,013       24,193       26,971       24,480       23,316  
Impairment of goodwill: Equipment
    -       2,709       -       -       -  
U.S. pension plan termination: Equipment
    -       -       9,152       -       -  
Gain on sale of assets
    -       -       -       -       (4,544 )
Total operating expenses (1)
    187,638       162,367       158,425       137,924       108,456  
Income (loss) from operations:
                                       
Equipment
    137,321       (78,741 )     (25,934 )     15,219       51,505  
Expendable Tools
    10,714       5,217       1,302       2,293       8,718  
Gain on sale of assets
    -       -       -       -       4,544  
Interest income (expense), net
    (7,930 )     (7,082 )     (3,869 )     2,346       795  
Gain on extinguishment of debt
    -       3,965       170       2,802       4,040  
Income (loss) from continuing operations before income taxes
    140,105       (76,641 )     (28,331 )     22,660       69,602  
Provision (benefit) for income taxes from continuing operations (2)
    (2,037 )     (13,029 )     (3,610 )     5,448       8,068  
Income (loss) from continuing operations
    142,142       (63,612 )     (24,721 )     17,212       61,534  
Income (loss) from discontinued operations, net of tax (3)
    -       22,011       23,441       18,874       (9,364 )
Net income (loss)
  $ 142,142     $ (41,601 )   $ (1,280 )   $ 36,086     $ 52,170  
                                         
Per Share Data:
                                       
Income (loss) per share from continuing operations  (4)
                                       
Basic
  $ 2.01     $ (1.02 )   $ (0.46 )   $ 0.31     $ 1.12  
Diluted
  $ 1.92     $ (1.02 )   $ (0.46 )   $ 0.27     $ 0.91  
                                         
Income (loss) per share from discontinued operations, net of tax:
                                       
Basic
  $ -     $ 0.35     $ 0.44     $ 0.33     $ (0.17 )
Diluted
  $ -     $ 0.35     $ 0.44     $ 0.28     $ (0.14 )
                                         
Net income (loss) per share: (5)
                                       
Basic
  $ 2.01     $ (0.67 )   $ (0.02 )   $ 0.64     $ 0.95  
Diluted
  $ 1.92     $ (0.67 )   $ (0.02 )   $ 0.55     $ 0.78  
                                         
Weighted average shares outstanding: (5)
                                       
Basic
    70,012       62,188       53,449       56,221       55,089  
Diluted
    73,548       62,188       53,449       68,274       68,881  
                               
Balance Sheet Data:
                             
Cash, cash equivalents, investments and restricted cash
  $ 181,334     $ 144,841     $ 186,081     $ 169,910     $ 157,283  
Working capital excluding discontinued operations
    347,560       172,401       165,543       219,755       156,237  
Total assets excluding discontinued operations
    580,169       412,635       335,614       383,779       261,109  
Long-term debt
    98,475       92,217       151,415       222,446       195,000  
Shareholders' equity
  $ 322,480     $ 170,803     $ 125,396     $ 111,286     $ 79,306  

 
23

 

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

(1)
During fiscal 2010 and 2009, we recorded $2.4 and $7.4 million, respectively, in operating expense for restructuring-related severance.

 
During fiscal 2010, 2009, 2008, 2007 and 2006, we recorded $17.4 million, $2.7 million, $2.2 million, $4.4 million and $8.4 million, respectively, in operating expense for incentive compensation.

 
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.

(2)
The following are the most significant factors which affect our provision for income taxes: implementation of our international restructuring plan in fiscal 2010, 2008, 2007, and 2006; 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; changes in tax legislation and our provision for various tax exposure items.

(3)
Reflects the operations of the Company’s Wire business (sold fiscal 2009) and Test business (sold March 2006).

(4)
For fiscal 2010, $1.5 million of net income applicable to participating securities and the related participating securities were excluded from the computation of basic income per share.

(5)
For fiscal 2010, 2007 and 2006 the exercise of dilutive stock options and expected vesting of performance-based restricted stock (fiscal 2010 and 2007 only) and conversion of the Convertible Subordinated Notes were assumed. In addition for those periods, $0.3 million, $1.3 million and $1.4 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 2009 and 2008, potentially dilutive shares were not assumed since the effect would have been anti-dilutive.

 
24

 

Item 7. 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS 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, cost reductions, operational flexibility, 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 fiscal year ended October 2, 2010 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, the amounts and discussion contained in 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.

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 (“IC”), high and low powered discrete devices, light-emitting diodes (“LEDs”), and power modules. We also service, maintain, repair and upgrade our equipment. Our customers primarily consist of semiconductor device manufacturers, outsourced semiconductor assembly and test providers (“OSAT”), 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.

 
25

 

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. The Orthodyne wedge bonding business 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.
 
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 (“IDMs”) and OSATs, 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 OSAT customers in any period, since changes in the mix of sales to IDMs and OSATs can affect our products’ average selling prices and gross margins 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 a direct impact on demand for semiconductor units and ultimately demand for semiconductor capital equipment and expendable tools. Business conditions in the semiconductor industry improved significantly during fiscal 2010 after a dramatic deterioration in the global economy and a corresponding reduction in semiconductor production activity during fiscal 2009. We expect overall demand to be lower during the first quarter of fiscal 2011 as compared to the fourth quarter of fiscal 2010. Our visibility into future demand beyond that 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 2010, we reduced our debt by $49.0 million, and ended fiscal 2010 with cash, cash equivalents, and investments totaling $181.3 million. As of October 2, 2010, our total cash, and investments exceeded the face value of our total debt by $71.3 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.

 
26

 

Technology Leadership

We compete largely by offering our customers the most advanced equipment and expendable tools available for the wire, wedge and die bonding processes. Our equipment is typically the most productive, has the highest levels of process capability, and as a result, has the lowest cost of ownership available in their respective markets. 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.

K&S’s leadership in the industry’s use of copper wire, instead of gold, for the wire bonding process is an example of the benefits of collaborative efforts. By working with customers, material suppliers, and suppliers of equipment used around the wire bonding process, we have developed a series of robust, high yielding production processes that have made copper wire commercially viable, significantly reducing the cost of assembling an integrated circuit. Many of our customers started large scale conversion of their output to copper wire in fiscal 2010. We expect this conversion process to continue throughout the industry for the next several years, potentially driving a significant wire bonder replacement cycle as we believe much of the industries’ installed base is not suitable for copper bonding. Based on our industry leading copper bonding processes, we believe the market share for wire bonders configured for copper wire is much higher than our already leading market share for ball bonders in general.

We also maintain the technology leadership of our equipment by optimizing variants of our products to serve high growth niche markets. For example, over the last two years we have developed extensions of our main ball bonding platforms to address opportunities in LED assembly. We estimate the LED device market to be 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.

Another example of our developing equipment for high growth niche markets is our AT Premier. This machine utilizes a modified wire bonding process to mechanically place bumps on devices, while still in a wafer format, for variants of the flip chip assembly process. Typical applications include complimentary metal-oxide semiconductor (“CMOS”) image sensors, surface acoustical wave (“SAW”) filters and high brightness LEDs.
 
Our focus on technology leadership also extends to die bonding. We offer a new die bonding platform, our state of the art iStackPS die bonder for advanced stacked die applications. iStackPS offers best-in-class throughput and accuracy, and we believe iStackPS 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. Our Equipment segment represented 90.7%, 75.7% and 82.6% of total net revenue for fiscal 2010, 2009 and 2008. Accordingly, our Expendable Tools segment represented 9.3%, 24.3% and 17.4% of total net revenue for fiscal 2010, 2009 and 2008.

 
27

 

Equipment Segment

We manufacture and sell a line of ball bonders, heavy wire wedge bonders, stud bumpers, and die bonders that are sold to semiconductor device manufacturers, their OSATs, other electronics manufacturers and automotive electronics suppliers. Ball bonders are used to connect very fine wires, typically made of gold or copper, between the bond pads of the semiconductor device, or die, and the leads on its package. 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. Stud bumpers mechanically apply bumps to die, typically while still in the wafer format, for some variants of the flip chip assembly process. 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, superior package quality/process control, and as a result, a lower cost of ownership.
 
Our principal Equipment segment products include:
 
Business Unit
 
Product Name
 
Typical Served Market
Ball bonders
 
IConnPS
 
Advanced and ultra fine pitch applications using either gold or copper wire
   
    IConnPS ProCu
 
  Advanced copper wire applications demanding high productivity
   
    IConnPS LA
 
  Large area applications
   
ConnXPS
 
Cost performance, low pin count applications using either gold or copper wire
   
    ConnXPS LED
 
  LED applications
   
    ConnXPS VLED
 
  Vertical LED applications
   
    ConnXPS LA
 
  Large area applications
   
AT Premier
 
Stud bumping applications (high brightness LED and image sensor)
         
Wedge bonders
3600Plus
 
Power hybrid and automotive modules using either aluminum wire or ribbon
   
7200Plus
 
Power semiconductors using either aluminum wire or ribbon
   
7200HD
 
Smaller power packages using either aluminum wire or ribbon
   
7600HD
 
Power semiconductors including smaller power packages using either aluminum wire or ribbon
         
Die bonder
 
iStackPS
 
Advanced stacked 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 (PS) — a family of assembly equipment that is setting new standards for performance, productivity, upgradeability, and ease of use. Our Power Series consists of our IConnPS high-performance ball bonders, and our ConnXPS cost-performance ball bonders, both of which can be configured for either gold or copper wire. In addition, targeted specifically at the fast growing LED market, the Power Series includes our ConnXPS LED and our ConnXPS VLED.  Targeted for large area applications, the Power Series includes our IConnPS LA and ConnXPS LA. In November 2010, we introduced the IConnPS ProCu which offers a significant new level of capability for customers transitioning from gold to copper wire bonding.

 
28

 
 
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

We are the leaders in the design and manufacture of heavy wire wedge bonders for the power semiconductor and automotive power module markets. Wedge bonders may use either aluminum wire or aluminum ribbon to connect semiconductor chips in power packages, power hybrids and automotive modules for products such as motor control modules or inverters for hybrid cars. In addition, we see some potential use for our wedge bonder products in select solar applications.
 
Our portfolio of wedge bonding products includes:

 
·
The 3600Plus:   high speed, high accuracy wire bonders designed for power modules, automotive packages and other large wire multi-chip module applications.
 
·
The 7200Plus:   dual head wedge bonder designed specifically for power semiconductor applications.
 
·
The 7200HD:    wedge bonder designed for smaller power packages using either aluminum wire or ribbon.
 
·
The 7600HD:    wedge bonder targeted for small power packages.

While wedge bonding traditionally utilized aluminum wire, all of our wedge bonders are also available modified to bond aluminum ribbon using our proprietary PowerRibbon® process. Ribbon offers device makers performance advantages over traditional round wire and is being increasingly used for high current packages and automotive applications.
 
Die Bonders

Our die bonder, the iStack, was launched in March of 2009, and focuses on stacked die applications for both memory and OSAT customers.
 
iStack is targeted at stacked die and high end ball grid array (BGA) applications. In these applications, we expect up to 40% productivity increases compared to current generation machines. In addition, iStack has demonstrated superior accuracy and process control.
 
Other Equipment Products and Services

We also sell manual wire bonders, and we offer spare parts, equipment repair, training services, and upgrades for our equipment through our Support Services business unit.
 
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. In addition, our capillaries are used with both gold and copper wire.

 
29

 
 
 
·
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 and liabilities, net revenue and expenses during the reporting periods, and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. On an on-going basis, we evaluate estimates, including but not limited to, those related to accounts receivable, reserves for excess and obsolete inventory, carrying value and lives of fixed assets, goodwill and intangible assets, valuation allowances for deferred tax assets and deferred tax liabilities, repatriation of un-remitted foreign subsidiary earnings, equity-based compensation expense, restructuring, and warranties. 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.

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

Revenue Recognition

In accordance with Accounting Standards Codification (“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 equipment installation obligations have been completed and customer acceptance, when applicable, has been received or otherwise released from 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 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.
 
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.

 
·
Warranties: Our equipment is generally shipped with a one-year warranty against manufacturing defects. We establish 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.

 
·
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.

 
30

 
 
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 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 we do business, it could have a significant impact on our results of 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 typically 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 cyclical market changes. If actual market conditions are less favorable than projections, additional inventory reserves may be required.
 
Income Taxes

Deferred income taxes are determined using the liability method in accordance with ASC No. 740, Income Taxes (“ASC 740”). 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 our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our 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 740, we utilize a two-step approach for evaluating uncertain tax positions. Step one or recognition, requires us 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.
 
 
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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. The fair value of our stock option awards are estimated using a Black-Scholes option valuation model. Compensation expense associated with market-based restricted stock is determined using a Monte-Carlo valuation model, and compensation expense associated with time-based and performance-based restricted stock is determined based on the number of shares granted and the fair value on the date of grant.
 
The calculation of equity-based compensation costs requires we estimate the number of awards that will be forfeited during the vesting period. We have estimated forfeitures at the time of grant based upon historical experience, and review the forfeiture rates periodically and make adjustments as necessary. In addition, 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. In general, equity-based awards vest annually over a three year period. Our 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. Estimated attainment percentages and the corresponding equity-based compensation expense reported may vary from period to period.
 
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.
 
Presentation of non-GAAP measures

Adjusted net income (loss), adjusted diluted net income (loss) per share and quarterly adjusted return on invested capital (“ROIC”) are supplemental measures of our performance that are not presented in accordance with U.S. generally accepted accounting principles (“GAAP”). We believe certain non-GAAP measures provide investors with an additional, useful perspective on our performance as seen through the eyes of management. Beginning fiscal 2009, we have used non-GAAP measures along with GAAP financial results for: analyzing the performance of our businesses; strategic and tactical decision making; and determining compensation. We do not consider non-GAAP measures to be a substitute for, or superior to, financial results presented in accordance with GAAP. All of the non-GAAP measures included herein were reconciled to the most directly comparable GAAP results in the financial statements. These non-GAAP measures may be calculated differently from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on a comprehensive set of accounting rules or principles and some of the adjustments reflect the exclusion of items that are recurring and will be reflected in the our GAAP financial results for the foreseeable future.

We exclude the following from our GAAP results in presenting non-GAAP measures:

Equity-based compensation expenses
 
We recognize the fair value of our equity-based compensation in expense. Equity-based compensation consists of common stock, stock options and performance-based, market-based and time-based restricted stock granted under our equity compensation plans. Equity-based compensation can vary significantly in amount from period to period.
 
 
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Other

We believe the exclusion of certain other amounts allows for improved comparisons of our results to both prior periods and other companies. We exclude the following other items from non-GAAP measures:

 
·
Amortization of intangibles
 
·
Restructuring
 
·
Impairment of goodwill
 
·
Switzerland pension plan curtailment
 
·
Gain on extinguishment of debt
 
·
Non-cash interest expense
 
·
Net tax settlement expense (benefit) and other tax adjustments
 
Tax Adjustment
 
Non-GAAP measures are tax adjusted using the GAAP tax rate associated with each quarterly period. The tax rate is calculated by dividing each quarter’s GAAP tax expense (benefit), adjusted for discrete quarterly items, by the GAAP operating income (loss) for that quarter. Non-GAAP year-to-date measures are calculated by summing the associated quarterly non-GAAP measures, without further tax adjustments.

The specific non-GAAP measures included herein are: adjusted gross profit, adjusted gross margin, adjusted net income (loss), adjusted net margin, and adjusted earnings per share (“EPS”). We calculate these measures as follows:

Adjusted Gross Profit and Adjusted Gross Margin
 
Our non-GAAP adjusted gross profit and adjusted gross margin exclude the effects of equity-based compensation expense recorded within cost of sales.

Adjusted Net Income (Loss), Adjusted Net Margin and Adjusted EPS
 
Our non-GAAP adjusted net income (loss), adjusted net margin and adjusted EPS exclude equity-based compensation; amortization of intangibles; restructuring; impairment of goodwill; Switzerland pension plan curtailment; gain on extinguishment of debt; non-cash interest expense; net tax settlement expense (benefit); and related tax effects on non-GAAP adjustments.
 
 
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The following table reflects certain GAAP results and the corresponding non-GAAP financial measures for fiscal 2010 and 2009:
 
Unaudited
 
Fiscal
 
(in thousands, except per share amounts)
 
2010
   
2009 *
 
               
Gross profit (GAAP results)
  $ 335,673     $ 88,843  
- Equity-based compensation expense
    207       64  
Gross profit (Non-GAAP measures)
  $ 335,880     $ 88,907  
                 
Income (loss) from operations (GAAP results)
  $ 148,035     $ (73,524 )
- Amortization of intangibles
    9,545       11,092  
- Equity-based compensation expense
    7,565       1,387  
- Restructuring
    2,402       10,959  
- Impairment of goodwill
    -       2,709  
- Switzerland pension plan curtailment
    -       (1,446 )
- Net tax settlement benefit and other tax adjustments
    -       1,812  
Income (loss) from operations (Non-GAAP measures)
  $ 167,547     $ (47,011 )
                 
Weighted average shares outstanding (GAAP & Non-GAAP)
               
Basic
    70,012       62,188  
Diluted
    73,548       62,188  
                 
Income (loss) per share from continuing operations (GAAP results)
               
Basic
  $ 2.01     $ (1.02 )
Diluted
  $ 1.92     $ (1.02 )
                 
Adjustments to net income (loss) per share
               
Basic
  $ 0.37     $ 0.24  
Diluted
  $ 0.35     $ 0.24  
                 
Income (loss) per share from continuing operations (Non-GAAP measures)
               
Basic
  $ 2.38     $ (0.78 )
Diluted
  $ 2.27     $ (0.78 )

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.
 
 
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The following table reflects our adjusted ROIC for three months ended October 2, 2010:

   
Three months ended
 
   
October 2, 2010
 
             
Income from operations
  $ 56,675        
Adjustment: Depreciation and amortization  (1)
    4,273        
               
Adjusted income from operations
    60,948        
               
Adjusted income from operations, annualized (2)
          $ 243,792  
                 
Cash, cash equivalents, restricted cash and investments
  $ 181,334          
Adjustment: cash, cash equivalents, restricted cash and investments (3)
    (106,334 )        
                 
Adjusted cash, cash equivalents and investments
          $ 75,000  
Total assets excluding cash, cash equivalents and investments
            398,835  
                 
Adjusted total assets
            473,835  
                 
Total current liabilities
  $ 125,130          
Add: taxes payable (4)
    1,968          
                 
Adjusted current liabilities
            127,098  
                 
Adjusted net invested capital
          $ 346,737  
                 
ROIC  (4)
            70.3 %
 
(1) Depreciation and amortization are excluded from the ROIC calculation.
(2) ROIC is calculated as non-GAAP adjusted income from operations, annualized by multiplying the current quarter’s non-GAAP income from operations by 4, then divided by adjusted net invested capital. Adjusted income from operations is not intended to forecast the Company's future income from operations.
(3) Management estimates minimum cash requirement is $75.0 million.
(4) Adjusted current liabilities includes tax liabilities classified as current in prior periods but reclassed to long term liabilities as a result of our adoption of ASC 740.10 during the first quarter of fiscal 2008.
 
 
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Results of Operations for fiscal 2010 and 2009

The following table reflects our income (loss) from operations for fiscal 2010 and 2009:

   
Fiscal
             
(dollar amounts in thousands)
 
2010
   
2009
   
$ Change
   
% Change
 
Net revenue
  $ 762,784     $ 225,240     $ 537,544       238.7 %
Cost of sales
    427,111       136,397       290,714       213.1 %
Gross profit
    335,673       88,843       246,830       277.8 %
                                 
Selling, general and administrative
    130,978       106,175       24,803       23.4 %
Research and development
    56,660       53,483       3,177       5.9 %
Impairment of goodwill
    -       2,709       (2,709 )     -100.0 %
Operating expenses
    187,638       162,367       25,271       15.6 %
                                 
Income (loss) from operations
  $ 148,035     $ (73,524 )   $ 221,559       301.3 %

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 2010 and 2009:

   
Fiscal
 
(in thousands)
 
2010
   
2009
 
Bookings
  $ 973,062     $ 208,234  

The following table reflects our backlog as of October 2, 2010 and October 3, 2009:

   
As of
 
(in thousands)
 
October 2, 2010
   
October 3, 2009
 
Backlog
  $ 252,459     $ 42,181  
 
 
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Net Revenue

 
Approximately 98.6% and 97.0% of our net revenue for fiscal 2010 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 2010 and 2009:

   
Fiscal
             
(dollar amounts in thousands)
 
2010
   
2009
   
$ Change
   
% Change
 
Equipment
  $ 691,988     $ 170,536     $ 521,452       305.8 %
Expendable Tools
    70,796       54,704       16,092       29.4 %
Total
  $ 762,784     $ 225,240     $ 537,544       238.7 %

Equipment

The following table reflects the components of Equipment net revenue change from fiscal 2010 to 2009:

   
Fiscal 2010 vs. 2009
 
(in thousands)
 
Price
   
Volume
   
$ Change
 
Equipment
  $ 669     $ 520,783     $ 521,452  
 
For fiscal 2010, higher Equipment net revenue was due to a 413.9% increase in volume for ball bonders and 157.8% increase in volume for wedge bonders. The volume increases were due to higher semiconductor unit demand and increased capacity utilization rates of our customers, which in turn increased demand for capital equipment. In addition, customer investment in new copper bonding capability has driven a significant proportion of our ball bonder business.

Expendable Tools

The following table reflects the components of Expendable Tools net revenue change from fiscal 2010 to 2009:

   
Fiscal 2010 vs. 2009
 
(in thousands)
 
Price
   
Volume
   
$ Change
 
Expendable Tools
  $ (752 )   $ 16,844     $ 16,092  

The increase in Expendable Tools net revenue from fiscal 2009 to 2010 was due to volume increases in all our Expendable Tools businesses. Since Expendable Tools products are consumables used for the connections of Integrated Circuits (“IC”) units, as overall consumer demand for electronic equipment has increased, so has the demand for IC units. As a result, volume increased for our Expendable Tools. Our non-wedge bonder Tools volume increased 31.3% while Blades volume increased 40.1%. Our wedge bonder tools net revenue also increased 25.7%.
 
 
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Gross Profit

The following table reflects gross profit by business segment for fiscal 2010 and 2009:

   
Fiscal
             
(dollar amounts in thousands)
 
2010
   
2009
   
$ Change
   
% Change
 
Equipment
  $ 292,946     $ 59,433     $ 233,513       392.9 %
Expendable Tools
    42,727       29,410       13,317       45.3 %
Total
  $ 335,673     $ 88,843     $ 246,830       277.8 %

The following table reflects gross profit as a percentage of net revenue by business segment for fiscal 2010 and 2009:

   
Fiscal
   
Basis Point
 
   
2010
   
2009
   
Change
 
Equipment
    42.3 %     34.9 %     740  
Expendable Tools
    60.4 %     53.8 %     660  
Total
    44.0 %     39.4 %     460  

Equipment

The following table reflects the components of Equipment gross profit change from fiscal 2010 to 2009:

   
Fiscal 2010 vs. 2009
 
(in thousands)
 
Price
   
Cost
   
Volume
   
$ Change
 
Equipment
  $ 669     $ (220 )   $ 233,064     $ 233,513  
 
For fiscal 2010, gross profit increased significantly due to volume increases for ball bonders and wedge bonders. The higher semiconductor unit demand during the current year increased capacity utilization rates of our customers, which in turn increased demand for capital equipment.
 
Expendable Tools

The following table reflects the components of Expendable Tools gross profit change from fiscal 2010 to 2009:
 
   
Fiscal 2010 vs. 2009
 
(in thousands)
 
Price
   
Cost
   
Volume
   
$ Change
 
Expendable Tools
  $ (752 )   $ 6,216     $ 7,853     $ 13,317  
 
The net increase in Expendable Tools gross profit from fiscal 2009 to 2010 was primarily due to volume increases in all Expendable Tools businesses. Since Expendable Tools products are consumables used for the connections of IC units, as overall consumer demand for electronic equipment increased, so has the demand for IC units. As a result, volume has increased for our Expendable Tools segment. Tools volume increased 31.3%, while Blades volume increased 40.1%. The increase in the gross profit was also due to lower cost from better absorption of fixed manufacturing costs as our volumes were higher. Consolidating our capillary tools manufacturing from Israel to China also contributed to our cost reductions and resulted in improved gross profit.
 
 
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Operating Expenses

The following table reflects operating expenses as a percentage of net revenue for fiscal 2010 and 2009:

   
Fiscal
   
Basis Point
 
   
2010
   
2009
   
Change
 
Selling, general and administrative
    17.2 %     47.1 %     2,990  
Research and development
    7.4 %     23.7 %     1,630  
Impairment of goodwill
    0.0 %     1.2 %     120  
Total
    24.6 %     72.0 %     4,740  

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

An increase in SG&A expenses of $24.8 million during fiscal 2010 as compared to fiscal 2009 was primarily due to:

 
·
$14.7 million higher incentive compensation expense driven by current fiscal year net income as compared to a net loss during fiscal 2009;
 
·
$5.4 million increase in sales commissions due to higher net revenue for the current fiscal year;
 
·
$5.2 million higher equity-based compensation expense due to the following:
 
·
$2.3 million related to higher estimated percentage attainments for performance-based restricted stock, of which $0.3 million related to compensation as a result of the retirement of our Chief Executive Officer;
 
·
$1.5 million related to market-based restricted stock granted during fiscal 2010, of which $0.9 million related to compensation as a result of the retirement of our Chief Executive Officer, and;
 
·
$1.4 million related to time-based restricted stock granted during fiscal 2010.
 
·
$4.7 million higher consulting, employee staffing and travel related costs, of which $1.9 million relates to the retirement of our Chief Executive Officer and the hiring of his replacement;
 
·
$4.1 million higher factory transition costs for the move of additional production to Asia from Irvine, California and Israel;
 
·
$1.9 million pension expense related to a current year increase in our pension obligation primarily related to sales representatives in Taiwan, and;
 
·
$1.0 million unfavorable foreign currency variance.

These increases in SG&A were partially offset by:
 
·
$8.6 million lower severance costs related to prior fiscal year headcount reductions, and;
 
·
$2.9 million lower depreciation and amortization expense due to certain intangible assets and fixed assets becoming fully depreciated.

Research and development (“R&D”)

The $3.2 million increase of R&D expense during fiscal 2010 compared to fiscal 2009 was mostly attributable to:

 
·
$2.1 million higher R&D expense related to set up costs for our Israel technology center; and
 
·
$0.8 million higher equity-based compensation expense due to higher estimated percentage attainments for performance-based restricted stock and time-based restricted stock granted during fiscal 2010.
 
 
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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.
 
Income (Loss) from Operations

The following table reflects income (loss) from operations by business segment for fiscal 2010 and 2009:

   
Fiscal
             
(dollar amounts in thousands)
 
2010
   
2009 *
   
$ Change
   
% Change
 
Equipment
  $ 137,321     $ (78,741 )   $ 216,062       274.4 %
Expendable Tools
    10,714       5,217       5,497       105.4 %
Total
  $ 148,035     $ (73,524 )   $ 221,559       301.3 %

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

For fiscal 2010, higher Equipment income from operations was due to significantly improved volume for ball bonders and wedge bonders. In addition for fiscal 2010, the higher semiconductor unit-demand during the current year increased capacity utilization rates of our customers, which in turn increased demand for capital equipment.
 
Expendable Tools

The increase in Expendable Tools income from operations from fiscal 2009 to 2010 was due to volume increases in all our Expendable Tools businesses. Accordingly, the net increase in Expendable Tools gross profit from fiscal 2009 to 2010 was primarily due to volume increases in all Expendable Tools businesses. In addition, the increase in the gross profit was due to lower cost from better absorption of fixed manufacturing costs as our volumes were higher. Consolidating our capillary tools manufacturing from Israel to China also contributed to our cost reductions and resulted in improved gross profit.
 
Interest Income and Expense

The following table reflects interest income and interest expense for fiscal 2010 and 2009:

   
Fiscal
             
(dollar amounts in thousands)
 
2010
   
2009 *
   
$ Change
   
% Change
 
Interest income
  $ 403     $ 1,106     $ (703 )     -63.6