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EX-10.1 - KULICKE & SOFFA INDUSTRIES INCv220751_ex10-1.htm
EX-10.4 - KULICKE & SOFFA INDUSTRIES INCv220751_ex10-4.htm
EX-31.1 - KULICKE & SOFFA INDUSTRIES INCv220751_ex31-1.htm
EX-31.2 - KULICKE & SOFFA INDUSTRIES INCv220751_ex31-2.htm
EX-10.3 - KULICKE & SOFFA INDUSTRIES INCv220751_ex10-3.htm
EX-32.2 - KULICKE & SOFFA INDUSTRIES INCv220751_ex32-2.htm
EX-32.1 - KULICKE & SOFFA INDUSTRIES INCv220751_ex32-1.htm
EX-10.2 - KULICKE & SOFFA INDUSTRIES INCv220751_ex10-2.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended April 2, 2011

OR

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

For the transition period from                     to                .

Commission File No.  0-121

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

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

6 Serangoon North, Avenue 5, #03-16, Singapore 554910
(Address of principal executive offices and Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No ¨

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 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 May 5, 2011, there were 71,998,581 shares of the Registrant's Common Stock, no par value, outstanding.

 
 

 

KULICKE AND SOFFA INDUSTRIES, INC.

FORM 10 – Q

April 2, 2011

Index

   
Page Number
     
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
FINANCIAL STATEMENTS (Unaudited)
 
     
 
Consolidated Balance Sheets as of April 2, 2011 and October 2, 2010
3
     
 
Consolidated Statements of Operations for the three and six months ended April 2, 2011 and April 3, 2010
4
     
 
Consolidated Statements of Cash Flows for the six months ended April 2, 2011 and April 3, 2010
5
     
 
Notes to the Consolidated Financial Statements
6
     
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
24
     
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
40
     
Item 4.
CONTROLS AND PROCEDURES
40
     
PART II.
OTHER INFORMATION
 
     
Item 1A.
RISK FACTORS
41
     
Item 6.
EXHIBITS
41
     
 
SIGNATURES
42
 
 
2

 
 
PART I. - FINANCIAL INFORMATION
Item 1.  FINANCIAL STATEMENTS

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
   
As of
 
   
April 2, 2011
   
October 2, 2010
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 275,676     $ 178,112  
Restricted cash
    -       237  
Short-term investments
    6,139       2,985  
Accounts and notes receivable, net of allowance for doubtful accounts of $870 and $980, respectively
    163,631       196,035  
Inventories, net
    82,939       73,893  
Prepaid expenses and other current assets
    12,232       15,985  
Deferred income taxes
    5,454       5,443  
TOTAL CURRENT ASSETS
    546,071       472,690  
                 
Property, plant and equipment, net
    30,604       30,059  
Goodwill
    43,898       26,698  
Intangible assets
    34,340       39,111  
Other assets
    11,902       11,611  
TOTAL ASSETS
  $ 666,815     $ 580,169  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current Liabilities:
               
Accounts payable
  $ 76,030     $ 82,353  
Accrued expenses and other current liabilities
    48,193       41,498  
Earnout agreement payable (Note 4)
    17,200       -  
Income taxes payable
    1,349       1,279  
TOTAL CURRENT LIABILITIES
    142,772       125,130  
                 
Long-term debt
    101,749       98,475  
Deferred income taxes
    21,388       20,355  
Other liabilities
    13,129       13,729  
TOTAL LIABILITIES
    279,038       257,689  
                 
Commitments and contingent liabilities (Note 10)
               
                 
SHAREHOLDERS' EQUITY:
               
Preferred stock, without par value:
               
Authorized 5,000 shares; issued - none
    -       -  
Common stock, no par value:
               
Authorized 200,000 shares; issued 76,767 and 75,429, respectively; outstanding 71,813 and 70,475 shares, respectively
    433,176       423,715  
Treasury stock, at cost, 4,954 shares
    (46,356 )     (46,356 )
Accumulated deficit
    (686 )     (55,670 )
Accumulated other comprehensive income
    1,643       791  
TOTAL SHAREHOLDERS' EQUITY
    387,777       322,480  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 666,815     $ 580,169  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
3

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

   
Three months ended
   
Six months ended
 
   
April 2,
   
April 3,
   
April 2,
   
April 3,
 
   
2011
   
2010
   
2011
   
2010
 
Net revenue
  $ 206,729     $ 153,838     $ 355,592     $ 282,253  
                                 
Cost of sales
    107,772       86,066       184,523       158,108  
                                 
Gross profit
    98,957       67,772       171,069       124,145  
                                 
Selling, general and administrative
    38,784       30,470       73,634       55,696  
Research and development
    16,524       13,980       31,719       27,141  
Operating expenses
    55,308       44,450       105,353       82,837  
                                 
Income from operations
    43,649       23,322       65,716       41,308  
Interest income
    156       89       261       186  
Interest expense
    (2,021 )     (2,105 )     (4,035 )     (4,188 )
Income from operations before income tax
    41,784       21,306       61,942       37,306  
Provision for income taxes
    1,899       148       6,958       308  
Net income
  $ 39,885     $ 21,158     $ 54,984     $ 36,998  
                                 
Net income per share:
                               
Basic
  $ 0.55     $ 0.30     $ 0.77     $ 0.52  
Diluted
  $ 0.54     $ 0.28     $ 0.75     $ 0.50  
                                 
Weighted average shares outstanding:
                               
Basic
    71,512       69,806       71,196       69,745  
Diluted
    73,120       74,371       72,410       74,143  

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

 
 
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
 
   
Six months ended
 
   
April 2, 2011
   
April 3, 2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 54,984     $ 36,998  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
               
Depreciation and amortization
    8,804       8,919  
Amortization of debt discount and debt issuance costs
    3,552       3,404  
Equity-based compensation and employee benefits
    4,124       3,411  
Provision for doubtful accounts
    (109 )     15  
Provision for inventory valuation
    2,212       169  
Deferred taxes
    2,716       8  
Changes in operating assets and liabilities, net of businesses acquired or sold:
               
                 
Accounts and notes receivable
    32,445       (12,557 )
Inventory
    (11,407 )     (15,787 )
Prepaid expenses and other current assets
    3,702       (1,661 )
Accounts payable, accrued expenses and other current liabilities
    601       20,371  
Income taxes payable
    81       (984 )
Other, net
    82       (1,987 )
Net cash provided by continuing operations
    101,787       40,319  
Net cash used in discontinued operations
    (968 )     (906 )
Net cash provided by operating activities
    100,819       39,413  
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property, plant and equipment
    (4,589 )     (2,106 )
Proceeds from sale of property, plant and equipment
    -       3,958  
Purchases of investments classified as available-for-sale
    (3,285 )     -  
Changes in restricted cash, net
    237       65  
Net cash provided by (used in) continuing operations
    (7,637 )     1,917  
Net cash used in discontinued operations
    -       (1,838 )
Net cash provided by (used in) investing activities
    (7,637 )     79  
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from exercise of common stock options
    4,031       212  
Net costs from sale of common stock
    -       (29 )
Net cash provided by financing activities
    4,031       183  
Effect of exchange rate changes on cash and cash equivalents
    351       (154 )
Changes in cash and cash equivalents
    97,564       39,521  
Cash and cash equivalents at beginning of period
    178,112       144,560  
Cash and cash equivalents at end of period
  $ 275,676     $ 184,081  
CASH PAID FOR:
               
Interest
  $ 481     $ 726  
Income taxes
  $ 4,288     $ 1,725  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
5

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

NOTE 1:  BASIS OF PRESENTATION

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

The interim consolidated financial statements are unaudited and, in management’s opinion, include all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of results for these interim periods. The interim consolidated financial statements do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended October 2, 2010, filed with the Securities and Exchange Commission, which includes Consolidated Balance Sheets as of October 2, 2010 and October 3, 2009, and the related Consolidated Statements of Operations, Cash Flows, and Changes in Shareholders’ Equity for each of the years in the three-year period ended October 2, 2010. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full year.

Each of the Company’s first three fiscal quarters end on the Saturday that is 13 weeks after the end of the immediately preceding fiscal quarter. The fourth quarter of each fiscal year ends on the Saturday closest to September 30th. Fiscal 2011 quarters end on January 1, 2011, April 2, 2011, July 2, 2011 and October 1, 2011. Fiscal 2010 quarters ended on January 2, 2010, April 3, 2010, July 3, 2010 and October 2, 2010. In fiscal years consisting of 53 weeks, the fourth quarter will consist of 14 weeks.

Nature of Business

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

Use of Estimates

The preparation of the interim consolidated financial statements requires management to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the interim consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Authoritative pronouncements, historical experience and assumptions are used as the basis for making estimates, and on an ongoing basis, management evaluates these estimates. Actual results could differ from those estimates.

Vulnerability to Certain Concentrations

Financial instruments which may subject the Company to concentrations of credit risk as of April 2, 2011 and October 2, 2010 consisted primarily of short-term investments and trade receivables. The Company manages credit risk associated with investments by investing its excess cash in highly rated debt instruments of the U.S. Government and its agencies, financial institutions, and corporations. The Company has established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity. These guidelines are periodically reviewed and modified as appropriate. The Company does not have any exposure to sub-prime financial instruments or auction rate securities.
 
 
6

 
 
The Company’s trade receivables result primarily from the sale of semiconductor equipment, related accessories and replacement parts, and expendable tools to a relatively small number of large manufacturers in a highly concentrated industry. Write-offs of uncollectible accounts have historically not been significant; however, the Company closely monitors its customers’ financial strength to reduce the risk of loss.

The Company’s products are complex and require raw materials, components and subassemblies having a high degree of reliability, accuracy and performance. The Company relies on subcontractors to manufacture many of these components and subassemblies and it relies on sole source suppliers for some important components and raw material inventory.

The Company’s international operations are exposed to changes in foreign currency exchange rates due to transactions denominated in currencies other than the location’s functional currency. The Company is also exposed to foreign currency fluctuations that impact the remeasurement of net monetary assets of those operations whose functional currency, the U.S. dollar, differs from their respective local currencies, most notably in Israel, Malaysia, Singapore and Switzerland. In addition to net monetary remeasurement, the Company has exposures related to the translation of subsidiary financial statements from their functional currency, the local currency, into our reporting currency, the U.S. dollar, most notably in China and Japan. The Company’s U.S. operations also have foreign currency exposure due to net monetary assets denominated in currencies other than the U.S. dollar.

Foreign Currency Translation

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

Allowance for Doubtful Accounts

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

Inventories

Inventories are stated at the lower of cost (on a first-in first-out basis) or market value. The Company generally provides reserves for obsolete inventory and for inventory considered to be in excess of demand. In addition, the Company generally records as accrued expense inventory purchase commitments in excess of demand. Demand is generally defined as eighteen months future consumption for non-Wedge bonder equipment, twenty-four months consumption for Wedge bonder equipment and all spare parts, and twelve months consumption for expendable tools. The forecasted demand is based upon internal projections, historical sales volumes, customer order activity and a review of consumable inventory levels at customers’ facilities. The Company communicates forecasts of its future demand to its suppliers and adjusts commitments to those suppliers accordingly. If required, the Company reserves the difference between the carrying value of its inventory and the lower of cost or market value, based upon assumptions about future demand, and market conditions. If actual market conditions are less favorable than projections, additional inventory reserves may be required.
 
 
7

 

Revenue Recognition

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

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

Income Taxes

Deferred income taxes are determined using the liability method in accordance with ASC No. 740, Income Taxes (“ASC 740”). The Company records a valuation allowance to reduce its deferred tax assets to the amount it expects is more likely than not to be realized. While the Company has considered future taxable income and its ongoing tax planning strategies in assessing the need for the valuation allowance, if it were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax asset would decrease income in the period such determination was made.

In accordance with ASC No. 740 Topic 10, Income Taxes, General (“ASC 740.10”), the Company accounts for uncertain tax positions taken or expected to be taken in its income tax return. Under ASC 740.10, the Company utilizes a two-step approach for evaluating uncertain tax positions. Step one, or recognition, requires a company to determine if the weight of available evidence indicates a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, or measurement, is based on the largest amount of benefit, which is more likely than not to be realized on settlement with the taxing authority.

 
8

 

NOTE 2: RESTRUCTURING
 
During fiscal 2010, the Company committed to a plan to reduce its Irvine, California workforce by approximately 60 employees over a period of approximately 26 months. As part of this workforce reduction plan, substantially all of the Company's California-based wedge bonder manufacturing, as well as certain administrative functions, are being transferred to the Company's manufacturing facilities in Kuala Lumpur, Malaysia and Singapore. Management determined it was in the best interests of the Company to migrate production and certain administrative functions from California to Asia. With respect to the California-based wedge bonder transfer to Asia, the Company anticipates $0.5 million of additional pre-tax expense to be incurred over the next twelve months, with cash payments to be substantially complete by the end of fiscal 2012.
 
In addition to the California-based transition to Asia, the Company is consolidating certain of its other U.S.-based operations to Asia.

The following table reflects severance activity for all plans during the three and six months ended April 2, 2011 and April 3, 2010:

   
Three months ended
   
Six months ended
 
(in thousands)
 
April 2, 2011
   
April 3, 2010
   
April 2, 2011
   
April 3, 2010
 
                         
Accrual for estimated severance and benefits, beginning of period
  $ 3,473     $ 2,193     $ 2,395     $ 2,413  
Provision for severance and benefits: Equipment segment  (1)
    541       202       1,685       168  
Provision for severance and benefits: Expendable Tools segment (1)
    139       124       463       357  
Payment of severance and benefits
    (1,000 )     (446 )     (1,390 )     (865 )
Accrual for estimated severance and benefits, end of period  (2)
  $ 3,153     $ 2,073     $ 3,153     $ 2,073  
 
(1) Provision for severance and benefits is the total amount expected to be incurred and is included within selling, general and administrative expenses on the Consolidated Statements of Operations.
(2)  The accrual for estimated severance as of April 2, 2011 and April 3, 2010 was included within accrued expenses and other current liabilities and other liabilities on the Consolidated Balance Sheets. In addition to these restructuring amounts, as of April 2, 2011, the Company had other non-restructuring severance obligations included within accrued expenses and other current liabilities and other liabilities on the Consolidated Balance Sheets.
 
 
9

 
 
NOTE 3: BALANCE SHEET COMPONENTS

The following tables reflect the components of significant balance sheet accounts as of April 2, 2011 and October 2, 2010:

   
As of
 
(in thousands)
 
April 2, 2011
   
October 2, 2010
 
             
Short term investments, available-for-sale:
           
Deposits maturing within one year  (1)
  $ 6,139     $ 2,985  
    $ 6,139     $ 2,985  
                 
Inventories, net:
               
Raw materials and supplies
  $ 50,235     $ 41,693  
Work in process
    30,039       26,682  
Finished goods
    14,212       15,658  
      94,486       84,033  
Inventory reserves
    (11,547 )     (10,140 )
    $ 82,939     $ 73,893  
                 
Property, plant and equipment, net:
               
Land
  $ 2,086     $ 2,086  
Buildings and building improvements
    8,651       8,651  
Leasehold improvements
    14,851       12,916  
Data processing equipment and software
    23,291       22,280  
Machinery, equipment, furniture and fixtures
    38,727       37,007  
      87,606       82,940  
Accumulated depreciation
    (57,002 )     (52,881 )
    $ 30,604     $ 30,059  
                 
Accrued expenses and other current liabilities:
               
Wages and benefits
  $ 15,533     $ 15,836  
Accrued customer obligations  (2)
    13,102       8,918  
Commissions and professional fees  (3)
    6,463       6,639  
Severance  (4)
    3,729       2,947  
Short-term facility accrual related to discontinued operations (Test)
    1,696       1,734  
Other
    7,670       5,424  
    $ 48,193     $ 41,498  

(1) All short-term investments were classified as available for sale and were measured at fair value based on level one measurement, or quoted market prices, as defined by ASC 820. As of April 2, 2011 and October 2, 2010, fair value approximated the cost basis for short-term investments. The Company did not recognize any realized gains or losses on the sale of investments during the three or six months ended April 2, 2011 and April 3, 2010.
(2) Represents customer advance payments, customer credit program, accrued warranty expense and accrued retrofit costs.
(3) Balances as of April 2, 2011 and October 2, 2010 include $1.8 million and $0.9 million, respectively, of liability classified stock compensation expenses in connection with the September 2010 retirement of the Company’s former Chief Executive Officer (“CEO”). In addition, balances for both periods include $0.3 million related to his three year consulting arrangement. An additional $0.2 million of liability classified stock compensation expenses was recorded in other liabilities related to the long term portion of his agreement (see Note 6) as of October 2, 2010. In addition, $0.4 million and $0.6 million were recorded within other liabilities related to the long term portion of his consulting agreement as of April 2, 2011 and October 2, 2010, respectively.
(4) Total severance payable within the next twelve months includes restructuring plan discussed in Note 2 and approximately $0.7 million of other severance not part of the Company’s transition and consolidation of operations to Asia.
 
 
10

 
 
NOTE 4: GOODWILL AND INTANGIBLE ASSETS

Goodwill

Intangible assets classified as goodwill are not amortized. The Company performs an annual impairment test of its goodwill during the fourth quarter of each fiscal year, which coincides with the completion of its annual forecasting process. The Company performed its annual impairment test in the fourth quarter of fiscal 2010 and no impairment charge was required.

The Company also tests for impairment between annual tests if a “triggering” event occurs that may have the effect of reducing the fair value of a reporting unit below its respective carrying value.

On October 3, 2008, the Company completed the acquisition of Orthodyne Electronics Corporation (“Orthodyne”) and agreed to pay Orthodyne an additional amount in the future based upon the gross profit realized by the acquired business over a three year period from date of acquisition pursuant to an Earnout Agreement (the “Earnout”). As of April 2, 2011, the maximum potential payout under the Earnout could be $30.0 million, and the Company has accrued $17.2 million as an adjustment to goodwill.

The following table reflects Goodwill as of April 2, 2011 and October 2, 2010:

   
As of
 
(dollar amounts in thousands)
 
April 2, 2011
   
October 2, 2010
 
Beginning of period, Goodwill
  $ 26,698     $ 26,698  
Increase to Goodwill for Earnout
    17,200       -  
                 
End of period, Goodwill
  $ 43,898     $ 26,698  

Intangible Assets

Intangible assets with determinable lives are amortized over their estimated useful lives. The Company’s intangible assets consist primarily of wedge bonder developed technology and customer relationships.
 
 
11

 
 
The following table reflects net intangible assets as of April 2, 2011and October 2, 2010:

   
As of
   
Average estimated
 
(dollar amounts in thousands)
 
April 2, 2011
   
October 2, 2010
   
useful lives (in years)
 
Wedge bonder developed technology
  $ 33,200     $ 33,200       7.0  
Accumulated amortization
    (11,857 )     (9,486 )        
Net wedge bonder developed technology
    21,343       23,714          
                         
Wedge bonder customer relationships
    19,300       19,300       5.0  
Accumulated amortization
    (9,650 )     (7,720 )        
Net wedge bonder customer relationships
    9,650       11,580          
                         
Wedge bonder trade name
    4,600       4,600       8.0  
Accumulated amortization
    (1,437 )     (1,150 )        
Net wedge bonder trade name
    3,163       3,450          
                         
Wedge bonder other intangible assets
    2,500       2,500       1.9  
Accumulated amortization
    (2,316 )     (2,133 )        
Net wedge bonder other intangible assets
    184       367          
                         
Net intangible assets
  $ 34,340     $ 39,111          

The following table reflects estimated annual amortization expense related to intangible assets as of April 2, 2011:

(in thousands)
     
Remaining fiscal 2011
  $ 4,773  
Fiscal 2012
    9,178  
Fiscal 2013
    9,178  
Fiscal 2014
    5,318  
Fiscal 2015-2016
    5,893  
         
Total amortization expense
  $   34,340  

NOTE 5: DEBT AND OTHER OBLIGATIONS

The following table reflects debt consisting of Convertible Subordinated Notes as of April 2, 2011 and October 2, 2010:
               
(in thousands)
 
               
As of
 
Rate
 
Payment date of each year
 
Conversion price
 
Maturity date
 
April 2, 2011
   
October 2, 2010
 
  0.875 %
June 1 and December 1
  $ 14.36  
June 1, 2012
  $ 110,000     $ 110,000  
     
Debt discount on 0.875% Convertible Subordinated Notes due June 2012
    (8,251 )     (11,525 )
                    $ 101,749     $ 98,475  
 
 
12

 
 
The following table reflects the estimated fair value of the Company’s Convertible Subordinated Notes as of April 2, 2011 and October 2, 2010:
 
   
(in thousands)
 
   
Fair value as of (1)
 
Description
 
April 2, 2011
   
October 2, 2010
 
             
0.875% Convertible Subordinated Notes
  $ 108,350     $ 102,025  
 
(1)
In accordance with ASC 820, the Company relies upon observable market data such as its common stock price, interest rates, and other market factors in establishing fair value.

The following table reflects amortization expense related to issue costs from the Company’s Convertible Subordinated Notes for the three and six months ended April 2, 2011 and April 3, 2010:

   
Three months ended
   
Six months ended
 
(in thousands)
 
April 2, 2011
   
April 3, 2010
   
April 2, 2011
   
April 3, 2010
 
Amortization expense related to issue costs
  $ 141     $ 192     $ 279     $ 388  

0.875% Convertible Subordinated Notes

Holders of the 0.875% Convertible Subordinated Notes may convert their notes based on an initial conversion rate of approximately 69.6621 shares per $1,000 principal amount of notes (equal to an initial conversion price of approximately $14.355 per share) only under specific circumstances. The initial conversion rate will be adjusted for certain events. The Company presently intends to satisfy any conversion of the 0.875% Convertible Subordinated Notes with cash up to the principal amount of the 0.875% Convertible Subordinated Notes and, with respect to any excess conversion value, with shares of its common stock. The Company has the option to elect to satisfy the conversion obligations in cash, common stock or a combination thereof.

The 0.875% Convertible Subordinated Notes will not be redeemable at the Company’s option. Holders of the 0.875% Convertible Subordinated Notes will not have the right to require the Company to repurchase their 0.875% Convertible Subordinated Notes prior to maturity except in connection with the occurrence of certain fundamental change transactions. The 0.875% Convertible Subordinated Notes may be accelerated upon an event of default as described in the Indenture and will be accelerated upon bankruptcy, insolvency, appointment of a receiver and similar events with respect to the Company.
 
The Company adopted ASC 470.20, which requires that issuers of convertible debt that may be settled in cash upon conversion record the liability and equity components of the convertible debt separately. The liability component of the Company’s 0.875% Convertible Subordinated Notes will continue to be classified as long-term debt and the equity component of the 0.875% Convertible Subordinated Notes is classified as common stock on the Company’s Consolidated Balance Sheets.
 
 
13

 

Credit Facility

On April 4, 2011, Kulicke & Soffa Pte. Ltd. (“Pte”), the Company’s wholly-owned subsidiary, entered into a Short Term Credit Facilities Agreement (the “Facilities Agreement”) with DBS Bank Ltd. (“DBS Bank”). In accordance with the Facilities Agreement, DBS Bank has agreed to make available to Pte the following banking facilities:

(i) a short term loan facility of up to $12.0 million (the “STL Facility”); and
(ii) a revolving credit facility of up to $8.0 million (the “RC Facility”).

The STL Facility is an uncommitted facility, and therefore, cancellable by DBS Bank at any time in its sole discretion. Borrowings under the STL Facility bear interest at the Singapore Interbank Offered Rate (“SIBOR”) plus 1.5%. The RC Facility is a committed facility and is available to Pte until September 10, 2013, the maturity date. Borrowings under the RC Facility bear interest at SIBOR plus 2.5%. The Facilities Agreement has been entered into in order to provide support, if needed, to fund Pte’s working capital requirements. The Company did not have any borrowings under the Facilities Agreement as of or during the six months ended April 2, 2011.

The Facilities Agreement and related Debenture dated April 4, 2011 replace the facilities agreement and related debenture by and between Kulicke and Soffa Global Holding Corporation, a wholly-owned subsidiary of the Company, and DBS Bank Ltd. (Labuan Branch), entered into on September 29, 2010, which were terminated as of April 4, 2011.

NOTE 6: SHAREHOLDERS’ EQUITY AND EMPLOYEE BENEFIT PLANS
 
Common Stock
 
The Company has a 401(k) retirement income plan (the “Plan”) for its employees. Historically, the Company’s matching contributions to the Plan were made in the form of issued and contributed shares of Company common stock; however, beginning January 2, 2011, matching contributions to the Plan are made in cash rather than shares of the Company’s common stock. The Plan allows for employee contributions and matching Company contributions up to 4% or 6% of the employee’s contributed amount based upon years of service.

The following table reflects the Company’s matching contributions to the 401(k) retirement income plan which were made in the form of issued and contributed shares of Company common stock or cash during the three and six months ended April 2, 2011 and April 3, 2010:

   
Three months ended
   
Six months ended
 
(in thousands)
 
April 2, 2011
   
April 3, 2010
   
April 2, 2011
   
April 3, 2010
 
Number of common shares
    n/a       50       42       100  
Fair value based upon market price at date of distribution
    n/a     $ 308     $ 279     $ 598  
Cash
  $ 406       n/a       406       n/a  
 
 
14

 
 
Accumulated Other Comprehensive Income

The following table reflects accumulated other comprehensive income (expense) reflected on the Consolidated Balance Sheets as of April 2, 2011 and October 2, 2010:

   
As of
 
(in thousands)
 
April 2, 2011
   
October 2, 2010
 
Gain from foreign currency translation adjustments
  $ 2,661     $ 1,767  
Unrecognized actuarial net loss, Switzerland pension plan, net of tax
    (630 )     (588 )
Switzerland pension plan curtailment
    (388 )     (388 )
Accumulated other comprehensive income
  $ 1,643     $ 791  

The following table reflects the components of comprehensive income for the three and six months ended April 2, 2011 and April 3, 2010:

   
Three months ended
   
Six months ended
 
   
April 2, 2011
   
April 3, 2010
   
April 2, 2011
   
April 3, 2010
 
Net income (1)
  $ 39,885     $ 21,158     $ 54,984     $ 36,998  
Gain (loss) from foreign currency translation adjustments
    196       (2 )     894       (655 )
Unrecognized actuarial net gain (loss),
                               
Switzerland pension plan, net of tax
    -       (29 )     (42 )     9  
Other comprehensive income (loss)
    196       (31 )     852       (646 )
Comprehensive income
  $ 40,081     $ 21,127     $ 55,836     $ 36,352  

Equity-Based Compensation

As of April 2, 2011, the Company had seven equity-based employee compensation plans (the “Employee Plan”) and three director compensation plans (the “Director Plans”) (collectively, the “Plans”). Under these Plans, stock options, performance-based share awards (collectively, “performance-based restricted stock”), time-based share awards (collectively, “time-based restricted stock”), market-based share awards (collectively, “market-based restricted stock”) or common stock have been granted at 100% of the market price of the Company’s common stock on the date of grant. As of April 2, 2011, the Company’s one active plan, the 2009 Equity Plan, had 6.1 million shares of common stock available for grant to its employees and directors.

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

 
·
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.
 
 
15

 

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

Equity-based compensation expense recognized in the Consolidated Statements of Operations for the three and six months ended April 2, 2011 and April 3, 2010 was based upon awards ultimately expected to vest. In accordance with ASC 718, forfeitures have been estimated at the time of grant and were based upon historical experience. The Company reviews the forfeiture rates periodically and makes adjustments as necessary.

The following table reflects restricted stock, stock options and common stock granted during the three and six months ended April 2, 2011 and April 3, 2010:

   
Three months ended
   
Six months ended
 
(number of shares in thousands)
 
April 2, 2011
   
April 3, 2010
   
April 2, 2011
   
April 3, 2010
 
Market-based restricted stock
    19       -       368       398  
Time-based restricted stock
    92       -       708       784  
Stock options
    -       26       -       26  
Common stock
    25       33       54       65  
Equity-based compensation in shares
    136       59       1,130       1,273  

The following table reflects total equity-based compensation expense, which includes restricted stock, stock options and common stock, included in the Consolidated Statements of Operations during the three and six months ended April 2, 2011 and April 3, 2010:
 
   
Three months ended
   
Six months ended
 
(in thousands)
 
April 2, 2011
   
April 3, 2010
   
April 2, 2011
   
April 3, 2010
 
Cost of sales
  $ 56     $ 50     $ 104     $ 96  
Selling, general and administrative  (1)
    2,148       1,273       3,111       1,987  
Research and development
    354       386       630       730  
Equity-based compensation expense
  $ 2,558     $ 1,709     $ 3,845     $ 2,813  

The following table reflects equity-based compensation expense, by type of award, for the three and six months ended April 2, 2011 and April 3, 2010:
 
   
Three months ended
   
Six months ended
 
(in thousands)
 
April 2, 2011
   
April 3, 2010
   
April 2, 2011
   
April 3, 2010
 
Market-based restricted stock  (2)
  $ 871     $ 273     $ 873     $ 388  
Time-based restricted stock
    1,123       467       2,122       1,057  
Performance-based restricted stock  (3)
    364       682       435       738  
Stock options
    20       107       55       270  
Common stock
    180       180       360       360  
Equity-based compensation expense
  $ 2,558     $ 1,709     $ 3,845     $ 2,813  
 
 
16

 
 
(1)  Three and six months ended April 2, 2011 selling, general and administrative expense includes $0.7 million and $0.6 million, respectively, related to the liability classified stock compensation expense for the retired former Chief Executive Officer (“CEO”). In connection with his retirement, deferred cash payments equal the difference, if any, between (i) the fair market value of the shares of common stock of the Company to which he would have been entitled pursuant to the performance share unit awards granted to him in fiscal 2008 and 2009 had he remained employed through June 30, 2011 and (ii) the fair market value of the shares of common stock of the Company actually received by him pursuant to such awards. The deferred cash payments, if any, will be paid in July 2011 and February 2012, respectively. An accrual for estimated deferred cash payments measured at fair value as of April 2, 2011 and October 2, 2010 was included within accrued expenses and other current liabilities and other liabilities on the Consolidated Balance Sheets.
(2)  Three and six months ended April 2, 2011 includes $0.5 million and $0.4 million, respectively, related to the liability classified stock compensation expense for the retired former CEO.
(3)  Three and six months ended April 2, 2011 includes $0.2 million related to the liability classified stock compensation expense for the retired former CEO.

NOTE 7: EARNINGS PER SHARE

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

The Company’s 0.875% Convertible Subordinated Notes would not result in the issuance of any dilutive shares, since the Notes were not convertible and the conversion option was not “in the money” as of April 2, 2011 and April 3, 2010. Accordingly, diluted EPS excludes the effect of the conversion of the 0.875% Convertible Subordinated Notes.
 
 
17

 

The following tables reflect a reconciliation of the shares used in the basic and diluted net income per share computation for the three and six months ended April 2, 2011 and April 3, 2010:

   
Three months ended
 
 
 
April 2, 2011
   
April 3, 2010
 
(in thousands, except per share data)
 
Basic
   
Diluted
   
Basic
   
Diluted
 
NUMERATOR:
                               
Net income
  $ 39,885     $ 39,885     $ 21,158     $ 21,158  
Less: Income applicable to participating securities
    (243 )     (243 )     (227 )     (227 )
After-tax interest expense
    -       -       -       122  
                                 
Net income applicable to common shareholders
  $ 39,642     $ 39,642     $ 20,931     $ 21,053  
                                 
DENOMINATOR:
                               
Weighted average shares outstanding - Basic
    71,512       71,512       69,806       69,806  
Stock options
            328               192  
Time-based restricted stock
            761               234  
Market-based restricted stock
            519               326  
1.000 % Convertible Subordinated Notes
            -               3,813  
Weighted average shares outstanding - Diluted (1)
            73,120               74,371  
                                 
EPS:
                               
Net income per share - Basic
  $ 0.55     $ 0.55     $ 0.30     $ 0.30  
                                 
Effect of dilutive shares
          $ (0.01 )           $ (0.02 )
                                 
Net income per share - Diluted
          $ 0.54             $ 0.28  

(1) Three months ended April 2, 2011 and April 3, 2010 excludes 365 and 284 dilutive participating securities, respectively, as the income attributable to these shares was not included in EPS.

For the three months ended April 2, 2011 and April 3, 2010, 0.4 million and 2.9 million potentially dilutive shares related to out of the money stock options, respectively, were excluded from EPS.
 
 
18

 
 
   
Six months ended
 
 
 
April 2, 2011
   
April 3, 2010
 
(in thousands, except per share data)
 
Basic
   
Diluted
   
Basic
   
Diluted
 
NUMERATOR:
                       
Net income
  $ 54,984     $ 54,984     $ 36,998     $ 36,998  
Less: Income applicable to participating securities
    (343 )     (343 )     (398 )     (398 )
After-tax interest expense
    -       -       -       245  
                                 
Net income applicable to common shareholders
  $ 54,641     $ 54,641     $ 36,600     $ 36,845  
                                 
DENOMINATOR:
                               
Weighted average shares outstanding - Basic
    71,196       71,196       69,745       69,745  
Stock options
            189               171  
Time-based restricted stock
            592               137  
Market-based restricted stock
            433               277  
1.000 % Convertible Subordinated Notes
            -               3,813  
Weighted average shares outstanding - Diluted (1)
            72,410               74,143  
                                 
EPS:
                               
Net income per share - Basic
  $ 0.77     $ 0.77     $ 0.52     $ 0.52  
                                 
Effect of dilutive shares
          $ (0.02 )           $ (0.02 )
                                 
Net income per share - Diluted
          $ 0.75             $ 0.50  

(1) Six months ended April 2, 2011 and April 3, 2010 excludes 348 and 325 dilutive participating securities, respectively, as the income attributable to these shares was not included in EPS.

For the six months ended April 2, 2011 and April 3, 2010, 0.8 million and 3.7 million potentially dilutive shares related to out of the money stock options, respectively, were excluded from EPS.

NOTE 8: INCOME TAXES

The following table reflects the provision for income taxes and the effective tax rate for the six months ended April 2, 2011 and April 3, 2010:

   
Six months ended
 
(dollar amounts in thousands)
 
April 2, 2011
   
April 3, 2010
 
Income from operations before taxes
  $ 61,942     $ 37,306  
Provision for income taxes
    6,958       308  
                 
Net income
  $ 54,984     $ 36,998  
                 
Effective tax rate
    11.2 %     0.8 %
 
 
19

 
 
For the six months ended April 2, 2011, the effective income tax rate differed from the federal statutory rate primarily due to tax from foreign operations at a lower effective tax rate than the U.S. statutory rate, the impact of tax holidays, decreases in the valuation allowance offset by an increase for deferred taxes on un-remitted earnings as well as other U.S. current and deferred taxes. In addition, the Company finalized negotiations with a foreign tax jurisdiction which resulted in a decreased effective tax rate in that jurisdiction for a limited period of time.

For the six months ended April 3, 2010, the effective income tax rate differed from the federal statutory rate primarily due to: decreases in the valuation allowance, federal alternative minimum taxes, state income taxes, tax from foreign operations, the impact of tax holidays, an increase in deferred taxes for un-remitted earnings and other U.S. current and deferred taxes.

The Company’s future effective tax rate would be affected if earnings were lower than anticipated in countries where it has lower statutory rates and higher than anticipated in countries where it has higher statutory rates, by changes in the valuation of its deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. The Company regularly assesses the effects resulting from these factors to determine the adequacy of its provision for income taxes.

NOTE 9: SEGMENT INFORMATION

The Company operates two segments: Equipment and Expendable Tools. The Equipment segment manufactures and sells a line of ball bonders, heavy wire wedge bonders and die bonders that are sold to semiconductor device manufacturers, their outsourced semiconductor assembly and test subcontractors, other electronics manufacturers and automotive electronics suppliers. The Company also services, maintains, repairs and upgrades its equipment. The Expendable Tools segment manufactures and sells a variety of expendable tools for a broad range of semiconductor packaging applications.
 
 
20

 
 
The following table reflects operating information by segment for the three months and six months ended April 2, 2011 and April 3, 2010:

   
Three months ended
   
Six months ended
 
(in thousands)
 
April 2, 2011
   
April 3, 2010
   
April 2, 2011
   
April 3, 2010
 
Net revenue:
                       
Equipment
  $ 190,010     $ 136,353     $ 322,708     $ 247,950  
Expendable Tools
    16,719       17,485       32,884       34,303  
Net revenue
    206,729       153,838       355,592       282,253  
Cost of sales:
                               
Equipment
    100,833       79,466       171,071       144,611  
Expendable Tools
    6,939       6,600       13,452       13,497  
Cost of sales
    107,772       86,066       184,523       158,108  
Gross profit:
                               
Equipment
    89,177       56,887       151,637       103,339  
Expendable Tools
    9,780       10,885       19,432       20,806  
Gross profit
    98,957       67,772       171,069       124,145  
Operating Expenses:
                               
Equipment
    47,831       36,693       91,107       68,298  
Expendable Tools
    7,477       7,757       14,246       14,539  
Operating expenses
    55,308       44,450       105,353       82,837  
Income from operations:
                               
Equipment
    41,346       20,194       60,530       35,041  
Expendable Tools
    2,303       3,128       5,186       6,267  
Income from operations
  $ 43,649     $ 23,322     $ 65,716     $ 41,308  
 
 
21

 
 
The following tables reflect assets by segment as of April 2, 2011 and October 2, 2010, capital expenditures for the six months ended April 2, 2011 and April 3, 2010, and depreciation expense for the three and six months ended April 2, 2011 and April 3, 2010:

   
As of
 
(in thousands)
 
April 2, 2011
   
October 2, 2010
 
Segment assets
           
Equipment
  $ 587,678     $ 493,712  
Expendable Tools
    79,137       86,457  
Total assets
  $ 666,815     $ 580,169  
                 
   
Six months ended
 
(in thousands)
 
April 2, 2011
   
April 3, 2010
 
Capital expenditures
               
Equipment
  $ 2,179     $ 1,229  
Expendable Tools
    2,410       877  
Capital expenditures
  $ 4,589     $ 2,106  
 
   
Three months ended
   
Six months ended
 
(in thousands)
 
April 2, 2011
   
April 3, 2010
   
April 2, 2011
   
April 3, 2010
 
Depreciation expense
                       
Equipment
  $ 1,460     $ 1,345     $ 2,982     $ 2,743  
Expendable Tools
    551       678       1,050       1,405  
Depreciation expense
  $ 2,011     $ 2,023     $ 4,032     $ 4,148  

NOTE 10: COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

Warranty Expense

The Company’s equipment is generally shipped with a one-year warranty against manufacturing defects. The Company establishes reserves for estimated warranty expense when revenue for the related equipment is recognized. The reserve for estimated warranty expense is based upon historical experience and management’s estimate of future expenses.
 
The following table reflects the reserve for product warranty activity for the three and six months ended April 2, 2011 and April 3, 2010:
 
   
Three months ended
   
Six months ended
 
(in thousands)
 
April 2, 2011
   
April 3, 2010
   
April 2, 2011
   
April 3, 2010
 
                         
Reserve for product warranty, beginning of period
  $ 2,236     $ 1,393     $ 2,657     $ 1,003  
Provision for product warranty
    529       744       938       1,535  
Product warranty costs paid
    (711 )     (467 )     (1,541 )     (868 )
Reserve for product warranty, end of period
  $ 2,054     $ 1,670     $ 2,054     $ 1,670  
 
 
22

 
 
Other Commitments and Contingencies

The following table reflects operating lease obligations not reflected on the Consolidated Balance Sheet as of April 2, 2011:

         
Payments due by fiscal year
 
(in thousands)
 
Total
   
2011
   
2012
   
2013
   
2014
   
2015 and
thereafter
 
Operating lease obligations (1)
  $ 31,083     $ 4,312     $ 7,151     $ 5,409     $ 2,799     $ 11,412  
 
(1)  The Company has minimum rental commitments under various leases which are not recorded as liabilities on the balance sheet (excluding taxes, insurance, maintenance and repairs, which are also paid by the Company) primarily for various facility and equipment leases, which expire periodically through 2018 (not including lease extension options, if applicable).

Concentrations

The following table reflects significant customer concentrations for the six months ended and as of April 2, 2011 and April 3, 2010:
   
Six months ended
 
   
April 2, 2011
   
April 3, 2010
 
Customer net revenue as a percentage of Net Revenue
           
Advanced Semiconductor Engineering Group
    18.8 %     29.1 %
                 
   
As of
 
   
April 2, 2011
   
April 3, 2010
 
Customer accounts receivable as a percentage of Total Accounts Receivable
         
Siliconware Precision Industries Co., Ltd.
    10.0 %     16.5 %
Haoseng Industrial Company Limited
    *       11.8 %

*  Represents less than 10% of total accounts receivable.

NOTE 11: RELATED PARTY TRANSACTIONS

In connection with the Company’s acquisition of its wedge bonder division, Orthodyne Electronics Corporation, on October 3, 2008, the Company entered into a real property lease agreement with OE Holdings, Inc. Jason Livingston was the Vice President of the Company’s wedge bonder division until his resignation in October 2010 and is also a shareholder of OE Holdings, Inc. The lease agreement dated as of October 3, 2008 has a five-year term with a five-year renewal option. Rent was $124,369 per month in the first year and increases 3.0% per year thereafter. If the lease agreement renewal is exercised, rent during the renewal term will be at fair market value. The Company is guaranteeing the obligations of its subsidiary under the lease agreement.
 
 
23

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

Forward-Looking Statements

In addition to historical information, this filing contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the safe harbor provisions created by statute. Such forward-looking statements include, but are not limited to, statements that relate to increasing, continuing or strengthening demand for our products, and our future revenue and operational flexibility as a result of (among other factors):

 
·
projected growth rates in the overall semiconductor industry, the semiconductor assembly equipment market, and the market for semiconductor packaging materials; and
 
·
projected demand for ball, wedge and die bonder equipment and for expendable tools.

Generally, words such as “may,” “will,” “should,” “could,” “anticipate,” “expect,” “intend,” “estimate,” “plan,” “continue,” “goal” and “believe,” or the negative of or other variations on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this filing. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

Forward-looking statements are based on current expectations and involve risks and uncertainties. Our future results could differ significantly from those expressed or implied by our forward-looking statements. These risks and uncertainties include, without limitation, those described below and under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended 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.

OVERVIEW

Introduction

Kulicke and Soffa Industries, Inc. (the “Company” or “K&S”) designs, manufactures and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits (“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.

 
24

 

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. Net revenue in the second quarter of fiscal 2011 was sequentially higher than our first fiscal quarter of 2011.  We continue to position our business to leverage our research and development leadership and innovation and to focus our efforts to mitigate volatility, improve profitability and ensure our longer-term growth. We expect our overall ball and wedge bonding businesses to remain strong through the third fiscal quarter of 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.
 
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 as of April 2, 2011, our total cash, cash equivalents and investments exceeded the face value of our total debt by $171.8 million, a $100.5 million increase from our fiscal year end. We believe a strong cash position allows us to continue making longer term investments in product development and in cost reduction activities throughout the semiconductor cycle.

Technology Leadership

We compete largely by offering our customers the most advanced equipment and expendable tools available for 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.
 
 
25

 
 
Our leadership in the industries’ use of copper wire, rather than gold, for the wire bonding process is an example of the benefits of collaborative efforts. By working with customers, material suppliers, and other equipment suppliers, we have developed a series of robust, high yielding production processes that have made copper wire commercially viable, significantly reducing the cost of assembling an integrated circuit. Many of our customers began converting their output to copper wire in fiscal 2010, and we believe a majority of the conversion was initiated through fabless companies in the consumer segment. Gradually, the level of confidence and the reliability of data collected have enabled a larger segment of the customer base to increase copper capabilities. Since this initial conversion, a significant portion of our wire bonder sales have been configured for copper. We believe this is the first phase of the gold-to-copper migration, and we expect this conversion process to continue throughout the industry for the next several years. This could potentially drive a significant wire bonder replacement cycle as we believe much of the industries’ installed base is not suitable for copper bonding. Based on our industry leading copper bonding processes and the continuing rise of gold prices, we believe the total available market for copper configured wire bonders is likely to continue to demonstrate solid growth.
 
Our leadership has allowed us to maintain a competitive position in the latest generations of gold and copper ball bonders, which enable our customers to handle the leading technologies in terms of pitch and bond size. We have recently seen increased demand for our large bondable area configured machines.  This is an option available on all of our Power Series (PS) models that allows our customers to gain added efficiencies and to reduce the cost of packaging.

We also leverage the technology leadership of our equipment by optimizing our bonder platforms, and we deliver variants of our products to serve emerging high growth markets. For example, we have developed extensions of our main ball bonding platforms to address opportunities in LED assembly. The LED backlights for flat-screen displays have been the main driver of the LED market in the last few years where we have successfully captured substantial market share in LED assembly equipment. We expect the next wave of growth in the LED market to be high brightness (“HB”) LED for general lighting, and we believe we are well positioned for this trend.

Additionally, we are taking advantage and leveraging the technology between our ball bonder and wedge bonder platforms. We are developing the next generation platform for our power semiconductor wedge bonder. In addition, we intend to initiate design of our next Hybrid wedge bonder. In both cases, we are making a conscious effort to develop commonality of subsystems, or design practices, in order to improve performance and design efficiencies. We believe this will benefit us in maintaining our leadership position in the wedge bonding market and increase synergies between the various engineering product groups. Furthermore, we are continually looking at adjacent market segments where our technologies could be used. As an example, we are reviewing the use of wedge bonding in the fabrication of solar panels. Many of these initiatives are in the early stages of development and may become business opportunities in the future.

Another example of our developing equipment for high growth niche markets is our 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.  These applications are commonly used in most if not all Smartphones available today in the market.
 
Our focus on technology leadership also extends to die bonding. We offer a 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.
 
 
26

 

Products and Services

We supply a range of bonding equipment and expendable tools. The following tables reflect net revenue by business segment for the three and six months ended April 2, 2011 and April 3, 2010, respectively:

   
Three months ended
 
   
April 2, 2011
   
April 3, 2010
 
(dollar amounts in thousands)
 
Net Revenues
   
% of Total
Revenue
   
Net
Revenues
   
% of Total
Revenue
 
Equipment
  $ 190,010       91.9 %   $ 136,353       88.6 %
Expendable Tools
    16,719       8.1 %     17,485       11.4 %
    $ 206,729       100.0 %   $ 153,838       100.0 %

   
Six months ended
 
   
April 2, 2011
   
April 3, 2010
 
(dollar amounts in thousands)
 
Net Revenues
   
% of Total
Revenue
   
Net
Revenues
   
% of Total
Revenue
 
Equipment
  $ 322,708       90.8 %   $ 247,950       87.8 %
Expendable Tools
    32,884       9.2 %     34,303       12.2 %
    $ 355,592       100.0 %   $ 282,253       100.0 %

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.
 
 
27

 
 
Our principal Equipment segment products include:
 
Business Unit
 
Product Name (1)
 
Typical Served Market
Ball bonders
 
IConnPS
 
Advanced and ultra fine pitch applications using either gold or copper wire
         
   
IConnPS ProCu
 
High-end copper wire applications demanding advanced process capability and high productivity
         
   
IConnPS LA
 
Large area substrate and matrix 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
 
Cost performance large area substrate and matrix applications
         
   
AT Premier
 
Stud bumping applications (high brightness LED and image sensor)
         
Wedge bonders
 
3600Plus
 
Power hybrid and automotive modules using either heavy aluminum wire or PowerRibbon®
         
   
3700Plus
 
Hybrid and automotive modules using thin aluminum wire
         
   
7200Plus
 
Power semiconductors using either aluminum wire or 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

 
(1)
Power Series (PS
 
 
28

 

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 LED PS and our ConnX VLED PS. Targeted for large bondable 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.

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 heavy wire multi-chip module applications.
 
·
The 3700Plus: wire bonders designed for hybrid and automotive modules using thin aluminum wire.
 
·
The 7200Plus:  dual head wedge bonder designed specifically for power semiconductor applications.
 
·
The 7200HD:  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, 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.
 
 
29

 
 
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.

RESULTS OF OPERATIONS

Results of Operations for fiscal 2011 and 2010

The following tables reflect our income from operations for the three and six months ended April 2, 2011 and April 3, 2010:

   
Three months ended
             
(dollar amounts in thousands)
 
April 2, 2011
   
April 3, 2010
   
$ Change
   
% Change
 
Net revenue
  $ 206,729     $ 153,838     $ 52,891       34.4 %
Cost of sales
    107,772       86,066       21,706       25.2 %
Gross profit
    98,957       67,772       31,185       46.0 %
                                 
Selling, general and administrative
    38,784       30,470       8,314       27.3 %
Research and development
    16,524       13,980       2,544       18.2 %
Operating expenses
    55,308       44,450       10,858       24.4 %
                                 
Income from operations
  $ 43,649     $ 23,322     $ 20,327       87.2 %

   
Six months ended
             
(dollar amounts in thousands)
 
April 2, 2011
   
April 3, 2010
   
$ Change
   
% Change
 
Net revenue
  $ 355,592     $ 282,253     $ 73,339       26.0 %
Cost of sales
    184,523       158,108       26,415       16.7 %
Gross profit
    171,069       124,145       46,924       37.8 %
                                 
Selling, general and administrative
    73,634       55,696       17,938       32.2 %
Research and development
    31,719       27,141       4,578       16.9 %
Operating expenses