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EX-31.1 - EXHIBIT - KULICKE & SOFFA INDUSTRIES INCexhibit3112014.htm
EX-21 - EXHIBIT - KULICKE & SOFFA INDUSTRIES INCexhibit212014.htm
EX-31.2 - EXHIBIT - KULICKE & SOFFA INDUSTRIES INCexhibit3122014.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-K
 
ý
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
EXCHANGE ACT OF 1934
For the fiscal year ended September 27, 2014  
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.)
 
 
23A Serangoon North, Avenue 5, #01-01 K&S Corporate Headquarters, Singapore

554369
(Address of principal executive offices)
(Zip Code)
(215) 784-7518
(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 ý
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 ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark 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 ý
Accelerated filer ¨
Non-accelerated filer ¨ 
Smaller reporting company ¨
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of March 29, 2014, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $1,001.8 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 November 7, 2014 there were 76,988,338 shares of the registrant's common stock, without par value, outstanding.

Documents Incorporated by Reference

Portions of the registrant's Proxy Statement for the 2015 Annual Meeting of Shareholders to be filed on or about December 24, 2014 are incorporated by reference into Part II, Item 5 and Part III, Items 10, 11, 12, 13 and 14 herein of this Report. Such Proxy Statement, except for the parts therein which have been specifically incorporated by reference, shall not be deemed “filed” for the purposes of this Report on Form 10-K.
 








Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
 2014 Annual Report on Form 10-K
September 27, 2014
 Index 
 
 
Page Number
 
Part I
 
Item 1.
Business
 
 
 
Item 1A.
Risks Related to Our Business and Industry
 
 
 
Item 1B.
Unresolved Staff Comments
 
 
 
Item 2.
Properties
 
 
 
Item 3.
Legal Proceedings
 
 
 
Item 4.
Mine Safety Disclosures
 
Part II
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
 
Item 6.
Selected Consolidated Financial Data
 
 
 
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Item 8.
Financial Statements and Supplementary Data
 
 
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
 
 
Item 9A.
Controls and Procedures
 
 
 
Item 9B.
Other Information
 
Part III
 
Item 10.
Directors, Executive Officers and Corporate Governance
 
 
 
Item 11.
Executive Compensation
 
 
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
 
Item 13.
Certain Relationships and Related Transactions and Director Independence
 
 
 
Item 14.
Principal Accounting Fees and Services
 
Part IV
 
Item 15.
Exhibits and Financial Statement Schedules
 
 
 
 
Signatures


Table of Contents

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 the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the safe harbor provisions created by statute. Such forward-looking statements include, but are not limited to, our future revenue, sustained, increasing, continuing or strengthening demand for our products, the continuing transition from gold to copper wire bonding, replacement demand, our research and development efforts, our ability to identify and realize new growth opportunities, our ability to control costs and our operational flexibility as a result of (among other factors):
projected growth rates in the overall semiconductor industry, the semiconductor assembly equipment market, and the market for semiconductor packaging materials; and
projected demand for ball and wedge 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 September 27, 2014 (the “Annual Report”) and our other reports and registration statements filed from time to time with the Securities and Exchange Commission. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in this report, as well as our audited financial statements included in the Annual Report.
We operate in a rapidly changing and competitive environment. New risks emerge from time to time and it is not possible for us to predict all risks that may affect us. Future events and actual results, performance and achievements could differ materially from those set forth in, contemplated by or underlying the forward-looking statements, which speak only as of the date on which they were made. Except as required by law, we assume no obligation to update or revise any forward-looking statement to reflect actual results or changes in, or additions to, the factors affecting such forward-looking statements. Given those risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictions of actual results.
Item 1. BUSINESS
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 (“ICs”), high and low powered discrete devices, light-emitting diodes (“LEDs”), and power modules. We also service, maintain, repair and upgrade our equipment. Our customers primarily consist of semiconductor device manufacturers, outsourced semiconductor assembly and test providers (“OSATs”), other electronics manufacturers and automotive electronics suppliers.
We operate two main business segments, Equipment and Expendable Tools. Our goal is to be the technology leader and the most competitive supplier in terms of cost and performance in each of our major product lines. Accordingly, we invest in research and engineering projects intended to enhance our position at the leading edge of semiconductor assembly technology. We also remain focused on cost structure through continuing improvements and optimization of our operations. Cost reduction efforts remain an important part of our normal ongoing operations and are expected to generate savings without compromising overall product quality and service levels.

K&S was incorporated in Pennsylvania in 1956. Our principal offices are located at 23A Serangoon North Avenue 5, #01-01, Singapore 554369 and our telephone number in the United States is (215) 784-7518. 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 or by calling the SEC at 1-800-SEC-0330.


1

Table of Contents

Our year end for each of fiscal 2014, 2013 and 2012 was September 27, 2014, September 28, 2013, and September 29, 2012, respectively.
Business Environment
The semiconductor business environment is highly volatile, driven by internal dynamics, both cyclical and seasonal, in addition to macroeconomic forces. Over the long term, semiconductor consumption has historically grown, and is forecast to continue to grow. This growth is driven, in part, by regular advances in device performance and by price declines that result from improvements in manufacturing technology. In order to exploit these trends, semiconductor manufacturers, both integrated device manufacturers (“IDMs”) and OSATs, periodically invest aggressively in latest generation capital equipment. This buying pattern often leads to periods of excess supply and reduced capital spending - the so called semiconductor cycle. Within this broad semiconductor cycle there are also, generally weaker, seasonal effects that are specifically tied to annual, end-consumer purchasing patterns. Typically, semiconductor manufacturers prepare for heightened demand by adding or replacing equipment capacity by the end of the September quarter. Occasionally, this results in subsequent reductions in the December quarter. This annual seasonality can occasionally be overshadowed by effects of the broader semiconductor cycle. Macroeconomic factors also affect the industry, primarily through their effect on business and consumer demand for electronic devices, as well as other products that have significant electronic content such as automobiles, white goods, and telecommunication equipment.
Our Equipment segment is primarily affected by the industry's internal cyclical and seasonal dynamics in addition to broader macroeconomic factors that positively and negatively affect our financial performance. The sales mix of IDM and OSAT customers in any period also impacts financial performance, as changes in this mix can affect our products' average selling prices and gross margins due to differences in volume purchases and machine configurations required by each customer type.
Our Expendable Tools segment is less volatile than our Equipment segment. Expendable Tools sales are more directly tied to semiconductor unit consumption rather than capacity requirements and production capability improvements. 
We continue to position our business to leverage our research and development leadership and innovation and to focus our efforts on mitigating volatility, improving profitability and ensuring longer-term growth. We remain focused on operational excellence, expanding our product offerings and managing our business efficiently throughout the business cycles. Our visibility into future demand is generally limited, forecasting is difficult, and we generally experience typical industry seasonality.
To limit potential adverse cyclical, seasonal and macroeconomic effects on our financial position, we have de-leveraged and strengthened our balance sheet. As of September 27, 2014, our total cash, cash equivalents and investments were $597.1 million, a $72.1 million increase from the prior fiscal year end. We believe this strong cash position will allow us to continue to invest in organic product development and non-organic opportunities.
On August 14, 2014, the Company’s Board of Directors authorized a program (the "Program") to repurchase up to $100 million of the Company’s common stock on or before August 14, 2017. The Company has entered into a written trading plan under Rule 10b5-1 of the Exchange Act to facilitate repurchases under the Program. The Program may be suspended or discontinued at any time and will be funded using the Company's available cash. Under the Program, shares may be repurchased through open market and/or privately negotiated transactions at prices deemed appropriate by management. The timing and amount of repurchase transactions under the Program will depend on market conditions as well as corporate and regulatory considerations. During the year ended September 27, 2014, the Company repurchased a total of 43.5 thousand shares of common stock at a cost of $0.6 million under the Program. As of September 27, 2014, our remaining stock repurchase authorization under the Program was approximately $99.4 million.
Technology Leadership
We compete largely by offering our customers among the most advanced equipment and expendable tools available for the wire and wedge bonding processes. Our equipment is typically the most productive and has the highest levels of process capability, and as a result, has a lower cost of ownership compared to other equipment in the market. Our expendable tools are designed to optimize the performance of the equipment in which they are used. We believe our technology leadership contributes to the strong market positions of our ball bonder, wedge bonder and expendable tools products. To maintain our competitive advantage, we invest in product development activities designed to produce a stream of improvements to existing products and to deliver next-generation products. These investments often focus as much on improvements in the semiconductor assembly process as on specific pieces of assembly equipment or expendable tools. In order to generate these improvements, we often work in close collaboration with customers, end users, and other industry members. In addition to producing technical advances, these collaborative development efforts strengthen customer relationships and enhance our reputation as a technology leader and solutions provider.


2

Table of Contents

In addition to gold, silver alloy wire and aluminum wire, our leadership in the industry's use of copper wire for the bonding process is an example of the benefits of our collaborative efforts. By working with customers, material suppliers, and other equipment suppliers, we have developed a series of robust, high-yielding production processes, which have made copper wire widely accepted and significantly reduced the cost of assembling an integrated circuit. Based on our industry leading copper bonding processes and the continued high price of gold, we believe the demand for copper configured wire bonders is likely to remain solid.
Our leadership also 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 bond pad pitch, silicon with the latest node and complex wire bonding requirement. We continue to see demand for our large bondable area (“LA”) configured machines. This LA option is now available on all of our Power Series (PS) models and allows our customers to gain added efficiencies and to reduce the cost of packaging.
We also leverage the technology leadership of our equipment by optimizing our bonder platforms, and we deliver variants of our products to serve emerging high-growth markets. For example, we have developed extensions of our main ball bonding platforms to address opportunities in LED assembly, in particular for general lighting. We expect the next wave of growth in the LED market to be high brightness LED for general lighting. We also believe there is an opportunity for growth in wire bonding sales at wafer level using our AT Premier Plus
Furthermore, we gain synergies by leveraging technologies between our unique platforms. Our leading technology for wedge bonder equipment uses aluminum ribbon or heavy wire as opposed to fine gold and fine copper wire used in ball bonders.  In 2013, we launched a new line of high performance wedge bonder products, PowerFusionPS. The advanced interconnect capabilities of PowerFusionPS improve the processing of high-density power packages, due to an expanded bondable area, wider leadframe capability, superior indexing accuracy and teach mode. We have also initiated the design and development of our next generation hybrid wedge bonder, which we currently expect to release in 2015. In both cases, we are making a concerted effort to develop commonality of subsystems and design practices, in order to improve performance and design efficiencies. We believe this will benefit us in maintaining our leadership position in the wedge bonding market and increase synergies between the various engineering product groups. Furthermore, we continually research adjacent market segments where our technologies could be used. Many of these initiatives are in the early stages of development and may become business opportunities in the future.
Another example of our developing equipment for high-growth niche markets is our AT Premier Plus. This machine utilizes a modified wire bonding process to mechanically place bumps on devices in a wafer format, for variants of the flip chip assembly process. Typical applications include complementary metal-oxide semiconductor (“CMOS”) image sensors, surface acoustical wave (“SAW”) filters and high brightness LEDs. These applications are commonly used in most, if not all, smartphones available today in the market. We also have expanded the use of AT Premier Plus for wafer level wire bonding for micro-electro-mechanical systems (“MEMS”) and other sensors.
Our technology leadership and bonding process know-how have enabled us to develop highly function-specific equipment with best-in-class throughput and accuracy. This forms the foundation for our advanced packaging equipment development. We established a dedicated team to develop and manufacture advanced packaging bonders for the emerging 2.5 dimensional (“2.5D IC”) and 3 dimensional integrated circuit (“3D IC”) markets. In November 2013, we shipped the first TCB (Thermo-Compression Bonder) C2S (Chip-to-Substrate) alpha machine to an initial strategic customer and have subsequently shipped additional variants to other customers. By reducing the interconnect dimensions, 2.5D and 3D ICs are expected to provide form factor, performance and power efficiency enhancements over traditional flip-chip packages in production today. High-performance processing and memory applications, in addition to mobile devices such as smartphones and tablets, are anticipated to be earlier adopters of this new packaging technology.
We bring the same technology focus to our expendable tools business, driving tool design and manufacturing technology to optimize the performance and process capability of the equipment in which our tools are used. For all our equipment products, expendable tools are an integral part of their process capability. We believe our unique ability to simultaneously develop both equipment and tools is a core strength supporting our products' technological differentiation.



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Table of Contents

Products and Services
The Company operates two segments: Equipment and Expendable Tools. The following table reflects net revenue by business segment for fiscal 2014, 2013, and 2012:
 

Fiscal
 

2014

2013

2012
(dollar amounts in thousands)

Net revenues

% of total net revenue

Net revenues

% of total net revenue

Net revenues

% of total net revenue
Equipment

$
503,049


88.5
%

$
472,567


88.3
%

$
727,082


91.9
%
Expendable Tools

65,520


11.5
%

62,371


11.7
%

63,941


8.1
%
 

$
568,569


100.0
%

$
534,938


100.0
%

$
791,023


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, wafer level bonders and heavy wire wedge 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. Wafer level bonders mechanically apply bumps to die, typically while still in the wafer format, for some variants of the flip chip assembly process. Heavy wire wedge bonders use either aluminum wire or ribbon to perform the same function in packages that cannot use gold or copper wire because of either high electrical current requirements or other package reliability issues. In September 2014, we introduced the APAMA (Advanced Packaging with Adaptive Machine Analytics) C2S bonder, which is designed for performance and high accuracy applications, delivering die-stacking solutions for 2.5 Dimensional, 3 Dimensional or Through Silicon Via (TSV) integrated chips. We believe our equipment offers competitive advantages by providing customers with high productivity/throughput, superior package quality/process control, and, as a result, a lower cost of ownership.































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Table of Contents

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

 
APAMA C2S
 
Flip chip thermo-compression bonding applications

 (1) Power Series (PS)


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Table of Contents

Ball Bonders
Automatic ball bonders represent the largest portion of our semiconductor equipment business. Our main product platform for ball bonding is the Power Series - a family of assembly equipment that is setting new standards for performance, productivity, upgradeability, and ease of use.
Our portfolio of ball bonding products includes:
The IConnPS: high-performance ball bonders which can be configured for either gold or copper wire.
The IConnPS LA: high-performance large area ball bonders which can be configured for either gold or copper wire.
The ConnXPS Plus: cost-performance ball bonders which can be configured for either gold or copper wire.
The ConnXPS Plus LA: cost-performance large area ball bonders which can be configured for either gold or copper wire.
The ConnXPS LED and ConnXPS VLED:  ball bonders targeted specifically at the fast growing LED market.
The IConnPS ProCu Plus: high-performance copper wire ball bonders for advanced wafer nodes at 28 nanometer and below.
The IConnPS ProCu Plus LA: high-performance large area copper wire ball bonders for advanced wafer nodes at 28 nanometer and below.
The AT Premier Plus: ball bonders which utilize a modified wire bonding process to mechanically place bumps on devices, while still in a wafer format for variants of the flip chip assembly process. Typical applications include CMOS image sensors, SAW filters, MEMS and high brightness LEDs. These applications are commonly used in most, if not all, smartphones available today in the market.
In March 2014, we introduced the IConnPS Plus and IConnPS Plus LA, which offer new capabilities and enhanced features. IConnPS Plus LA is the large area version which extends the bondable width up to 87 millimeters. In September 2014, we introduced ConnXPS LED Plus, which offers higher performance and a larger bondable area for the LED market.
Our Power Series products are setting new standards in wire bonding. Our ball bonders are capable of performing very fine pitch bonding, as well as creating the complex loop shapes needed in the assembly of advanced semiconductor packages and bonding on the latest silicon node-28 nanometer. Most of our installed base of gold wire bonders can also be retrofitted for copper applications through kits we sell separately.
Heavy Wire Wedge Bonders
We are the leaders in the design and manufacture of heavy wire wedge bonders for the power semiconductor and automotive power module markets. Heavy wire wedge bonders may use either aluminum wire or aluminum ribbon to connect semiconductor chips in power packages, power hybrids and automotive modules for products such as motor control modules or inverters for hybrid cars. In addition, we see some potential use for our wedge bonder products in high reliability interconnections of rechargeable batteries in hybrid and electric automotive 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 bonders designed specifically for power semiconductor applications.
The 7200HD: heavy wire wedge bonders designed for smaller power packages using either aluminum wire or ribbon.
The PowerFusionPS Semiconductor Wedge Bonders - Configurable in single, dual and multi-head configurations using aluminum wire and PowerRibbonTM:
The PowerFusionPS TL: designed for low-cost, high volume power semiconductor applications.
The PowerFusionPS HL: designed for advanced power semiconductor applications.
While wedge bonding traditionally utilizes aluminum wire, all of our heavy wire wedge bonders are also available to be modified to bond aluminum ribbon using our proprietary PowerRibbon® process. Aluminum ribbon offers device makers performance advantages over traditional round wire and is being increasingly used for high current packages and automotive applications.


6

Table of Contents

Our PowerFusionPS series are driven by new powerful direct-drive motion systems and expanded pattern recognition capabilities. The advanced interconnect capabilities of PowerFusionPS improves the processing of high-density power packages, due to an expanded bondable area, wider leadframe capability, superior indexing accuracy and teach mode.
In September 2014, we introduced the PowerFusionPS HLx, which has similar capabilities of the PowerFusionPS HL and extends the bondable width up to 105 millimeters.
Advanced Packaging Bonders
In September 2014, we introduced the APAMA C2S bonder, which is designed for performance and high accuracy applications, delivering die-stacking solutions for 2.5 Dimensional, 3 Dimensional or Through Silicon Via (TSV) integrated chips.
Other Equipment Products and Services
We also sell manual wire bonders, and we offer spare parts, equipment repair, maintenance and servicing, training services, and upgrades for our equipment through our Support Services business unit.
Our K&S Care service is designed to help customers operate their machines at an optimum level under the care of our trained specialists. K&S Care includes a range of programs, offering different levels of service depending on customer needs.
Expendable Tools Segment
We manufacture and sell a variety of expendable tools for a broad range of semiconductor packaging applications. Our principal Expendable Tools segment products include:
Capillaries: expendable tools used in ball bonders. Made of ceramic and other elements, a capillary guides the wire during the ball bonding process. Its features help control the bonding process. We design and build capillaries suitable for a broad range of applications, including for use on our competitors' equipment. In addition to capillaries used for gold wire bonding, we have developed capillaries for use with copper wire to achieve optimal performance in copper wire bonding.
Bonding wedges: expendable tools used in heavy wire wedge bonders. Like capillaries, their specific features are tailored to specific applications. We design and build bonding wedges for use both in our own equipment and in our competitors' equipment.
Dicing blades: expendable tools used by semiconductor manufacturers to cut silicon wafers into individual semiconductor die and to cut semiconductor devices that have been moulded in a matrix configuration into individual units.
The Optoceramic and OptoPCB package singulation blades for the LED market enable an improvement on package singulation quality, precision and productivity by providing a significantly longer life blade, and improved stability. We also offer ACS Pro Capillary, which is a new generation of copper capillary for advanced copper wire bonding applications.
In March 2014, we expanded the ACS series capillaries through the introduction of ACS Max and ACS Lite. ACS Max Capillary and ACS Lite Capillary are the new generation of copper capillary for medium-pin count and low-pin count copper wire applications.



7

Table of Contents

Customers
Our major customers include IDMs and OSATs, industrial manufacturers and automotive electronics suppliers. Revenue from our customers may vary significantly from year-to-year based on their respective 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 2014
 
Fiscal 2013
 
Fiscal 2012
1
Haoseng Industrial Co., Ltd. **
1
Siliconware Precision Industries, Ltd. *
1
Advance Semiconductor Engineering *
2
Advance Semiconductor Engineering
2
Advance Semiconductor Engineering
2
Siliconware Precision Industries, Ltd. *
3
Amkor Technology Inc.
3
STATS ChipPAC Ltd
3
Haoseng Industrial Co., Ltd. **
4
Skyworks Solutions Incorporated
4
Haoseng Industrial Co., Ltd. **
4
Rohm Intergrated Systems
5
Powertech Technology Inc.
5
Amkor Technology Inc.
5
Amkor Technology Inc.
6
Orient Semiconductor Electronics, Ltd.
6
Rohm Intergrated Systems
6
STATS ChipPAC Ltd
7
Texas Instruments, Inc.
7
Orient Semiconductor Electronics, Ltd.
7
LG Innotek Co. Ltd.
8
Greatek Electronics Inc.
8
Super Power International Ltd **
8
First Technology China, Ltd. **
9
Super Power International Ltd **
9
ST Microelectronics
9
Super Power International Ltd **
10
Freescale Semiconductor, Inc.
10
First Technology China, Ltd. **
10
ST Microelectronics
* Represents more than 10% of our net revenue for the applicable fiscal year.
** Distributor of our products.
Approximately 94.4%, 97.3%, and 98.3% of our net revenue for fiscal 2014, 2013, and 2012, respectively, were for shipments to customer locations outside of the U.S., primarily in the Asia/Pacific region, and we expect sales outside of the U.S. 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 primarily utilize our direct sales force, as well as distribution channels such as agents and distributors, depending on the product, region, or end-user 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 Singapore, Taiwan, China, Korea, Malaysia, the Philippines, Japan, Thailand, the U.S., and Germany. Supporting these local resources, we have technology centers offering additional process expertise in Singapore, China, Israel, and the U.S.
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.
Backlog
Our backlog consists of customer orders scheduled for shipment within the next twelve 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 backlog as of September 27, 2014 and September 28, 2013:
 
 
As of
(in thousands)
 
September 27, 2014

 
September 28, 2013

Backlog
 
$
79,100

 
$
52,100




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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. Raw materials used in our equipment manufacturing are generally available from multiple sources; however, many outsourced parts and components are only available from a single or limited number of sources.
Our ball bonder and wedge bonder manufacturing and assembly is done at our facility in Singapore. We have ISO 9001 and ISO 14001 certifications for our equipment manufacturing facilities in Singapore.
Expendable Tools
We manufacture dicing blades, capillaries and a portion of our bonding wedge inventory at our facility in Suzhou, China. The capillaries are made using blanks produced at our facility in Yokneam, Israel. We both produce and outsource the production of our bonding wedges. Both the Suzhou and Yokneam facilities are ISO 9001 certified. The Suzhou facility is also ISO 14001 and ISO 18001 certified.
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 $83.1 million, $61.6 million, and $63.4 million during fiscal 2014, 2013, and 2012, respectively. The higher research and development expense in 2014 primarily relates to the development of the advanced packaging bonder and other new products.
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 U.S. patents, many of which have foreign counterparts. We believe the duration of our patents often exceeds the commercial 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: ASM Pacific Technology, Cho-Onpa, F&K Delvotec, and Hesse Mechatronics
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, Small Precision Tools, Inc., and Coorstek (formerly Gaiser)
Dicing 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.


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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 incurred in the past, and expect in the future to 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.
Business Continuity Management Plan
We have developed and implemented a global Business Continuity Management Plan ("Plan") for our business operations. The Plan is designed to facilitate the prompt resumption of our business operations and functions arising from an event which impacts or potentially impacts our business operations.  As the scale, timing, and impact of disasters and disruptions are unpredictable, the Plan has been designed to be flexible in responding to actual events as they occur.  The Plan provides a structured framework for safeguarding our employees and property, making a financial and operational assessment, protecting our books and records, perpetuating critical business functions, and enabling the continuation of customer transactions.
Employees
As of September 27, 2014, we had approximately 1,943 regular full-time employees and 335 temporary workers worldwide.



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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 a 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. Our visibility into future demand is generally limited and forecasting is difficult. There can be no assurances regarding levels of demand for our products and we believe historic industry-wide volatility will persist.
Unpredictable spending by our customers due to uncertainties in the macroeconomic environment could adversely affect our net revenue and profitability.
We depend upon demand from our customers including IDMs and OSATs, industrial manufacturers and automotive electronics suppliers. Our net revenue and profitability is based upon our customers' level of anticipated sales. Reductions or other fluctuations in their spending as a result of uncertain conditions in the macroeconomic environment, such as government, economic or fiscal instability, restricted global credit conditions, reduced demand, unbalanced inventory levels, fluctuations in interest rates, higher energy prices, or other conditions, could adversely affect our net revenue and profitability. The impact of general economic slowdowns could make our customers cautious and delay orders until the economic environment becomes clearer.
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 mobile devices, personal computers, consumer electronics, telecommunications equipment, automotive goods and other industrial products. Significant downturns in the market for semiconductor devices or in general economic conditions reduce demand for our products and can materially and adversely affect our business, financial condition and operating results.
The semiconductor industry is volatile, with periods of rapid growth followed by industry-wide retrenchment. These periodic downturns and slowdowns have adversely affected our business, financial condition and operating results. Downturns have been characterized by, among other things, diminished product demand, excess production capacity, and accelerated erosion of selling prices. Historically these downturns have severely and negatively affected the industry's demand for capital equipment, including 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 cyclical and 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;
industry inventory level;
the mix of products we sell because, for example:
certain lines of equipment within our business segments are more profitable than others; and
some sales arrangements have higher gross margins than others;
cancelled or deferred orders;
seasonality;
competitive pricing pressures may force us to reduce prices;


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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 even 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.
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 require 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.
The pace of transition from gold to copper wire bonding by our customers and the industry may slow down.
Since fiscal 2010, many of our customers have converted their bonding wire from gold to copper wire. Since this initial conversion, a majority of our wire bonder sales are copper capable bonders. In fiscal 2014, 76% of total ball bonders sold by the Company were copper capable bonders. If the pace of transition from gold to copper wire bonding by our customers slows down or customers transition away from copper wire bonding, there may be a reduced demand for our wire bonders and our financial condition and operating results may be materially and adversely affected.
Substantially all of our sales and manufacturing operations are located outside of the U.S., 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 conflicts.
Approximately 94.4%, 97.3%, and 98.3% of our net revenue for fiscal 2014, 2013, and 2012, respectively, were for shipments to customers located outside of the U.S., primarily in the Asia/Pacific region. We expect our future performance to 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-U.S. suppliers for materials and components used in our products, and substantially all of our manufacturing operations are located in countries other than the U.S. We manufacture our ball and wedge bonders in Singapore, our dicing blades, capillaries and bonding wedges in China and capillary blanks in Israel. In addition, our corporate headquarters is in Singapore and


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we have sales, service and support personnel in China, Israel, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand, the U.S. 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;
foreign exchange restrictions and capital controls;
restrictions on the repatriation of our assets, including cash;
significant foreign and U.S. taxes on repatriated cash;
difficulties of staffing and managing dispersed international operations;
possible disagreements with tax authorities;
episodic events outside our control such as, for example, outbreaks of influenza or other illnesses;
natural disasters such as earthquakes, fires or floods;
tariff and currency fluctuations;
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 U.S.
In addition, there is a potential risk of conflict and instability in the relationship between Taiwan and China. Conflict or instability could disrupt the operations of our customers and/or suppliers in both Taiwan and China. Additionally, our manufacturing operations in China could be disrupted by any conflict.
Our international operations also depend upon favorable trade relations between the U.S. and those foreign countries in which our customers, subcontractors and materials suppliers have operations. A protectionist trade environment in either the U.S. 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.
Increased labor costs and competition for qualified personnel may reduce the efficiency of our flexible manufacturing model and adversely impact our operating results.
There is some uncertainty with respect to the pace of rising labor costs in the various countries in which we operate. In addition, there is substantial competition in China and Singapore for qualified and capable personnel, which may make it difficult for us to recruit and retain qualified employees. If we are unable to staff sufficient personnel at our China and Singapore facilities or if there are increases in labor costs that we are unable to recover in our pricing to our customers, we may experience increased manufacturing costs, which would adversely affect our operating results.
We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows.
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 therefore be materially and adversely affected by the fluctuations of the U.S. dollar against foreign currencies.
Because nearly all of our business is conducted outside the U.S., 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 U.S. where we sell in U.S. dollars, and a weakened U.S. dollar could increase the cost of local operating expenses and procurement of raw materials, both of which could have an adverse


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effect on our cash flows. Our primary exposures include the Singapore Dollar, Chinese Yuan, Japanese Yen, Malaysian Ringgit, Swiss Franc, Philippine Peso, Thai Baht, Taiwan Dollar, South Korean Won, Israeli Shekel and Euro. Although we from time to time have entered into foreign exchange forward contracts to hedge certain foreign currency exposure of our operating expenses, 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 continue to consolidate manufacturing and other facilities without incurring unanticipated costs and disruptions to our business.
As part of our ongoing efforts to drive further efficiency, we may consolidate other manufacturing facilities. Should we consolidate, we may experience unanticipated events, including the actions of governments, suppliers, employees or customers, which may result in unanticipated costs and disruptions to our business.
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. Experienced personnel with the relevant and necessary skill sets in our industry are in high demand and competition for their talents is intense, especially in Asia, where most of the Company’s key personnel are located. 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 failed, 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 and materially and adversely affect our overall business and financial results.
Alternative packaging technologies have emerged that may improve device performance or reduce the size of an integrated circuit package, as compared to traditional wire bonding. These technologies include flip chip and wafer level 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 to a technology not offered by us were to occur, demand for our equipment and related packaging materials may be materially and adversely affected. Given the lack of a significant alternate revenue stream other than wire bonding, a reduced demand for our equipment could materially and adversely affect our financial results.
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 have historically accounted for a significant percentage of our net revenue. Sales to our largest customers, defined as more than 10% of our net revenue, comprised 11.0% and 37.3% of our net revenue for fiscal 2013 and 2012, respectively, and in the future could again represent a significant percentage of our sales. No customer accounted for more than 10% of our net revenue in fiscal 2014.
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


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affected. If we lose orders from a significant customer, or if a significant customer reduces its orders substantially, these losses or reductions may materially and adversely affect our business, financial condition and operating results.
We maintain a backlog of customer orders that is subject to cancellation, reduction or delay in delivery schedules, which may result in lower than expected revenues.
We manufacture products primarily pursuant to purchase orders for current delivery or to forecast, rather than pursuant to long-term supply contracts. The semiconductor industry is occasionally subject to double-booking and rapid changes in customer outlooks or unexpected build ups of inventory in the supply channel as a result of shifts in end market demand and macro-economic conditions. Accordingly, many of these purchase orders or forecasts may be revised or canceled without penalty. As a result, we must commit resources to the manufacture of products without binding purchase commitments from customers. Even in cases where our standard terms and conditions of sale or other contractual arrangements do not permit a customer to cancel an order without penalty, we may from time to time accept cancellations to maintain customer relationships or because of industry practice, custom or other factors. Our inability to sell products after we devote significant resources to them could have a material adverse effect on both our levels of inventory and revenues. While we currently believe our inventory levels are appropriate for the current economic environment, continued global economic uncertainty may result in lower than expected demand.
Undetected problems in our products could directly impair our financial results.
If flaws in design, production, assembly or testing of our products (by us or our suppliers) were to occur, we could experience a rate of failure in our products that would result in substantial repair, replacement or service costs and potential damage to our reputation. Continued improvement in manufacturing capabilities, control of material and manufacturing quality and costs and product testing are critical factors in our future growth. There can be no assurance that our efforts to monitor, develop, modify and implement appropriate tests and manufacturing processes for our products will be sufficient to permit us to avoid a rate of failure in our products that results in substantial delays in shipment, significant repair or replacement costs or potential damage to our reputation, any of which could have a material adverse effect on our business, results of operations or financial condition.
Costs related to product defect and errata may harm our results of operations and business.
Costs of product defects and errata (deviations from product specifications) due to, for example, problems in our design and manufacturing processes, or those of our suppliers, could include:
writing off the value of inventory;
disposing of products that cannot be fixed;
retrofitting products that have been shipped;
providing product replacements or modifications; and
defending against litigation.
These costs could be large and may increase expenses and lower our operating profits. Our reputation with customers or end users could be damaged as a result of product defects and errata, and product demand could be reduced. These factors could harm our business and financial results.
We depend on our suppliers, including sole source suppliers, for critical 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 inability of suppliers to meet customer demand requirements during volatile cycles;
reliability or quality issues with certain key subassemblies provided by single source suppliers as to which we may not have any short term alternative;


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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 and at expected cost 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.
New regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.
In 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the SEC adopted requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, regardless of whether these products are manufactured by third parties. These requirements require companies to conduct due diligence and disclose whether or not such minerals originate from the Democratic Republic of Congo and certain adjoining countries. These requirements could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of semiconductor devices, including our products. In addition, since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free.
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.
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


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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, although this protection may in some cases be insufficient as the duration of our patents often exceeds the commercial life cycles of the technologies disclosed and claimed in the patents due to the rapid development of technology in our industry. 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.
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.


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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 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 76.6 million shares were outstanding as of September 27, 2014. 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. 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.
We may be subject to disruptions or failures in our information technology systems and network infrastructures that could have a material adverse effect on us.
We maintain and rely extensively on information technology systems and network infrastructures for the effective operation of our business. We also hold large amounts of data in data center facilities around the world, primarily in Singapore and the U.S., which our business depends upon. A disruption, infiltration or failure of our information technology systems or any of our data centers as a result of software or hardware malfunctions, computer viruses, cyber-attacks, employee theft or misuse, power disruptions, natural disasters or accidents could cause breaches of data security and loss of critical data, which in turn could materially adversely affect our business. Our security procedures, such as virus protection software and our business continuity planning, such as our disaster recovery policies and back-up systems, may not be adequate or implemented properly to fully address the adverse effect of such events, which could adversely impact our operations. In addition, our business could be adversely affected to the extent we do not make the appropriate level of investment in our technology systems as our technology systems become out-of-date or obsolete and are not able to deliver the type of data integrity and reporting we need to run our business. Furthermore, when we implement new systems and or upgrade existing systems, we could be faced with temporary or prolonged disruptions that could adversely affect our business.
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. As of September 27, 2014, we have foreign net operating loss carryforwards of $80.6 million, domestic state net operating loss carryforwards of $177.8 million, domestic federal net operating loss carryforwards of $6.9 million, and tax credit carryforwards of $0.7 million.



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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. Officials in some of the jurisdictions in which we do business have proposed, or announced that they are reviewing, tax changes that could potentially increase taxes, and other revenue-raising laws and regulations. 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 U.S. or U.S. 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 Singapore and the U.S. and manufacturing and research and development facilities in China, 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 U.S. 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.



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Item 2. PROPERTIES
The following table reflects our major facilities as of September 27, 2014:
Facility (1)
 
Approximate Size
 
Function
 
Business Segment and Products Manufactured
 
Lease Expiration Date
Singapore
 
198,000 sq. ft.
 
Corporate headquarters, manufacturing, technology, sales and service center
 
Equipment: ball and wedge bonders
 
November 2043 (2)
Suzhou, China
 
155,000 sq. ft.
 
Manufacturing, technology and shared support services center
 
Expendable Tools: capillaries, dicing blades and bonding wedges
 
(3)
Fort Washington, Pennsylvania
 
88,000 sq. ft.
 
Technology, sales and service center
 
Not applicable
 
September 2033 (4)
Santa Ana, California
 
65,000 sq. ft.
 
Technology, sales and service center
 
Not applicable
 
August 2036 (5)
Yokneam, Israel
 
21,000 sq. ft.
 
Manufacturing and technology center
 
Expendable Tools: capillary blanks (semi-finish)
 
January 2018 (6)
Damansara Uptown, Malaysia
 
12,000 sq ft
 
Shared support services, sales and service center
 
Not applicable
 
July 2017 (7)

(1)
Each of the facilities listed in this table is leased other than the facility in Suzhou, China - see (3) below.
(2)
Includes lease extension periods at the Company's option. Initial lease expires in November 2023.
(3)
On September 25, 2013, the Company completed the building purchase.
(4)
Includes lease extension periods at the Company's option. Initial lease expires in September 2023.
(5)
Includes lease extension periods at the Company's option. Initial lease expires in August 2026.
(6)
Includes lease extension periods at the Company's option. Initial lease expires in January 2015.
(7)
Includes lease extension periods at the Company's option. Initial lease expires in July 2015.
In addition, the Company rents space for sales and service offices and administrative functions in China, Germany, Japan, Malaysia, South Korea, Switzerland, Taiwan, Thailand and the Philippines. The Company believes the 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.    MINE SAFETY DISCLOSURES
Not applicable.



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PART II
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on The Nasdaq Global Market (“Nasdaq”) under the symbol “KLIC.” The following table reflects the ranges of high and low sale prices for our common stock as reported on Nasdaq for the periods indicated:
 
Fiscal 2014
 
Fiscal 2013
 
High
 
Low
 
High
 
Low
First Quarter
$
13.70

 
$
11.19

 
$
12.04

 
$
9.41

Second Quarter
$
13.30

 
$
10.73

 
$
12.95

 
$
10.58

Third Quarter
$
15.10

 
$
11.74

 
$
12.56

 
$
10.08

Fourth Quarter
$
15.23

 
$
13.44

 
$
12.27

 
$
10.91

On November 7, 2014, there were approximately 285 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 2015 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission on or about December 24, 2014.
Recent Sales of Unregistered Securities and Use of Proceeds
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share repurchase activity during the year ended September 27, 2014 was as follows (in millions, except number of shares, which are reflected in thousands, and per share amounts):
Periods
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares That May Yet Be Purchase Under the Plans or Programs (1)
August 14, 2014 to September 27, 2014
43.5

 
$
14.40

 
43.50

 
$
99.4

(1)
On August 14, 2014, the Company’s Board of Directors authorized a program (the "Program") to repurchase up to $100 million of the Company’s common stock on or before August 14, 2017. The Company has entered into a written trading plan under Rule 10b5-1 of the Exchange Act, to facilitate repurchases under the Program. The Program may be suspended or discontinued at any time and will be funded using the Company's available cash. Under the Program, shares may be repurchased through open market and/or privately negotiated transactions at prices deemed appropriate by management. The timing and amount of repurchase transactions under this program will depend on market conditions as well as corporate and regulatory considerations. The $99.4 million represents the remaining amount available to repurchase shares under the Program.


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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables reflect 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 2014, 2013, 2012, 2011, and 2010.
This data should be read in conjunction with our consolidated financial statements, including notes and other financial information included elsewhere in this report or other reports filed previously by us in respect of the fiscal years identified in the column headings of the tables below.
 
 
 
Fiscal
(in thousands)
2014
 
2013
 
2012
 
2011
 
2010
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net revenue:
 
 
 
 
 
 
 
 
 
 
Equipment
$
503,049

 
$
472,567

 
$
727,082

 
$
759,331

 
$
691,988

 
Expendable Tools
65,520

 
62,371

 
63,941

 
71,070

 
70,796

 
 
Total net revenue
568,569

 
534,938

 
791,023

 
830,401

 
762,784

Cost of sales:
 
 
 
 
 
 
 
 
 
 
Equipment
268,934

 
261,270

 
397,210

 
412,914

 
399,042

 
Expendable Tools
26,081

 
26,723

 
26,423

 
29,578

 
28,069

 
 
Total cost of sales
295,015

 
287,993

 
423,633

 
442,492

 
427,111

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Equipment
174,346

 
158,306

 
164,081

 
189,631

 
155,625

 
Expendable Tools
22,224

 
22,833

 
24,083

 
28,218

 
32,013

 
 
Total operating expenses (1)
196,570

 
181,139

 
188,164

 
217,849

 
187,638

Income from operations:
 
 
 
 
 
 
 
 
 
 
Equipment
59,769

 
52,991

 
165,791

 
156,786

 
137,321

 
Expendable Tools
17,215

 
12,815

 
13,435

 
13,274

 
10,714

Interest income (expense), net
149

 
862

 
(4,975
)
 
(7,632
)
 
(7,930
)
Income from continuing operations before income tax
77,133

 
66,668

 
174,251

 
162,428

 
140,105

Provision (benefit) for income taxes from continuing operations (2)
14,145

 
7,310

 
13,671

 
34,818

 
(2,037
)
Net income
$
62,988

 
$
59,358

 
$
160,580

 
$
127,610

 
$
142,142


(1)
During fiscal 2014, 2013, 2012, 2011 and 2010, we recorded $1.1 million, $1.9 million, $1.7 million, $2.5 million and $2.4 million, respectively, in operating expense for restructuring-related severance.
During fiscal 2014, 2013, 2012, 2011 and 2010, we recorded $17.6 million, $17.2 million, $22.0 million, $24.3 million and $17.4 million, respectively, in operating expense for incentive compensation.    
(2) The following are the most significant factors that affected our provision for income taxes: implementation of our international restructuring plan in fiscal 2011 and 2010; 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.



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Fiscal
 
 
2014
 
2013
 
2012

2011
 
2010
Per Share Data:
 
 
 
 
 
 
 
 
 
 
Net income per share: (1) (2)
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.82

 
$
0.79

 
$
2.17

 
$
1.77

 
$
2.01

Diluted
 
$
0.81

 
$
0.78

 
$
2.13

 
$
1.73

 
$
1.92

 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding: (1) (2)
 
 
 
 
 
 
 
 
 
 
Basic
 
76,396

 
75,132

 
73,887

 
71,820

 
70,012

Diluted
 
77,292

 
76,190

 
75,502

 
73,341

 
73,548

(1) For fiscal 2014, 2013, 2012, 2011 and 2010, the exercise of dilutive stock options and expected vesting of time-based and market-based restricted stock were included.
(2) For fiscal 2010, expected vesting of performance-based restricted stock and conversion of the 1% Convertible Subordinated Notes were included. For fiscal 2010, $0.3 million of after-tax interest expense related to our 1% Convertible Subordinated Notes was added to the Company's net income to determine diluted earnings per share.
 
Fiscal
(in thousands)
2014
 
2013
 
2012
 
2011
 
2010
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, investments and restricted cash
$
597,086

 
$
525,040

 
$
440,244

 
$
384,552

 
$
181,334

Working capital excluding discontinued operations
756,340

 
676,986

 
589,947

 
405,659

 
347,560

Total assets excluding discontinued operations
944,448

 
862,994

 
815,609

 
728,391

 
580,169

Long-term debt and current portion of long-term debt

 

 

 
105,224

 
98,475

Long-term and current portion of financing obligation
19,616

 
19,396

 

 

 

Shareholders' equity
789,242

 
716,665

 
643,667

 
469,877

 
322,480





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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, this filing contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the safe harbor provisions created by statute. Such forward-looking statements include, but are not limited to, our future revenue, sustained, increasing, continuing or strengthening demand for our products, the continuing transition from gold to copper wire bonding, replacement demand, our research and development efforts, our ability to identify and realize new growth opportunities, our ability to control costs and our operational flexibility as a result of (among other factors):
projected growth rates in the overall semiconductor industry, the semiconductor assembly equipment market, and the market for semiconductor packaging materials; and
projected demand for ball and wedge 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 September 27, 2014 (the “Annual Report”) and our other reports and registration statements filed from time to time with the Securities and Exchange Commission. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in this report, as well as our audited financial statements included in the Annual Report.
We operate in a rapidly changing and competitive environment. New risks emerge from time to time and it is not possible for us to predict all risks that may affect us. Future events and actual results, performance and achievements could differ materially from those set forth in, contemplated by or underlying the forward-looking statements, which speak only as of the date on which they were made. Except as required by law, we assume no obligation to update or revise any forward-looking statement to reflect actual results or changes in, or additions to, the factors affecting such forward-looking statements. Given those risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictions of actual results.
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 (“ICs”), high and low powered discrete devices, light-emitting diodes (“LEDs”), and power modules. We also service, maintain, repair and upgrade our equipment. Our customers primarily consist of semiconductor device manufacturers, outsourced semiconductor assembly and test providers (“OSATs”), other electronics manufacturers and automotive electronics suppliers.
We operate two main business segments, Equipment and Expendable Tools. Our goal is to be the technology leader and the most competitive supplier in terms of cost and performance in each of our major product lines. Accordingly, we invest in research and engineering projects intended to enhance our position at the leading edge of semiconductor assembly technology. We also remain focused on our cost structure through continuing improvement and optimization of operations. Cost reduction efforts remain an important part of our normal ongoing operations and are expected to generate savings without compromising overall product quality and service levels.
Business Environment
The semiconductor business environment is highly volatile, driven by internal dynamics, both cyclical and seasonal, in addition to macroeconomic forces. Over the long term, semiconductor consumption has historically grown, and is forecast to continue to grow. This growth is driven, in part, by regular advances in device performance and by price declines that result from improvements in manufacturing technology. In order to exploit these trends, semiconductor manufacturers, both integrated device manufacturers (“IDMs”) and OSATs, periodically invest aggressively in latest generation capital equipment. This buying pattern often leads to periods of excess supply and reduced capital spending - the so called semiconductor cycle. Within this broad semiconductor cycle there are also, generally weaker, seasonal effects that are specifically tied to annual, end-consumer purchasing patterns. Typically, semiconductor manufacturers prepare for heightened demand by adding or replacing equipment capacity by the end of the September quarter. Occasionally, this results in subsequent reductions in the December quarter. This annual seasonality can occasionally be


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overshadowed by effects of the broader semiconductor cycle. Macroeconomic factors also affect the industry, primarily through their effect on business and consumer demand for electronic devices, as well as other products that have significant electronic content such as automobiles, white goods, and telecommunication equipment.
Our Equipment segment is primarily affected by the industry's internal cyclical and seasonal dynamics in addition to broader macroeconomic factors that positively and negatively affect our financial performance. The sales mix of IDM and OSAT customers in any period also impacts financial performance, as changes in this mix can affect our products' average selling prices and gross margins due to differences in volume purchases and machine configurations required by each customer type.
Our Expendable Tools segment is less volatile than our Equipment segment. Expendable Tools sales are more directly tied to semiconductor unit consumption rather than capacity requirements and production capability improvements. 
We continue to position our business to leverage our research and development leadership and innovation and to focus our efforts on mitigating volatility, improving profitability and ensuring longer-term growth. We remain focused on operational excellence, expanding our product offerings and managing our business efficiently throughout the business cycles. Our visibility into future demand is generally limited, forecasting is difficult, and we generally experience typical industry seasonality.
To limit potential adverse cyclical, seasonal and macroeconomic effects on our financial position, we have de-leveraged and strengthened our balance sheet. As of September 27, 2014, our total cash, cash equivalents and investments were $597.1 million, a $72.1 million increase from the prior fiscal year end. We believe this strong cash position will allow us to continue to invest in product development and pursue organic and non-organic opportunities.
On August 14, 2014, the Company’s Board of Directors authorized a program (the "Program") to repurchase up to $100 million of the Company’s common stock on or before August 14, 2017. The Company has entered into a written trading plan under Rule 10b5-1 of the Exchange Act, to facilitate repurchases under the Program. The Program may be suspended or discontinued at any time and will be funded using the Company's available cash. Under the Program, shares may be repurchased through open market and/or privately negotiated transactions at prices deemed appropriate by management. The timing and amount of repurchase transactions under the Program will depend on market conditions as well as corporate and regulatory considerations. During the year ended September 27, 2014, the Company repurchased a total of 43.5 thousand shares of common stock at a cost of $0.6 million under the Program. As of September 27, 2014, our remaining stock repurchase authorization under the Program was approximately $99.4 million.
Technology Leadership
We compete largely by offering our customers among the most advanced equipment and expendable tools available for the wire and wedge bonding processes. Our equipment is typically the most productive and has the highest levels of process capability, and as a result, has a lower cost of ownership compared to other equipment in its market. Our expendable tools are designed to optimize the performance of the equipment in which they are used. We believe our technology leadership contributes to the strong market positions of our ball bonder, wedge bonder and expendable tools products. To maintain our competitive advantage, we invest in product development activities designed to produce a stream of improvements to existing products and to deliver next-generation products. These investments often focus as much on improvements in the semiconductor assembly process as on specific pieces of assembly equipment or expendable tools. In order to generate these improvements, we often work in close collaboration with customers, end users, and other industry members. In addition to producing technical advances, these collaborative development efforts strengthen customer relationships and enhance our reputation as a technology leader and solutions provider.
In addition to gold, silver alloy wire and aluminum wire, our leadership in the industry's use of copper wire for the bonding process is an example of the benefits of our collaborative efforts. By working with customers, material suppliers, and other equipment suppliers, we have developed a series of robust, high-yielding production processes, which have made copper wire widely accepted and significantly reduced the cost of assembling an integrated circuit. Based on our industry leading copper bonding processes and the continued high price of gold, we believe the demand for copper configured wire bonders is likely to remain solid.
Our leadership also 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 bond pad pitch, silicon with the latest node and complex wire bonding requirement. We continue to see demand for our large bondable area (“LA”) configured machines. This LA option is now available on all of our Power Series (PS) models and allows our customers to gain added efficiencies and to reduce the cost of packaging.
We also leverage the technology leadership of our equipment by optimizing our bonder platforms, and we deliver variants of our products to serve emerging high-growth markets. For example, we have developed extensions of our main ball bonding platforms to address opportunities in LED assembly, in particular for general lighting. We expect the next wave of growth in the LED market


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to be high brightness LED for general lighting. We also believe there is an opportunity for growth in wire bonding sales at wafer level using our AT Premier Plus
Furthermore, we gain synergies by leveraging technologies between our unique platforms. Our leading technology for wedge bonder equipment uses aluminum ribbon or heavy wire as opposed to fine gold and fine copper wire used in ball bonders.  In 2013, we launched a new line of high performance wedge bonder products, PowerFusionPS. The advanced interconnect capabilities of PowerFusionPS improve the processing of high-density power packages, due to an expanded bondable area, wider leadframe capability, superior indexing accuracy and teach mode. We have also initiated the design and development of our next generation hybrid wedge bonder, which we currently expect to release in 2015. In both cases, we are making a concerted effort to develop commonality of subsystems and design practices, in order to improve performance and design efficiencies. We believe this will benefit us in maintaining our leadership position in the wedge bonding market and increase synergies between the various engineering product groups. Furthermore, we continually research adjacent market segments where our technologies could be used. Many of these initiatives are in the early stages of development and may become business opportunities in the future.
Another example of our developing equipment for high-growth niche markets is our AT Premier Plus. This machine utilizes a modified wire bonding process to mechanically place bumps on devices in a wafer format, for variants of the flip chip assembly process. Typical applications include complementary metal-oxide semiconductor (“CMOS”) image sensors, surface acoustical wave (“SAW”) filters and high brightness LEDs. These applications are commonly used in most, if not all, smartphones available today in the market. We also have expanded the use of AT Premier Plus for wafer level wire bonding for micro-electro-mechanical systems (“MEMS”) and other sensors.
Our technology leadership and bonding process know-how have enabled us to develop highly function-specific equipment with best-in-class throughput and accuracy. This forms the foundation for our advanced packaging equipment development. We established a dedicated team to develop and manufacture advanced packaging bonders for the emerging 2.5 dimensional (“2.5D IC”) and 3 dimensional integrated circuit (“3D IC”) markets. In November 2013, we shipped the first TCB (Thermo-Compression Bonder) C2S (Chip-to-Substrate) alpha machine to an initial strategic customer and have subsequently shipped additional variants to other customers. By reducing the interconnect dimensions, 2.5D and 3D ICs are expected to provide form factor, performance and power efficiency enhancements over traditional flip-chip packages in production today. High-performance processing and memory applications, in addition to mobile devices such as smartphones and tablets, are anticipated to be earlier adopters of this new packaging technology.
We bring the same technology focus to our expendable tools business, driving tool design and manufacturing technology to optimize the performance and process capability of the equipment in which our tools are used. For all our equipment products, expendable tools are an integral part of their process capability. We believe our unique ability to simultaneously develop both equipment and tools is a core strength supporting our products' technological differentiation.
Products and Services
We supply a range of bonding equipment and expendable tools. The following tables reflect net revenue by business segment for fiscal 2014, 2013, and 2012:
 
 
Fiscal
 
 
2014
 
2013
 
2012
(dollar amounts in thousands)
 
Net revenues
 
% of total net revenue
 
Net revenues
 
% of total net revenue
 
Net revenues
 
% of total net revenue
Equipment
 
$
503,049

 
88.5
%
 
$
472,567

 
88.3
%
 
$
727,082

 
91.9
%
Expendable Tools
 
65,520

 
11.5
%
 
62,371

 
11.7
%
 
63,941

 
8.1
%
 
 
$
568,569

 
100.0
%
 
$
534,938

 
100.0
%
 
$
791,023

 
100.0
%

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


26

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Equipment Segment
We manufacture and sell a line of ball bonders, wafer level bonders and heavy wire wedge 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. Wafer level bonders mechanically apply bumps to die, typically while still in the wafer format, for some variants of the flip chip assembly process. Heavy wire wedge bonders use either aluminum wire or ribbon to perform the same function in packages that cannot use gold or copper wire because of either high electrical current requirements or other package reliability issues. In September 2014, we introduced the APAMA (Advanced Packaging with Adaptive Machine Analytics) C2S bonder, which is designed for performance and high accuracy applications, delivering die-stacking solutions for 2.5 Dimensional, 3 Dimensional or Through Silicon Via (TSV) integrated chips. 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

Table of Contents

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

 
APAMA C2S
 
Flip chip thermo-compression bonding applications

 (1) Power Series (PS)


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Table of Contents

Ball Bonders
Automatic ball bonders represent the largest portion of our semiconductor equipment business. Our main product platform for ball bonding is the Power Series - a family of assembly equipment that is setting new standards for performance, productivity, upgradeability, and ease of use.
Our portfolio of ball bonding products includes:
The IConnPS: high-performance ball bonders which can be configured for either gold or copper wire.
The IConnPS LA: high-performance large area ball bonders which can be configured for either gold or copper wire.
The ConnXPS Plus: cost-performance ball bonders which can be configured for either gold or copper wire.
The ConnXPS Plus LA: cost-performance large area ball bonders which can be configured for either gold or copper wire.
The ConnXPS LED and ConnXPS VLED:  ball bonders targeted specifically at the fast growing LED market.
The IConnPS ProCu Plus: high-performance copper wire ball bonders for advanced wafer nodes at 28 nanometer and below.
The IConnPS ProCu Plus LA: high-performance large area copper wire ball bonders for advanced wafer nodes at 28 nanometer and below.
The AT Premier Plus: ball bonders which utilize a modified wire bonding process to mechanically place bumps on devices, while still in a wafer format for variants of the flip chip assembly process. Typical applications include CMOS image sensors, SAW filters, MEMS and high brightness LEDs. These applications are commonly used in most, if not all, smartphones available today in the market.
In March 2014, we introduced the IConnPS Plus and IConnPS Plus LA, which offer new capabilities and enhanced features. IConnPS Plus LA is the large area version which extends the bondable width up to 87 millimeters. In September 2014, we introduced ConnXPS LED Plus, which offers higher performance and a larger bondable area for the LED market.
Our Power Series products are setting new standards in wire bonding. Our ball bonders are capable of performing very fine pitch bonding, as well as creating the complex loop shapes needed in the assembly of advanced semiconductor packages and bonding on the latest silicon node-28 nanometer. Most of our installed base of gold wire bonders can also be retrofitted for copper applications through kits we sell separately.
Heavy Wire Wedge Bonders
We are the leaders in the design and manufacture of heavy wire wedge bonders for the power semiconductor and automotive power module markets. Heavy wire wedge bonders may use either aluminum wire or aluminum ribbon to connect semiconductor chips in power packages, power hybrids and automotive modules for products such as motor control modules or inverters for hybrid cars. In addition, we see some potential use for our wedge bonder products in high reliability interconnections of rechargeable batteries in hybrid and electric automotive 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 bonders designed specifically for power semiconductor applications.
The 7200HD: heavy wire wedge bonders designed for smaller power packages using either aluminum wire or ribbon.
The PowerFusionPS Semiconductor Wedge Bonders - Configurable in single, dual and multi-head configurations using aluminum wire and PowerRibbonTM:
The PowerFusionPS TL: designed for low-cost, high volume power semiconductor applications.
The PowerFusionPS HL: designed for advanced power semiconductor applications.
While wedge bonding traditionally utilizes aluminum wire, all of our heavy wire wedge bonders are also available to be modified to bond aluminum ribbon using our proprietary PowerRibbon® process. Aluminum ribbon offers device makers performance advantages over traditional round wire and is being increasingly used for high current packages and automotive applications.


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Our PowerFusionPS series are driven by new powerful direct-drive motion systems and expanded pattern recognition capabilities. The advanced interconnect capabilities of PowerFusionPS improves the processing of high-density power packages, due to an expanded bondable area, wider leadframe capability, superior indexing accuracy and teach mode.
In September 2014, we introduced the PowerFusionPS HLx, which has similar capabilities of the PowerFusionPS HL and extends the bondable width up to 105 millimeters.
Advanced Packaging Bonders
In September 2014, we introduced the APAMA C2S bonder, which is designed for performance and high accuracy applications, delivering die-stacking solutions for 2.5 Dimensional, 3 Dimensional or Through Silicon Via (TSV) integrated chips.
Other Equipment Products and Services
We also sell manual wire bonders, and we offer spare parts, equipment repair, maintenance and servicing, training services, and upgrades for our equipment through our Support Services business unit.
Our K&S Care service is designed to help customers operate their machines at an optimum level under the care of our trained specialists. K&S Care includes a range of programs, offering different levels of service depending on customer needs.
Expendable Tools Segment
We manufacture and sell a variety of expendable tools for a broad range of semiconductor packaging applications. Our principal Expendable Tools segment products include:
Capillaries:  expendable tools used in ball bonders. Made of ceramic and other elements, a capillary guides the wire during the ball bonding process. Its features help control the bonding process. We design and build capillaries suitable for a broad range of applications, including for use on our competitors' equipment. In addition to capillaries used for gold wire bonding, we have developed capillaries for use with copper wire to achieve optimal performance in copper wire bonding.
Bonding wedges:  expendable tools used in heavy wire wedge bonders. Like capillaries, their features are tailored to specific applications. We design and build bonding wedges for use both in our own equipment and in our competitors' equipment.
Dicing blades:  expendable tools used by semiconductor manufacturers to cut silicon wafers into individual semiconductor die and to cut semiconductor devices that have been moulded in a matrix configuration into individual units.
The Optoceramic and OptoPCB package singulation blades for the LED market enable an improvement on package singulation quality, precision and productivity by providing a significantly longer life blade, and improved stability. We also offer ACS Pro Capillary, which is a new generation of copper capillary for advanced copper wire bonding applications.

In March 2014, we expanded the ACS series capillaries through the introduction of ACS Max and ACS Lite. ACS Max Capillary and ACS Lite Capillary are the new generation of copper capillary for medium-pin count and low-pin count copper wire applications.
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, tax provisions, 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, reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements.


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Revenue Recognition
In accordance with ASC No. 605, Revenue Recognition, we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, the collectability is reasonably assured, and customer acceptance, when applicable, has been received or we otherwise have been released from customer acceptance obligations. If terms of the sale provide for a customer acceptance period, revenue is recognized upon the expiration of the acceptance period or customer acceptance, whichever occurs first. 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.
Our business is subject to contingencies related to customer orders, including:
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 not be recognized until acceptance, which typically consists of installation and testing, is received from the customer.
Shipping and handling costs billed to customers are recognized in net revenue. Shipping and handling costs paid by us 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 concentrated geographic locations, which could also impact the collectability of certain receivables. If global economic conditions deteriorate or political conditions were to change in some of the countries where 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. Demand is generally defined as 18 months forecasted future consumption for equipment, 24 months forecasted future consumption for all spare parts, and 12 months forecasted future consumption for expendable tools. Forecasted consumption 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 consumption 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 consumption, and market conditions. If actual market conditions are less favorable than projections, additional inventory reserves may be required.
Accounting for Impairment of Goodwill
The Company operates two reportable segments: Equipment and Expendable Tools. Goodwill was recorded in 2009 for the acquisition of Orthodyne Electronics Inc., which added wedge bonder products to the Equipment business.
Accounting Standard Update 2011-08, Testing Goodwill for Impairment provides companies with the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, after assessing the qualitative factors, a company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then performing the two-step impairment test is unnecessary. However, if a company concludes otherwise, then it is required to perform the first step of the two-step goodwill impairment test. If the carrying value of a reporting


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unit exceeds its fair value in the first step of the test, then a company is required to perform the second step of the goodwill impairment test to measure the amount of the reporting unit's goodwill impairment loss, if any. 
In fiscal 2013 and 2014, we chose to bypass the qualitative assessment and proceed directly to performing the quantitative evaluation of the fair value of the reporting unit, to compare against the carrying value of the reporting unit.
As part of our annual evaluation of the goodwill, we perform an impairment test of our goodwill in the fourth quarter of each fiscal year to coincide with the completion of our annual forecasting process and refreshing of our business outlook processes. On an ongoing basis, we monitor whether a "triggering" event has occurred that may have the effect of reducing the fair value of a reporting unit below its respective carrying value. Adverse changes in expected operating results and/or unfavorable changes in other economic factors used to estimate fair values could result in a non-cash impairment charge in the future.   
Impairment assessments inherently involve judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions as to prices, costs, growth rates or other factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions we have used in testing for impairment are reasonable, significant changes in any one of our assumptions could produce a significantly different result. Indicators of potential impairment may lead us to perform interim goodwill impairment assessments, including significant and unforeseen customer losses, a significant adverse change in legal factors or in the business climate, a significant adverse action or assessment by a regulator, a significant stock price decline, unforeseen changes in technology or unanticipated competition.
For further information on goodwill and other intangible assets, see Note 3 to our Consolidated Financial Statements included in Item 8.
Income Taxes
In accordance with ASC No. 740, Income Taxes, deferred income taxes are determined using the liability method. 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 No. 740 Topic 10, Income Taxes, General (“ASC 740.10”), we account for uncertain tax positions taken or expected to be taken in the Company's income tax return. Under ASC 740.10, 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.
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. Compensation expense associated with market-based restricted stock is determined using a Monte-Carlo valuation model, and compensation expense associated with time-based and performance-based restricted stock is determined based on the number of shares granted and the fair value on the date of grant. The fair value of our stock option awards are estimated using a Black-Scholes option valuation model.
The calculation of equity-based compensation costs requires us to 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 have 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.


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

RESULTS OF OPERATIONS
Results of Operations for fiscal 2014 and 2013
The following table reflects our income from operations for fiscal 2014 and 2013:
 
 
Fiscal
 
 
 
 
(dollar amounts in thousands)
 
2014
 
2013
 
$ Change
 
% Change
Net revenue
 
$
568,569

 
$
534,938

 
$
33,631

 
6.3
 %
Cost of sales
 
295,015

 
287,993

 
7,022

 
2.4
 %
Gross profit
 
273,554

 
246,945

 
26,609

 
10.8
 %
 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
113,514

 
119,519

 
(6,005
)
 
(5.0
)%
Research and development
 
83,056

 
61,620

 
21,436

 
34.8
 %
Operating expenses
 
196,570

 
181,139

 
15,431

 
8.5
 %
 
 
 
 
 
 
 
 
 
Income from operations
 
$
76,984

 
$
65,806

 
$
11,178

 
17.0
 %
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. We use bookings to evaluate the results of our operations, generate future operating plans and assess the performance of our company. While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for revenue recognized in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate bookings differently or not at all, which reduces its usefulness as a comparative measure. Reconciliation of bookings to net revenue is not practicable. Our backlog consists of customer orders scheduled for shipment within the next twelve 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 tables reflect our bookings and backlog for fiscal 2014 and 2013:
 
Fiscal
(in thousands)
2014
 
2013
Bookings
$
595,565

 
$
497,335

 
 
 
 
 
As of
(in thousands)
September 27, 2014

 
September 28, 2013

Backlog
$
79,100

 
$
52,100

Net Revenue
Approximately 94.4% and 97.3% of our net revenue for fiscal 2014 and 2013, respectively, was for shipments to customer locations outside of the U.S., primarily in the Asia/Pacific region, and we expect sales outside of the U.S. to continue to represent the majority of our future revenue.



33

Table of Contents

The following table reflects net revenue by business segment for fiscal 2014 and 2013:
 
 
Fiscal
 
 
 
 
(dollar amounts in thousands)
 
2014
 
2013
 
$ Change
 
% Change
Equipment
 
$
503,049

 
$
472,567

 
$
30,482

 
6.5
%
Expendable Tools
 
65,520

 
62,371

 
3,149

 
5.0
%
Total net revenue
 
$
568,569

 
$
534,938

 
$
33,631

 
6.3
%
Equipment
The following table reflects the components of Equipment net revenue change between fiscal 2014 and 2013
 
 
Fiscal 2014 vs. 2013
(in thousands)
 
Price
 
Volume
 
$ Change
Equipment
 
$
9,224

 
$
21,258

 
$
30,482

For fiscal 2014, the higher Equipment net revenue as compared to fiscal 2013 was primarily due to the higher volume of both ball bonder and wedge bonder sales and a favorable product mix. The higher volume on ball bonders was driven primarily by higher demand for mobile devices. The higher volume on wedge bonders was driven primarily by sales of the new product family which was introduced in the third quarter of fiscal 2013.
Expendable Tools
The following table reflects the components of Expendable Tools net revenue change between fiscal 2014 and 2013
 
 
Fiscal 2014 vs. 2013
(in thousands)
 
Price
 
Volume
 
$ Change
Expendable Tools
 
$
(1,017
)
 
$
4,166

 
$
3,149

 
For fiscal 2014, the higher Expendable Tools net revenue as compared to fiscal 2013 was primarily due to higher volume. This was partially offset by price reduction in wire bonding tools business and wedge bonder tools business. The price reduction in wedge bonder tools business was primarily due to an adjustment of the pricing discounts given to certain distributors, which resulted in the decrease in the selling, general and administrative ("SG&A") expense and the revenue in our wedge bonder tools business, partially offset by favorable product mix.
Gross Profit
The following table reflects gross profit by business segment for fiscal 2014 and 2013
 
 
Fiscal
 
 
 
 
(dollar amounts in thousands)
 
2014
 
2013
 
$ Change
 
% Change
Equipment
 
$
234,115

 
$
211,297

 
$
22,818

 
10.8
%
Expendable Tools
 
39,439

 
35,648

 
3,791

 
10.6
%
Total gross profit
 
$
273,554

 
$
246,945

 
$
26,609

 
10.8
%
 
The following table reflects gross profit as a percentage of net revenue by business segment for fiscal 2014 and 2013
 
 
Fiscal
 
Basis Point
 
 
2014
 
2013
 
Change
Equipment
 
46.5
%
 
44.7
%
 
180
Expendable Tools
 
60.2
%
 
57.2
%
 
300
Total gross margin
 
48.1
%
 
46.2
%
 
190


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Table of Contents

 Equipment
The following table reflects the components of Equipment gross profit change between fiscal 2014 and 2013
 
 
Fiscal 2014 vs. 2013
(in thousands)
 
Price
 
Cost
 
Volume
 
$ Change
Equipment
 
$
9,224

 
$
(5,062
)
 
$
18,656

 
$
22,818

For fiscal 2014, the higher Equipment gross profit as compared to fiscal 2013 was primarily due to the higher volume of both ball bonder and wedge bonder sales and a favorable product mix as described above. This was partially offset by higher production costs for our ball bonders and wedge bonders, which was primarily due to product mix.
Expendable Tools
The following table reflects the components of Expendable Tools gross profit change between fiscal 2014 and 2013
 
 
Fiscal 2014 vs. 2013
(in thousands)
 
Price
 
Cost
 
Volume
 
$ Change
Expendable Tools
 
$
(1,017
)
 
$
2,333

 
$
2,475

 
$
3,791

For fiscal 2014, the higher Expendable Tools gross profit as compared to fiscal 2013 was primarily due to the higher volume and lower cost. This was partially offset by price reduction in wire bonding tools business and wedge bonder tools business. The price reduction in wedge bonder tools business was primarily due to an adjustment of the pricing discounts given to certain distributors, which resulted in the decrease in the SG&A expense and the revenue in our wedge bonder tools business, partially offset by favorable product mix.
Operating Expenses
The following table reflects operating expenses as a percentage of net revenue for fiscal 2014 and 2013:
 
 
Fiscal
 
Basis point
 
 
2014
 
2013
 
change
Selling, general & administrative
 
20.0
%
 
22.3
%
 
(230
)
Research & development
 
14.6
%
 
11.5
%
 
310

Total
 
34.6
%
 
33.8
%
 
80

Selling, General and Administrative (“SG&A”)
SG&A expense decreased $6.0 million during fiscal 2014 as compared to fiscal 2013 primarily due to a decrease in amortization expenses of $3.9 million as the intangible assets relating to the Orthodyne customer relationships have been fully amortized, net favorable variance of $2.8 million in foreign exchange rates due to strengthening of the U.S dollar against foreign currency denominated liabilities which increased in the current period, and net impact of adjustment of the pricing discounts given to certain distributors of $1.5 million that resulted in a decrease in the SG&A expense and revenue. These decreases were partially offset by a gain of $2.1 million related to the curtailment of our Swiss pension plan in fiscal 2013.
Research and Development (“R&D”)
R&D expense increased $21.4 million during fiscal 2014 as compared to fiscal 2013, during which we recognized a Research Incentive Scheme for Companies grant of $0.7 million. In fiscal 2014, we invested an additional $20.7 million of materials and other expenses in the development of new products.


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Table of Contents

Income from Operations
For fiscal 2014, total income from operations was higher by $11.2 million. This was due primarily to higher revenue and margin for equipment sales as explained above.
Interest Income and Expense
The following table reflects interest income and interest expense for fiscal 2014 and 2013
 
 
Fiscal
 
 
 
 
(dollar amounts in thousands)
 
2014
 
2013
 
$ Change
 
% Change
Interest income
 
$
1,197

 
$
883

 
$
314

 
35.6
%
Interest expense
 
$
(1,048
)
 
$
(21
)
 
$
(1,027
)
 
100.0
%
 
Interest income in fiscal 2014 was higher as compared to fiscal 2013 due to higher interest income derived from short term investments and a larger cash and cash equivalents balance.

The higher interest expense for fiscal 2014 was attributable to the interest on financing obligation relating to the new building (Refer to Note 7 of our Consolidated Financial Statements included in Item 8 of this report).
Provision for Income Taxes
The following table reflects the provision for income taxes and the effective tax rate for fiscal 2014 and 2013
 
 
Fiscal
(in thousands)
 
2014
 
2013
Income from operations before income taxes
 
$
77,133

 
$
66,668

Provision for income taxes
 
14,145

 
7,310

Net income
 
$
62,988

 
$
59,358

 
 
 
 
 
Effective tax rate
 
18.3
%
 
11.0
%
For fiscal 2014, the effective income tax rate increased from fiscal 2013 by 7.3% due primarily to a shift in earnings to tax jurisdictions with higher effective tax rates, certain changes in estimates that were recorded upon filing tax returns in foreign jurisdictions and the release of a reserve in fiscal 2013.
For fiscal 2013, the effective income tax rate differed from the federal statutory rate due primarily to tax from foreign operations at a lower effective tax rate than the U.S. statutory rate and the impact of tax holidays, release of tax reserves, offset by an increase for deferred taxes on un-remitted earnings as well as other U.S. current and deferred taxes.
Our future effective tax rate would be affected if earnings were lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, a change in our assertion for un-remitted foreign earnings, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. We regularly assess the effects resulting from these factors to determine the adequacy of our provision for income taxes.




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Table of Contents

Results of Operations for fiscal 2013 and 2012
The following table reflects our income from operations for fiscal 2013 and 2012:
 
 
Fiscal
 
 
 
 
(dollar amounts in thousands)
 
2013
 
2012
 
$ Change
 
% Change
Net revenue
 
$
534,938

 
$
791,023

 
$
(256,085
)
 
(32.4
)%
Cost of sales
 
287,993

 
423,633

 
(135,640
)
 
(32.0
)%
Gross profit
 
246,945

 
367,390

 
(120,445
)
 
(32.8
)%
 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
119,519

 
124,718

 
(5,199
)
 
(4.2
)%
Research and development
 
61,620

 
63,446

 
(1,826
)
 
(2.9
)%
Operating expenses
 
181,139

 
188,164

 
(7,025
)
 
(3.7
)%
 
 
 
 
 
 
 
 
 
Income from operations
 
$
65,806

 
$
179,226

 
$
(113,420
)
 
(63.3
)%

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 scheduled for shipment within the next twelve 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 tables reflect our bookings and backlog for fiscal 2013 and 2012:
 
Fiscal
(in thousands)
2013
 
2012
Bookings
$
497,335

 
$
778,000

 
 
 
 
 
As of
(in thousands)
September 28, 2013

 
September 29, 2012

Backlog
$
52,100

 
$
90,000

Our net revenues for fiscal 2013 decreased significantly as compared to our net revenues for fiscal 2012 due to reduced customer demand. The semiconductor industry is volatile and our operating results have fluctuated significantly in the past.  Customer demand for our products could continue to remain weak and lead to a decline in our net revenues.  If there is a significant slowdown of transition from gold to copper wire bonding by our customers, then our net revenues may continue to decline.
Net Revenue
Approximately 97.3% and 98.3% of our net revenue for fiscal 2013 and 2012, respectively, was for shipments to customer locations outside of the U.S., primarily in the Asia/Pacific region, and we expect sales outside of the U.S. to continue to represent a substantial majority of our future revenue.

The following table reflects net revenue by business segment for fiscal 2013 and 2012:
 
 
Fiscal
 
 
 
 
(dollar amounts in thousands)
 
2013
 
2012
 
$ Change
 
% Change
Equipment
 
$
472,567

 
$
727,082

 
$
(254,515
)
 
(35.0
)%
Expendable Tools
 
62,371

 
63,941

 
(1,570
)
 
(2.5
)%
Total net revenue
 
$
534,938

 
$
791,023

 
$
(256,085
)
 
(32.4
)%
 


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Table of Contents

Equipment
The following table reflects the components of Equipment net revenue change between fiscal 2013 and 2012: 
 
 
Fiscal 2013 vs. 2012
(in thousands)
 
Price
 
Volume
 
$ Change
Equipment
 
$
(10,255
)
 
$
(244,260
)
 
$
(254,515
)
For fiscal 2013, the lower Equipment net revenue as compared to fiscal 2012 was due primarily to the lower volume from our ball bonders and heavy wire wedge bonders. The volume reduction in ball bonders and heavy wire wedge bonders was mainly attributable to the lower demand in the market due to uncertainties around technology migration and the weakness in the discrete market. In addition to lower volume, pricing on our ball bonders was also lower due to change in customer and product mix.
Expendable Tools
The following table reflects the components of Expendable Tools net revenue change between fiscal 2013 and 2012: 
 
 
Fiscal 2013 vs. 2012
(in thousands)
 
Price
 
Volume
 
$ Change
Expendable Tools
 
$
1,176

 
$
(2,746
)
 
$
(1,570
)
 
For fiscal 2013, the Expendable Tools net revenue decreased 2.5% as compared to the prior year. This was due primarily to the volume decrease in both our wire bonding tools business and wedge bonder tools businesses as a result of the lower demand in the market due to uncertainties around technology migration and the weakness in the discrete market. The lower volume was partially offset by favorable selling prices due to change in product mix.
Gross Profit
The following table reflects gross profit by business segment for fiscal 2013 and 2012: 
 
 
Fiscal
 
 
 
 
(dollar amounts in thousands)
 
2013
 
2012
 
$ Change
 
% Change
Equipment
 
$
211,297

 
$
329,872

 
$
(118,575
)
 
(35.9
)%
Expendable Tools
 
35,648

 
37,518

 
(1,870
)
 
(5.0
)%
Total gross profit
 
$
246,945

 
$
367,390

 
$
(120,445
)
 
(32.8
)%
 
The following table reflects gross profit as a percentage of net revenue by business segment for fiscal 2013 and 2012: 
 
 
Fiscal
 
Basis Point
 
 
2013
 
2012
 
Change
Equipment
 
44.7
%
 
45.4
%
 
(70
)
Expendable Tools
 
57.2
%
 
58.7
%
 
(150
)
Total gross margin
 
46.2
%
 
46.4
%
 
(20
)
 Equipment
The following table reflects the components of Equipment gross profit change between fiscal 2013 and 2012: 
 
 
Fiscal 2013 vs. 2012
(in thousands)
 
Price
 
Cost
 
Volume
 
$ Change
Equipment
 
$
(10,255
)
 
$
10,631

 
$
(118,951
)
 
$
(118,575
)
For fiscal 2013, the lower Equipment gross profit as compared to fiscal 2012 was due primarily to the lower volume from our ball bonders and heavy wire wedge bonders. The volume reduction in ball bonders and heavy wire wedge bonders was mainly attributable to lower demand in the market due to uncertainties around technology migration and the weakness in the discrete market. In addition to volume, pricing on our ball bonders was lower due to changes in customer and product mix.
The lower volume and less favorable pricing were offset partially by lower costs for our die bonders and heavy wire wedge bonders as compared to fiscal 2012. The manufacturing costs were lower due to the continued consolidation of our production facilities


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Table of Contents

and die bonder costs were lower due to sales of certain die bonders that were previously reserved, which resulted in lower costs of goods sold. In addition, in 2012, we recorded a reserve for inventory relating to heavy wire wedge bonders legacy spares.
Expendable Tools
The following table reflects the components of Expendable Tools gross profit change between fiscal 2013 and 2012: 
 
 
Fiscal 2013 vs. 2012
(in thousands)
 
Price
 
Cost
 
Volume
 
$ Change
Expendable Tools
 
$
1,176

 
$
(1,317
)
 
$
(1,729
)
 
$
(1,870
)
For fiscal 2013, Expendable Tools gross profit decreased 5.0% as compared to the prior year was due primarily to lower volume in both our wire bonding tools business and wedge bonder tools business. The lower volume resulted in increased manufacturing costs due to lower absorption of the fixed manufacturing costs.  
Operating Expenses
The following table reflects operating expenses as a percentage of net revenue for fiscal 2013 and 2012:
 
 
Fiscal
 
Basis point
 
 
2013
 
2012
 
change
Selling, general & administrative
 
22.3
%
 
15.8
%
 
650
Research & development
 
11.5
%
 
8.0
%
 
350
Total
 
33.8
%
 
23.8
%
 
1,000
 Selling, General and Administrative (“SG&A”)
SG&A decreased by $5.2 million during fiscal 2013 as compared to fiscal 2012, in which we experienced a $1.6 million gain in foreign exchange rates due to the strengthening of foreign currencies against the U.S. dollar and we recorded a favorable change in the accounts receivable reserve of $0.9 million as we were able to collect outstanding balances from customers that were previously reserved. In the twelve months ended September 28, 2013, sales commissions and incentive compensation decreased by $6.7 million driven by lower net revenue for the current fiscal year. We also experienced a favorable variance of $2.6 million for severance expenses relating to the our continued consolidation of our operations and a gain of $0.4 million relating to the curtailment of our Swiss pension plan. Offsetting this was a loss of $1.9 million in foreign exchange rates due to the strengthening of the U.S. dollar against foreign currencies.
Research and Development (“R&D”)
R&D expense decreased $1.8 million during fiscal 2013 as compared to fiscal 2012 due primarily to a $0.9 million reduction in staff costs as a result of consolidation and reduction of headcount to further streamline our R&D technology centers and release of a reserve of $0.8 million for a Research Incentive Scheme for Companies (“RISC”) grant relating to product development activities. The RISC grant reserve was released after receiving confirmation of the grant from the Economic Development Board, Singapore.
Income from Operations
For fiscal 2013, total income from operations was lower by $113.4 million. This was due primarily to lower revenue and margin for equipment sales as explained above.
Interest Income and Expense
The following table reflects interest income and interest expense for fiscal 2013 and 2012: 
 
 
Fiscal
 
 
 
 
(dollar amounts in thousands)
 
2013
 
2012
 
$ Change
 
% Change
Interest income
 
$
883

 
$
833

 
$
50

 
6.0
 %
Interest expense: cash
 
$
(21
)
 
$
(633
)
 
$
612

 
(96.7
)%
Interest expense: non-cash
 
$

 
$
(5,175
)
 
$
5,175

 
(100.0
)%
 


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Table of Contents

The non-cash interest expense for fiscal 2012 was attributable to the amortization of the debt discount relating to the Notes, which matured on June 1, 2012. We repaid the entire principal balance of the Notes in cash in fiscal 2012. See Note 6 of Item 1 for additional details.
Provision for Income Taxes
The following table reflects the provision for income taxes and the effective tax rate for fiscal 2013 and 2012: 
 
 
Fiscal
(in thousands)
 
2013
 
2012
Income from operations before income taxes
 
$
66,668

 
$
174,251

Provision for income taxes
 
7,310

 
13,671

Net income
 
$
59,358

 
$
160,580

 
 
 
 
 
Effective tax rate
 
11.0
%
 
7.8
%
 
For fiscal 2013, the effective income tax rate increased from fiscal 2012 by 3.2% due primarily to a shift in foreign earnings to tax jurisdictions with higher effective tax rates, certain changes in estimates that were recorded upon filing tax returns in foreign jurisdictions and the recording of a valuation allowance against certain deferred tax assets in foreign jurisdictions.
For fiscal 2012, the effective income tax rate differed from the federal statutory rate due primarily to tax from foreign operations at a lower effective tax rate than the U.S. statutory rate and the impact of tax holidays, offset by an increase for deferred taxes on un-remitted earnings as well as other U.S. current and deferred taxes. In addition, during the fourth quarter of fiscal 2012, we reached a favorable settlement with the tax authorities of a foreign jurisdiction and we reversed an accrual for an uncertain tax position of $7.5 million, recording it as an income tax benefit. This benefit was offset by additional taxes due to deemed distributions from certain foreign subsidiaries.
Our future effective tax rate would be affected if earnings were lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. We regularly assess the effects resulting from these factors to determine the adequacy of our provision for income taxes.




40

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES
The following table reflects total cash and investments as of September 27, 2014 and September 28, 2013:
 
 
As of
 
 
(dollar amounts in thousands)
 
September 27, 2014
 
September 28, 2013
 
Change
Cash and cash equivalents
 
$
587,981

 
$
521,788

 
$
66,193

Percentage of total assets
 
62.3
%
 
60.5
%
 
 

The following table reflects summary Consolidated Statement of Cash Flow information for fiscal 2014 and 2013:
 
 
Fiscal
(in thousands)
 
2014