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EXCEL - IDEA: XBRL DOCUMENT - KULICKE & SOFFA INDUSTRIES INCFinancial_Report.xls
EX-10.3 - EXHIBIT 10.3 - KULICKE & SOFFA INDUSTRIES INCexhibit103.htm
EX-10.4 - EXHIBIT 10.4 - KULICKE & SOFFA INDUSTRIES INCexhibit104.htm
EX-10.2 - EXHIBIT 10.2 - KULICKE & SOFFA INDUSTRIES INCexhibit102.htm
EX-10.1 - EXHIBIT 10.1 - KULICKE & SOFFA INDUSTRIES INCexhibit101sharesaleandpurc.htm
EX-32.1 - EXHIBIT 32.1 - KULICKE & SOFFA INDUSTRIES INCq12015ex321.htm
EX-32.2 - EXHIBIT 32.2 - KULICKE & SOFFA INDUSTRIES INCq12015ex322.htm
EX-31.1 - EXHIBIT 31.1 - KULICKE & SOFFA INDUSTRIES INCq12015ex311.htm
EX-31.2 - EXHIBIT 31.2 - KULICKE & SOFFA INDUSTRIES INCq12015ex312.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 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 and Zip Code)
 
(215) 784-7518
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 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 January 23, 2015, there were 76,771,266 shares of the Registrant's Common Stock, no par value, outstanding.


Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
 
FORM 10 – Q
 
December 27, 2014
 Index
 
 
 
Page Number
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
Item 1.
FINANCIAL STATEMENTS (Unaudited)
 
 
 
 
 
Consolidated Balance Sheets as of December 27, 2014 and September 27, 2014
 
 
 
 
Consolidated Statements of Operations for the three months ended December 27, 2014 and December 28, 2013
 
 
 
 
Consolidated Statements of Comprehensive Income for the three months ended December 27, 2014 and December 28, 2013
 
 
 
 
Consolidated Statements of Cash Flows for the three months ended December 27, 2014 and December 28, 2013
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
Item 4.
CONTROLS AND PROCEDURES
 
 
 
PART II - OTHER INFORMATION
 
 
 
Item 1A.
RISK FACTORS
 
 
 
Item 6.
EXHIBITS
 
 
 
 
SIGNATURES




Table of Contents

PART I. - FINANCIAL INFORMATION
Item 1. – FINANCIAL STATEMENTS
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
 
 
As of
 
 
December 27, 2014
 
September 27, 2014
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
622,590

 
$
587,981

Short-term investments
 
10,787

 
9,105

Accounts and notes receivable, net of allowance for doubtful accounts of $0 and $143 respectively
 
121,854

 
171,530

Inventories, net
 
51,930

 
49,694

Prepaid expenses and other current assets
 
11,143

 
15,090

Deferred income taxes
 
4,245

 
4,291

Total current assets
 
822,549

 
837,691

 
 
 
 


Property, plant and equipment, net
 
52,793

 
52,755

Goodwill
 
41,546

 
41,546

Intangible assets
 
4,562

 
5,891

Other assets
 
6,392

 
6,565

TOTAL ASSETS
 
$
927,842

 
$
944,448

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
27,425

 
$
35,132

Accrued expenses and other current liabilities
 
32,544

 
43,731

Income taxes payable
 
2,682

 
2,488

Total current liabilities
 
62,651

 
81,351

 
 
 
 
 
Financing obligation
 
18,261

 
19,102

Deferred income taxes
 
45,261

 
44,963

Other liabilities
 
9,666

 
9,790

TOTAL LIABILITIES
 
$
135,839

 
$
155,206

 
 
 
 
 
Commitments and contingent liabilities (Note 12)
 


 


 
 
 
 
 
SHAREHOLDERS' EQUITY:
 
 

 
 

Preferred stock, without par value:
 
 

 
 

Authorized 5,000 shares; issued - none
 
$

 
$

Common stock, no par value:
 
 

 
 

Authorized 200,000 shares; issued 82,490 and 81,624, respectively; outstanding 76,917 and 76,626 shares, respectively
 
482,744

 
479,116

Treasury stock, at cost, 5,573 and 4,998 shares, respectively
 
(54,622
)
 
(46,984
)
Accumulated income
 
362,708

 
354,866

Accumulated other comprehensive income
 
1,173

 
2,244

TOTAL SHAREHOLDERS' EQUITY
 
$
792,003

 
$
789,242

 
 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
927,842

 
$
944,448

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


1

Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Unaudited
 
 
 
Three months ended
 
 
December 27, 2014
 
December 28, 2013
Net revenue
 
$
107,438

 
$
79,113

Cost of sales
 
52,704

 
40,748

Gross profit
 
54,734

 
38,365

Selling, general and administrative
 
25,427

 
23,102

Research and development
 
19,581

 
17,471

Operating expenses
 
45,008

 
40,573

Income / (loss) from operations
 
9,726

 
(2,208
)
Interest income
 
262

 
279

Interest expense
 
(303
)
 
(119
)
Income / (loss) from operations before income taxes
 
9,685

 
(2,048
)
Provision (benefit) for income taxes
 
1,843

 
(91
)
Net income / (loss)
 
$
7,842

 
$
(1,957
)
 
 
 
 
 
Net income / (loss) per share:
 
 

 
 

Basic
 
$
0.10

 
$
(0.03
)
Diluted
 
$
0.10

 
$
(0.03
)
 
 
 
 
 
Weighted average shares outstanding:
 
 

 
 

Basic
 
76,888

 
75,912

Diluted
 
77,432

 
75,912

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














 



2

Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Unaudited

 
 
Three months ended
 
 
December 27, 2014

 
December 28, 2013

Net income / (loss)
 
$
7,842

 
$
(1,957
)
Other comprehensive income / (loss):
 
 
 
 
Foreign currency translation adjustment
 
(679
)
 
110

 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Unrealized loss on derivative instruments, net of tax
 
(640
)
 

Reclassification adjustment for loss on derivative instruments recognized, net of tax
 
248

 

Net decrease from derivatives designated as hedging instruments, net of tax
 
(392
)
 

 
 
 
 
 
Total other comprehensive income / (loss)
 
(1,071
)
 
110

 
 
 
 
 
Comprehensive income / (loss)
 
$
6,771

 
$
(1,847
)
The accompanying notes are an integral part of these consolidated financial statements.













3

Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
 
 
Three months ended
 
 
December 27, 2014

 
December 28, 2013

CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income / (loss)
 
$
7,842

 
$
(1,957
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
3,556

 
2,992

Equity-based compensation and employee benefits
 
3,435

 
3,396

Adjustment for doubtful accounts
 
143

 
229

Adjustment for inventory valuation
 
169

 
905

Deferred taxes
 
351

 
(116
)
Unrealized foreign currency transactions
 
(1,569
)
 
(195
)
Changes in operating assets and liabilities:
 
 

 
 

Accounts and notes receivable
 
49,302

 
49,245

Inventory
 
(2,903
)
 
972

Prepaid expenses and other current assets
 
4,009

 
7,197

Accounts payable, accrued expenses and other current liabilities
 
(18,172
)
 
(26,019
)
Income taxes payable
 
169

 
505

Other, net
 
110

 
95

Net cash provided by operating activities
 
46,442

 
37,249

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Purchases of property, plant and equipment
 
(2,546
)
 
(5,429
)
Purchase of short-term investments
 
(1,630
)
 
(3,300
)
Net cash used in investing activities
 
(4,176
)
 
(8,729
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Payment on debts
 
(81
)
 
(209
)
Proceeds from exercise of common stock options
 
98

 
467

Repurchase of common stock
 
(7,638
)
 

Net cash (used in) / provided by financing activities
 
(7,621
)
 
258

Effect of exchange rate changes on cash and cash equivalents
 
(36
)
 
32

Changes in cash and cash equivalents
 
34,609

 
28,810

Cash and cash equivalents at beginning of period
 
587,981

 
521,788

Cash and cash equivalents at end of period
 
$
622,590

 
$
550,598

 
 
 
 
 
CASH PAID FOR:
 
 

 
 

Interest
 
$
303

 
$
119

Income taxes
 
$
956

 
$
890


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


4

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



NOTE 1: BASIS OF PRESENTATION
These consolidated financial statements include the accounts of Kulicke and Soffa Industries, Inc. and its subsidiaries (the “Company”), with appropriate elimination of intercompany balances and transactions.
The interim consolidated financial statements are unaudited and, in management's opinion, include all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of results for these interim periods. The interim consolidated financial statements do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 2014, filed with the Securities and Exchange Commission, which includes Consolidated Balance Sheets as of September 27, 2014 and September 28, 2013, and the related Consolidated Statements of Operations, Statements of Other Comprehensive Income, Changes in Shareholders' Equity and Cash Flows for each of the years in the three-year period ended September 27, 2014. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full year.
Fiscal Year    
Each of the Company's first three fiscal quarters end on the Saturday that is 13 weeks after the end of the immediately preceding fiscal quarter. The fourth quarter of each fiscal year ends on the Saturday closest to September 30th. Fiscal 2015 quarters end on December 27, 2014, March 28, 2015, June 27, 2015 and October 3, 2015. Fiscal 2014 quarters ended on December 28, 2013, March 29, 2014, June 28, 2014 and September 27, 2014. In fiscal years consisting of 53 weeks, the fourth quarter will consist of 14 weeks.
Nature of Business
The Company designs, manufactures and sells capital equipment and expendable tools as well as services, maintains, repairs and upgrades equipment, all used to assemble semiconductor devices. The Company's operating results depend upon the capital and operating expenditures of semiconductor device manufacturers, outsourced semiconductor assembly and test providers (“OSATs”), and other electronics manufacturers including automotive electronics suppliers, worldwide which, in turn, depend on the current and anticipated market demand for semiconductors and products utilizing semiconductors. The semiconductor industry is highly volatile and experiences downturns and slowdowns which can have a severe negative effect on the semiconductor industry's demand for semiconductor capital equipment, including assembly equipment manufactured and sold by the Company and, to a lesser extent, expendable tools, including those sold by the Company. These downturns and slowdowns have in the past adversely affected the Company's operating results. The Company believes such volatility will continue to characterize the industry and the Company's operations in the future.
Use of Estimates
The preparation of consolidated financial statements requires management 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 ongoing basis, management evaluates estimates, including but not limited to, those related to accounts receivable, reserves for excess and obsolete inventory, carrying value and lives of fixed assets, goodwill and intangible assets, valuation allowances for deferred tax assets and deferred tax liabilities, repatriation of un-remitted foreign subsidiary earnings, equity-based compensation expense, and warranties. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable. As a result, management makes judgments regarding the carrying values of its assets and liabilities that are not readily apparent from other sources. Authoritative pronouncements, historical experience and assumptions are used as the basis for making estimates, and on an ongoing basis, management evaluates these estimates. Actual results may differ from these estimates.
Vulnerability to Certain Concentrations
Financial instruments which may subject the Company to concentrations of credit risk as of December 27, 2014 and September 27, 2014 consisted primarily of short-term investments and trade receivables. The Company manages credit risk associated with investments by investing its excess cash in highly rated debt instruments of the U.S. Government and its agencies, financial institutions, and corporations. The Company has established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity. These guidelines are periodically reviewed and modified as appropriate. The Company does not have any exposure to sub-prime financial instruments or auction rate securities.


5

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


The Company's trade receivables result primarily from the sale of semiconductor equipment, related accessories and replacement parts, and expendable tools to a relatively small number of large manufacturers in a highly concentrated industry. Write-offs of uncollectible accounts have historically not been significant; however, the Company monitors its customers' financial strength to reduce the risk of loss.
The Company's products are complex and require raw materials, components and subassemblies having a high degree of reliability, accuracy and performance. The Company relies on subcontractors to manufacture many of these components and subassemblies and it relies on sole source suppliers for some important components and raw material inventory.
Foreign Currency Translation
The majority of the Company's business is transacted in U.S. dollars; however, the functional currencies of some of the Company's subsidiaries are their local currencies. In accordance with ASC No. 830, Foreign Currency Matters (“ASC 830”), for a subsidiary of the Company that has a functional currency other than the U.S. dollar, gains and losses resulting from the translation of the functional currency into U.S. dollars for financial statement presentation are not included in determining net income, but are accumulated in the cumulative translation adjustment account as a separate component of shareholders' equity (accumulated other comprehensive income (loss)). Under ASC 830, cumulative translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. Gains and losses resulting from foreign currency transactions are included in the determination of net income.
The Company's operations are exposed to changes in foreign currency exchange rates due to transactions denominated in currencies other than the location's functional currency. The Company is also exposed to foreign currency fluctuations that impact the remeasurement of net monetary assets of those operations whose functional currency, the U.S. dollar, differs from their respective local currencies, most notably in Israel, Malaysia, Singapore and Switzerland. In addition to net monetary remeasurement, the Company has exposures related to the translation of subsidiary financial statements from their functional currency, the local currency, into its reporting currency, the U.S. dollar, most notably in China, Taiwan, Japan and Germany. The Company's U.S. operations also have foreign currency exposure due to net monetary assets denominated in currencies other than the U.S. dollar.
Derivative Financial Instruments
The Company’s primary objective for holding derivative financial instruments is to manage the fluctuation in foreign exchange rates and accordingly is not speculative in nature. The Company’s international operations are exposed to changes in foreign exchange rates as described above. The Company has established a program to monitor the forecasted transaction currency risk to protect against foreign exchange rate volatility. Generally, the Company uses foreign exchange forward contracts in these hedging programs. These instruments, which have maturities of up to six months, are recorded at fair value and are included in prepaid expenses and other current assets, or other accrued expenses and other current liabilities.
Our accounting policy for derivative financial instruments is based on whether they meet the criteria for designation as a cash flow hedge. A designated hedge with exposure to variability in the functional currency equivalent of the future foreign currency cash flows of a forecasted transaction is referred to as a cash flow hedge. The criteria for designating a derivative as a cash flow hedge include the assessment of the instrument’s effectiveness in risk reduction, matching of the derivative instrument to its underlying transaction, and the assessment of the probability that the underlying transaction will occur. For derivatives with cash flow hedge accounting designation, we report the after-tax gain / (loss) from the effective portion of the hedge as a component of accumulated other comprehensive income / (loss) and reclassify it into earnings in the same period in which the hedged transaction affects earnings and in the same line item on the consolidated statement of income as the impact of the hedged transaction. Derivatives that we designate as cash flow hedges are classified in the consolidated statement of cash flows in the same section as the underlying item, primarily within cash flows from operating activities.
The hedge effectiveness of these derivative instruments is evaluated by comparing the cumulative change in the fair value of the hedge contract with the cumulative change in the fair value of the forecasted cash flows of the hedged item.
If a cash flow hedge is discontinued because it is no longer probable that the original hedged transaction will occur as previously anticipated, the cumulative unrealized gain or loss on the related derivative is reclassified from accumulated other comprehensive income / (loss) into earnings. Subsequent gain / (loss) on the related derivative instrument is recognized into earnings in each period until the instrument matures, is terminated, is re-designated as a qualified cash flow hedge, or is sold. Ineffective portions of cash flow hedges, as well as amounts excluded from the assessment of effectiveness, are recognized in earnings.


6

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


Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Cash equivalents are measured at fair value based on level one measurement, or quoted market prices, as defined by ASC No. 820, Fair Value Measurements and Disclosures. As of December 27, 2014 and September 27, 2014, fair value approximated the cost basis for cash equivalents.
Investments
Investments, other than cash equivalents, are classified as “trading,” “available-for-sale” or “held-to-maturity,” in accordance with ASC No. 320, Investments-Debt & Equity Securities, and depending upon the nature of the investment, its ultimate maturity date in the case of debt securities, and management's intentions with respect to holding the securities. Investments classified as “trading” are reported at fair market value, with unrealized gains or losses included in earnings. Investments classified as “available-for-sale” are reported at fair market value, with net unrealized gains or losses reflected as a separate component of shareholders' equity (accumulated other comprehensive income (loss)). The fair market value of trading and available-for-sale securities is determined using quoted market prices at the balance sheet date. Investments classified as held-to-maturity are reported at amortized cost. Realized gains and losses are determined on the basis of specific identification of the securities sold.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from its customers' failure to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company is also subject to concentrations of customers and sales to a few geographic locations, which could also impact the collectability of certain receivables. If global or regional economic conditions deteriorate or political conditions were to change in some of the countries where the Company does business, it could have a significant impact on the results of operations, and the Company's ability to realize the full value of its accounts receivable.
Inventories
Inventories are stated at the lower of cost (on a first-in first-out basis) or market value. The Company generally provides reserves for obsolete inventory and for inventory considered to be in excess of demand. 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. The Company communicates forecasts of its future consumption to its suppliers and adjusts commitments to those suppliers accordingly. If required, the Company reserves the difference between the carrying value of its inventory and the lower of cost or market value, based upon projections about future consumption, and market conditions. If actual market conditions are less favorable than projections, additional inventory reserves may be required.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. The cost of additions and those improvements which increase the capacity or lengthen the useful lives of assets are capitalized, while repair and maintenance costs are expensed as incurred. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives as follows: buildings 25 years; machinery and equipment 3 to 10 years; and leasehold improvements are based on the shorter of the life of lease or life of asset. Purchased computer software costs related to business and financial systems are amortized over a five-year period on a straight-line basis.
Valuation of Long-Lived Assets
In accordance with ASC No. 360, Property, Plant & Equipment ("ASC 360"), the Company's property, plant and equipment is tested for impairment based on undiscounted cash flows when triggering events occur, and if impaired, written-down to fair value based on either discounted cash flows or appraised values. ASC 360 also provides a single accounting model for long-lived assets to be disposed of by sale and establishes additional criteria that would have to be met to classify an asset as held for sale. The carrying amount of an asset or asset group is not recoverable to the extent it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. Estimates of future cash flows used to test the recoverability of a long-lived asset or asset group must incorporate the entity's own assumptions about its use of the asset or asset group and must factor in all available evidence.
ASC 360 requires that long-lived assets be tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Such events include significant under-performance relative to historical internal forecasts or projected future operating results; significant changes in the manner of use of the assets; significant negative industry


7

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


or economic trends; and significant changes in market capitalization. During the three months ended December 27, 2014, no triggering events occurred.
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 Corporation ("Orthodyne"), which added wedge bonder products (also known as "reporting unit") to the Equipment business.
Accounting Standard Update 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”), 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 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. 
As part of the annual evaluation, the Company performs an impairment test of its goodwill in the fourth quarter of each fiscal year to coincide with the completion of its annual forecasting and refreshing of its business outlook processes. On an ongoing basis, the Company monitors if 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. During the three months ended December 27, 2014, no triggering events occurred.  
Impairment assessments inherently involve judgment as to the assumptions made about the expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact the assumptions as to prices, costs, growth rates or other factors that may result in changes in the estimates of future cash flows. Although the Company believes the assumptions that it has used in testing for impairment are reasonable, significant changes in any one of the assumptions could produce a significantly different result. Indicators of potential impairment may lead the Company 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 or unanticipated competition.
For further information on goodwill and other intangible assets, see Note 3 below.
Revenue Recognition
In accordance with ASC No. 605, Revenue Recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, the 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. The Company’s standard terms are ex works (the Company’s factory), with title transferring to its customer at the Company’s loading dock or upon embarkation. The Company has a small percentage of sales with other terms, and revenue is recognized in accordance with the terms of the related customer purchase order.
Shipping and handling costs billed to customers are recognized in net revenue. Shipping and handling costs paid by the Company are included in cost of sales.
Research and Development
The Company charges research and development costs associated with the development of new products to expense when incurred. In certain circumstances, pre-production machines which the Company intends to sell are carried as inventory until sold.



8

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


Income Taxes
In accordance with ASC No. 740, Income Taxes, deferred income taxes are determined using the liability method. The Company records a valuation allowance to reduce its deferred tax assets to the amount it expects is more likely than not to be realized. While the Company has considered future taxable income and its ongoing tax planning strategies in assessing the need for the valuation allowance, if it were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period when such determination is made. Likewise, should the Company determine it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax asset would decrease income in the period when such determination is made.
In accordance with ASC No. 740 Topic 10, Income Taxes, General (“ASC 740.10”), the Company accounts for uncertain tax positions taken or expected to be taken in its income tax return. Under ASC 740.10, the Company utilizes a two-step approach for evaluating uncertain tax positions. Step one, or recognition, requires a company to determine if the weight of available evidence indicates a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, or measurement, is based on the largest amount of benefit, which is more likely than not to be realized on settlement with the taxing authority.
Equity-Based Compensation
The Company accounts for equity-based compensation under the provisions of ASC No. 718, Compensation - Stock Compensation (“ASC 718”). ASC 718 requires the recognition of the fair value of the 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 the Company's stock option awards are estimated using a Black-Scholes option valuation model. In addition, the calculation of equity-based compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. The fair value of equity-based awards is amortized over the vesting period of the award and the Company elected to use the straight-line method for awards granted after the adoption of ASC 718.
Earnings per Share
Earnings per share (“EPS”) are calculated in accordance with ASC No. 260, Earnings per Share. Basic EPS include only the weighted average number of common shares outstanding during the period. Diluted EPS includes the weighted average number of common shares and the dilutive effect of stock options, restricted stock and share unit awards and convertible subordinated notes outstanding during the period, when such instruments are dilutive.
In accordance with ASC No. 260.10.55, Earnings per Share - Implementation & Guidance, the Company treats all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends as participating in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted EPS must be applied.
Recent Accounting Pronouncements
There were no new accounting pronouncements applicable to the Company during the three months ended December 27, 2014.


9

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


NOTE 2: BALANCE SHEET COMPONENTS
The following tables reflect the components of significant balance sheet accounts as of December 27, 2014 and September 27, 2014:
 
 
As of
(in thousands)
 
December 27, 2014
 
September 27, 2014
Short term investments, available-for-sale:
 
 
 
 
Deposits maturing within one year (1)
 
$
10,787

 
$
9,105

 
 
 
 
 
Inventories, net:
 
 

 
 

Raw materials and supplies
 
$
22,712

 
$
22,184

Work in process
 
24,545

 
18,783

Finished goods
 
18,203

 
22,590

 
 
65,460

 
63,557

Inventory reserves
 
(13,530
)
 
(13,863
)
 
 
$
51,930

 
$
49,694

Property, plant and equipment, net:
 
 

 
 

Buildings and building improvements
 
$
31,178

 
$
31,159

Leasehold improvements
 
13,873

 
13,962

Data processing equipment and software
 
27,612

 
27,538

Machinery, equipment, furniture and fixtures
 
47,593

 
45,442

 
 
120,256

 
118,101

Accumulated depreciation
 
(67,463
)
 
(65,346
)
 
 
$
52,793

 
$
52,755

Accrued expenses and other current liabilities:
 
 

 
 

Wages and benefits
 
$
13,355

 
$
21,498

Accrued customer obligations (2)
 
6,347

 
8,999

Commissions and professional fees
 
2,314

 
1,961

Deferred rent
 
2,422

 
2,161

Severance
 
617

 
1,067

Other
 
7,489

 
8,045

 
 
$
32,544

 
$
43,731


(1)
All short-term investments were classified as available-for-sale and were measured at fair value based on level one measurement, or quoted market prices, as defined by ASC 820. As of December 27, 2014 and September 27, 2014, fair value approximated the cost basis for short-term investments. The Company did not recognize any realized gains or losses on the sale of investments during the three months ended December 27, 2014 and December 28, 2013.
(2)
Represents customer advance payments, customer credit program, accrued warranty expense and accrued retrofit obligations.

NOTE 3: GOODWILL AND INTANGIBLE ASSETS
Goodwill
Intangible assets classified as goodwill are not amortized. The Company performs an annual impairment test of its goodwill during the fourth quarter of each fiscal year, which coincides with the completion of its annual forecasting and refreshing of business outlook process. The Company performed its annual impairment test in the fourth quarter of fiscal 2014 and concluded that no impairment charge was required. During the three months ended December 27, 2014, the Company reviewed the qualitative factors to ascertain if a "triggering" event may have taken place that may have the effect of reducing the fair value of the reporting unit below its carrying value and concluded that no triggering event had occurred.


10

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


In 2009, the Company acquired Orthodyne and added wedge bonder products to the business.
Intangible Assets
Intangible assets with determinable lives are amortized over their estimated useful lives. The Company's intangible assets consist primarily of wedge bonder developed technology and customer relationships.

The following table reflects net intangible assets as of December 27, 2014 and September 27, 2014
 
 
As of
 
Average estimated
(dollar amounts in thousands)
 
December 27, 2014
 
September 27, 2014
 
useful lives (in years)
Wedge bonder developed technology
 
$
33,200

 
$
33,200

 
7.0
Accumulated amortization
 
(29,644
)
 
(28,458
)
 
 
Net wedge bonder developed technology
 
$
3,556

 
$
4,742

 
 
 
 
 
 
 
 
 
Wedge bonder customer relationships
 
$
19,300

 
$
19,300

 
5.0
Accumulated amortization
 
(19,300
)
 
(19,300
)
 
 
Net wedge bonder customer relationships
 
$

 
$

 
 
 
 
 
 
 
 
 
Wedge bonder trade name
 
$
4,600

 
$
4,600

 
8.0
Accumulated amortization
 
(3,594
)
 
(3,451
)
 
 
Net wedge bonder trade name
 
$
1,006

 
$
1,149

 
 
 
 
 
 
 
 
 
Wedge bonder other intangible assets
 
$
2,500

 
$
2,500

 
1.9
Accumulated amortization
 
(2,500
)
 
(2,500
)
 
 
Net wedge bonder other intangible assets
 
$

 
$

 
 
Net intangible assets
 
$
4,562

 
$
5,891

 
 

The following table reflects estimated annual amortization expense related to intangible assets as of December 27, 2014:
 
 
As of
(in thousands)
December 27, 2014
Remaining fiscal 2015
$
3,988

Fiscal 2016
574

Total amortization expense
$
4,562

 

NOTE 4: CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. In general, these investments are free of trading restrictions. We carry these investments at fair value, based on quoted market prices or other readily available market information.
Cash and cash equivalents consisted of the following as of December 27, 2014:
(in thousands)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
131,263

 
$

 
$

 
$
131,263

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
327,742

 

 

 
327,742

Time deposits
134,085

 

 

 
134,085

Commercial paper
29,500

 

 

 
29,500

Total cash and cash equivalents
622,590

 

 

 
622,590

Short-term investments:
 
 
 
 
 
 
 
Time deposits
10,787

 

 

 
10,787

Total short-term investments
10,787

 

 

 
10,787

Total cash, cash equivalents and short-term investments
$
633,377

 
$

 
$

 
$
633,377

Cash and cash equivalents consisted of the following as of September 27, 2014:
(in thousands)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
130,668

 
$

 
$

 
$
130,668

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
295,529

 

 

 
295,529

Time deposits
132,284

 

 

 
132,284

Commercial paper
29,500

 

 

 
29,500

Total cash and cash equivalents
587,981

 

 

 
587,981

Short-term investments
 
 
 
 
 
 
 
Time deposits
9,105

 

 

 
9,105

Total short-term investments
9,105

 

 

 
9,105

Total cash, cash equivalents and short-term investments
$
597,086

 
$

 
$

 
$
597,086


NOTE 5: FAIR VALUE MEASURMENTS
Accounting standards establish three levels of inputs that may be used to measure fair value: quoted prices in active markets for identical assets or liabilities (referred to as Level 1), inputs other than Level 1 that are observable for the asset or liability either directly or indirectly (referred to as Level 2) and unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities (referred to as Level 3).
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis 
We measure certain financial assets and liabilities at fair value on a recurring basis. There were no transfers between fair value measurement levels during the three months months ended December 27, 2014.


11

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


Fair Value Measurements on a Nonrecurring Basis
Our non-financial assets such as intangible assets and property, plant and equipment are carried at cost unless impairment is deemed to have occurred.
Fair Value of Financial Instruments
Amounts reported as cash and equivalents, short-term investments, accounts receivables, prepaid expenses and other current assets, accounts payable and accrued expenses approximate fair value.
The fair value of our financial assets and liabilities at December 27, 2014 were determined using the following inputs:
(in thousands)
Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash
$
131,263

 
$
131,263

 
$

 
$

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
327,742

 
327,742

 

 

Time deposits
134,085

 
134,085

 

 

Commerical paper
29,500

 
29,500

 

 

Short-term investments:
 
 
 
 
 
 
 
Time deposits
10,787

 
10,787

 

 

Total assets
$
633,377

 
$
633,377

 
$

 
$

The fair value of our financial assets and liabilities at September 27, 2014 were determined using the following inputs:
(in thousands)
Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash
$
130,668

 
$
130,668

 
$

 
$

Cash equivalents
 
 
 
 
 
 
 
Money market funds
295,529

 
295,529

 

 

Time deposits
132,284

 
132,284

 

 

Commerical paper
29,500

 
29,500

 

 

Short-term investments
 
 
 
 
 
 
 
Time deposits
9,105

 
9,105

 

 

Total assets
$
597,086

 
$
597,086

 
$

 
$


NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS
The Company’s international operations are exposed to changes in foreign exchange rates due to transactions denominated in currencies other than U.S. dollars. Most of the Company’s revenue and cost of materials are transacted in U.S. dollars. However, a significant amount of the Company’s operating expenses are denominated in local currencies, primarily in Singapore.
The foreign currency exposure of our operating expenses are generally hedged with foreign exchange forward contracts. The Company’s foreign exchange risk management programs include using foreign exchange forward contracts with cash flow hedge accounting designation to hedge exposures to the vari


12

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


ability in the U.S.-dollar equivalent of forecasted non-U.S.-dollar-denominated operating expenses. These instruments generally mature within 6 months. For these derivatives, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss), and we reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings and in the same line item on the consolidated statements of income as the impact of the hedged transaction.
The fair value of derivative instruments on our Consolidated Balance Sheets as of December 27, 2014 was as follows:
 
As of
 
(in thousands)
December 27, 2014
 
 
Notional Amount
 
Fair Value Asset Derivatives(1)
 
Fair Value Liability Derivatives(2)
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange forward contracts (3)
$
9,537

 
$

 
$
392

 
Total derivatives
$
9,537

 
$

 
$
392

 
 
(1)
The fair value of derivative assets is measured using level 2 fair value inputs and is included in prepaid expenses and other current assets on our Consolidated Balance Sheets.
(2)
Included in accrued expenses and other current liabilities on our Consolidated Balance Sheets.
(3)
Hedged amounts expected to be recognized to income within the next twelve months.

The effect of derivative instruments designated as cash flow hedges in our Consolidated Statements of Income for the three months months ended December 27, 2014 was as follows:
(in thousands)
 
Three months ended
 
 
December 27, 2014
Foreign exchange forward contract in cash flow hedging relationships:
 
 
Net loss recognized in OCI, net of tax(1)
 
$
(640
)
Net loss reclassified from accumulated OCI into income, net of tax(2)
 
$
(249
)
Net gain recognized in income(3)
 
$

(1)Net change in the fair value of the effective portion classified in other comprehensive income (“OCI”).
(2)Effective portion classified as selling, general and administrative expense.
(3)Ineffective portion and amount excluded from effectiveness testing classified in selling, general and administrative expense.



13

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


NOTE 7: DEBT AND OTHER OBLIGATIONS
Financing obligation
On December 1, 2013, Kulicke & Soffa Pte Ltd. (“Pte”), the Company's wholly owned subsidiary, signed a lease with DBS Trustee Limited as trustee of Mapletree Industrial Trust (the “Landlord”) to lease from the Landlord approximately 198,000 square feet, representing approximately 70% of a building in Singapore as our corporate headquarters, manufacturing, technology, sales and service center (the “Building”). The lease has a 10 year non-cancellable term (the "Initial Term") and contains options to renew for 2 further 10 -year terms. The annual rent and service charge for the Initial Term range from approximately $4 million to approximately $5 million Singapore dollars.
Pursuant to the agreement to develop and lease (the "ADL") and in accordance with ASC No. 840, Leases ("ASC 840"), the Company was considered to be the owner of the Building during the construction phase due to its involvement in the asset construction. Following the completion of construction, we performed a sale-leaseback analysis pursuant to ASC 840-40 to determine if we could remove the Landlord’s asset and associated financing obligation from the consolidated balance sheet. Our lease contained collateral, considered a prohibited form of continuing involvement under ASC 840-40 and therefore involvement that precluded us from derecognizing the asset and associated financing obligation. As such, we reclassified the asset from construction in progress to Property, Plant and Equipment and began to depreciate the building over its estimated useful life of twenty-five years. We concluded that the term of the financing obligation is 10 years. This is equal to the non-cancellable term of our lease agreement with the Landlord. At the inception of the lease, the asset and financing obligation recorded on the balance sheet was $20.0 million, which was based on using an interest rate of 6.3% over the Initial Term.  The financing obligation will be settled through a combination of periodic cash rental payments and the return of the leased property at the expiration of the lease. We do not report rent expense for the property which is deemed owned for accounting purposes. Rather, rental payments required under the lease are considered debt service and applied to the deemed landlord financing obligation and interest expense. The Building and financing obligation are being amortized in a manner that will not generate a gain or loss upon lease termination.
Credit facility
On November 22, 2013, the Company obtained a $5.0 million credit facility with Citibank in connection with the issuance of a bank guarantee of $3.4 million Singapore dollars to the Landlord in connection with the lease. The bank guarantee was effective from December 1, 2013 to November 30, 2014. On November 19, 2014, the Company extended the expiration date of the bank guarantee to November 30, 2015 and increased the amount to $3.5 million Singapore dollars.

NOTE 8: SHAREHOLDERS’ EQUITY AND EMPLOYEE BENEFIT PLANS
Common Stock and 401(k) Retirement Income Plan
The Company has a 401(k) retirement income plan (the “Plan”) for its employees. Historically, the Company's matching contributions to the Plan were made in the form of issued and contributed shares of Company common stock; however, beginning January 2, 2011, matching contributions to the Plan were made in cash instead of stock. The Plan allows for employee contributions and matching Company contributions up to 4% or 6% of the employee's contributed amount based upon years of service.
The following table reflects the Company’s matching contributions to the Plan during the three months ended December 27, 2014 and December 28, 2013:
 
 
Three months ended
(in thousands)
 
December 27, 2014
 
December 28, 2013
Cash
 
$
295

 
$
281

Stock Repurchase Program
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. During the three months ended December 27, 2014, the Company repurchased a total of 0.6 million shares of common stock at a cost of $7.6 million. The stock repurchases were recorded in the periods they were delivered, and the payment of $7.6 million was accounted for as treasury stock in the Company’s Consolidated Balance Sheet. The Company records treasury stock purchases under the cost method using the first-in, fir


14

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


st-out (FIFO) method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid-in capital. If the Company reissues treasury stock at an amount below its acquisition cost and additional paid-in capital associated with prior treasury stock transactions is insufficient to cover the difference between acquisition cost and the reissue price, this difference is recorded against retained earnings.

Accumulated Other Comprehensive Income
The following table reflects accumulated other comprehensive income reflected on the Consolidated Balance Sheets as of December 27, 2014 and September 27, 2014
 
 
As of
(in thousands)
 
December 27, 2014
 
September 27, 2014
Gain from foreign currency translation adjustments
 
$
2,520

 
$
3,199

Unrecognized actuarial loss Switzerland pension plan, net of tax
 
(609
)
 
(609
)
Switzerland pension plan curtailment
 
(346
)
 
(346
)
Unrealized loss on hedging
 
(392
)
 

Accumulated other comprehensive income
 
$
1,173

 
$
2,244

Equity-Based Compensation
As of December 27, 2014, the Company had seven equity-based employee compensation plans (the “Employee Plans”) and three director compensation plans (the “Director Plans”) (collectively, the “Plans”). Under these Plans, market-based share awards (collectively, “market-based restricted stock”), time-based share awards (collectively, “time-based restricted stock”), performance-based share awards (collectively, “performance-based restricted stock”), stock options, or common stock have been granted at 100% of the market price of the Company's common stock on the date of grant. As of December 27, 2014, the Company’s one active plan, the 2009 Equity Plan, had 3.1 million shares of common stock available for grant to its employees and directors.
Market-based restricted stock entitles the employee to receive common shares of the Company on the award vesting date, if market performance objectives which measure relative total shareholder return (“TSR”) are attained. Relative TSR is calculated based upon the 90-calendar day average price of the Company's stock as compared to specific peer companies that comprise the Philadelphia Semiconductor Index. TSR is measured for the Company and each peer company over a performance period, which is generally three years. Vesting percentages range from 0% to 200% of awards granted. The provisions of the market-based restricted stock are reflected in the grant date fair value of the award; therefore, compensation expense is recognized regardless of whether or not the market condition is ultimately satisfied. Compensation expense is reversed if the award is forfeited prior to the vesting date.
In general, stock options and time-based restricted stock awarded to employees vest annually over a three-year period provided the employee remains employed by the Company. The Company follows the non-substantive vesting method for stock options and recognizes compensation expense immediately for awards granted to retirement eligible employees, or over the period from the grant date to the date retirement eligibility is achieved.
In general, performance-based restricted stock (“PSU”) 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 (“MDCC”) 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. Certain PSUs vest based on achievement of strategic goals over a certain time period or periods set by the MDCC. If the strategic goals are not achieved, the PSUs do not vest.
Equity-based compensation expense recognized in the Consolidated Statements of Operations for the three months ended December 27, 2014 and December 28, 2013 was based upon awards ultimately expected to vest. In accordance with ASC No. 718, Stock Based Compensation, forfeitures have been estimated at the time of grant and were based upon historical experience. The Company reviews the forfeiture rates periodically and makes adjustments as necessary.


15

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


The following table reflects restricted stock and common stock granted during the three months ended December 27, 2014 and December 28, 2013:
 
 
Three months ended
(shares in thousands)
 
December 27, 2014
 
December 28, 2013
Market-based restricted stock
 
232

 
324

Time-based restricted stock
 
472

 
581

Common stock
 
13

 
15

Equity-based compensation in shares
 
717

 
920

The following table reflects total equity-based compensation expense, which includes restricted stock, stock options and common stock, included in the Consolidated Statements of Operations during the three months ended December 27, 2014 and December 28, 2013
 
 
Three months ended
(in thousands)
 
December 27, 2014
 
December 28, 2013
Cost of sales
 
$
128

 
$
105

Selling, general and administrative
 
2,499

 
2,616

Research and development
 
808

 
675

Total equity-based compensation expense
 
$
3,435

 
$
3,396

The following table reflects equity-based compensation expense, by type of award, for the three months ended December 27, 2014 and December 28, 2013:  
 
 
Three months ended
(in thousands)
 
December 27, 2014
 
December 28, 2013
Market-based restricted stock 
 
$
1,350

 
$
1,472

Time-based restricted stock
 
1,869

 
1,705

Performance-based restricted stock 
 
33

 
33

Stock options
 
3

 
6

Common stock
 
180

 
180

Total equity-based compensation expense
 
$
3,435

 
$
3,396


NOTE 9: EARNINGS PER SHARE
Basic income (loss) per share is calculated using the weighted average number of shares of common stock outstanding during the period. Stock options and restricted stock are included in the calculation of diluted earnings per share, except when their effect would be anti-dilutive. For the three months ended December 28, 2013, 0.1 million stock options and 0.8 million restricted stocks were excluded due to the Company's net loss.
Diluted income (loss) per share is calculated using the weighted average number of shares of common stock outstanding during the period and, if there is net income during the period, the dilutive impact of common stock equivalents outstanding during the period.


16

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


The following tables reflect a reconciliation of the shares used in the basic and diluted net income (loss) per share computation for the three months ended December 27, 2014 and December 28, 2013
 
 
Three months ended
(in thousands, except per share data)
 
December 27, 2014
 
December 28, 2013
 
 
Basic
 
Diluted
 
Basic
 
Diluted
NUMERATOR:
 
 

 
 

 
 

 
 

Net income / (loss)
 
$
7,842

 
$
7,842

 
$
(1,957
)
 
$
(1,957
)
DENOMINATOR:
 
 

 
 

 
 

 
 

Weighted average shares outstanding - Basic
 
76,888

 
76,888

 
75,912

 
75,912

Stock options
 
 
 
94

 
 

 

Time-based restricted stock
 
 
 
213

 
 

 

Market-based restricted stock
 
 
 
237

 
 

 

Weighted average shares outstanding - Diluted
 
 

 
77,432

 
 

 
75,912

EPS:
 
 

 
 

 
 

 
 

Net income / (loss) per share - Basic
 
$
0.10

 
$
0.10

 
$
(0.03
)
 
$
(0.03
)
Effect of dilutive shares
 
 

 

 
 

 

Net income / (loss) per share - Diluted
 
 

 
$
0.10

 
 

 
$
(0.03
)
  
NOTE 10: INCOME TAXES
The following table reflects the provision for income taxes and the effective tax rate for the three months ended December 27, 2014 and December 28, 2013
 
Three months ended
(dollar amounts in thousands)
December 27, 2014
 
December 28, 2013
Income / (loss) from operations before income taxes
$
9,685

 
$
(2,048
)
Provision (benefit) for income taxes
1,843

 
(91
)
Net income / (loss)
$
7,842

 
$
(1,957
)
 
 
 
 
Effective tax rate
19.0
%
 
4.4
%
 
For the three months ended December 27, 2014, the effective income tax rate differed from the federal statutory tax rate primarily due to profits from foreign operations subject to a lower statutory tax rate than the U.S. statutory tax rate, and the impact of tax holidays, offset by an increase for deferred taxes on unremitted earnings, other U.S. deferred taxes and foreign withholding taxes.
For the three months ended December 28, 2013, the effective income tax rate differed from the federal statutory tax rate primarily due to profits from foreign operations subject to a lower statutory tax rate than the U.S. statutory tax rate, and the impact of tax holidays, offset by an increase for deferred taxes on unremitted earnings, other U.S. deferred taxes and additional foreign expenses or benefits related to returns filed in the period.
The effective tax rate for the period ended December 27, 2014 of 19.0% increased from the effective rate for the fiscal period ended September 27, 2014 of 18.3% primarily due to higher volume of local sales, which has a higher statutory tax rate. The Company's future effective tax rate would be affected if earnings were lower than anticipated in countries where it has lower statutory rates and higher than anticipated in countries where it has higher statutory rates, by changes in the valuation of its deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, anticipated tax benefits from research expenditures and changes in assertions for foreign earnings permanently or non-permanently reinvested as a result of changes in facts and circumstances could significantly impact the effective tax rate.  The Company regularly assesses the effects resulting from these factors to determine the adequacy of its provision for income taxes.

It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain unrecognized tax positions will decrease during the next 12 months due to the expected lapse of statutes of limitation. The Company does not expect the change to have a material effect on its statement of operations.


17

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



NOTE 11: SEGMENT INFORMATION
The Company operates two reportable segments: Equipment and Expendable Tools. The Equipment segment manufactures and sells a line of ball bonders and heavy wire wedge bonders that are sold to semiconductor device manufacturers, their outsourced semiconductor assembly and test subcontractors, other electronics manufacturers and automotive electronics suppliers. The Company also services, maintains, repairs and upgrades its equipment. The Expendable Tools segment manufactures and sells a variety of expendable tools for a broad range of semiconductor packaging applications.
The following table reflects operating information by segment for the three months ended December 27, 2014 and December 28, 2013
 
 
Three months ended
(in thousands)
 
December 27, 2014
 
December 28, 2013
Net revenue:
 
 

 
 

       Equipment
 
$
90,956

 
$
63,145

       Expendable Tools
 
16,482

 
15,968

              Net revenue
 
107,438

 
79,113

Cost of sales:
 
 

 
 

       Equipment
 
46,099

 
34,473

       Expendable Tools
 
6,605

 
6,275

              Cost of sales
 
52,704

 
40,748

Gross profit:
 
 

 
 

        Equipment
 
44,857

 
28,672

        Expendable Tools
 
9,877

 
9,693

              Gross profit
 
54,734

 
38,365

Operating expenses:
 
 

 
 

        Equipment
 
39,411

 
35,552

        Expendable Tools
 
5,597

 
5,021

              Operating expenses
 
45,008

 
40,573

Income / (loss) from operations:
 
 

 
 

        Equipment
 
5,446

 
(6,880
)
        Expendable Tools
 
4,280

 
4,672

              Income / (loss) from operations
 
$
9,726

 
$
(2,208
)
 
The following table reflects assets by segment as of December 27, 2014 and September 27, 2014:
 
 
 
As of
(in thousands)
 
December 27, 2014
 
September 27, 2014
Segment assets:
 
 

 
 

Equipment
 
$
795,040

 
$
839,847

Expendable Tools
 
132,802

 
104,601

Total assets
 
$
927,842

 
$
944,448

 


18

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


The following tables reflect capital expenditures and depreciation expense for the three months ended December 27, 2014 and December 28, 2013:
 
 
 
Three months ended
(in thousands)
 
December 27, 2014
 
December 28, 2013
Capital expenditures:
 
 

 
 

Equipment
 
$
1,736

 
$
4,232

Expendable Tools
 
517

 
1,197

Capital expenditures
 
$
2,253

 
$
5,429

 
 
Three months ended
(in thousands)
 
December 27, 2014
 
December 28, 2013
Depreciation expense:
 
 

 
 

Equipment
 
$
1,585

 
$
1,098

Expendable Tools
 
642

 
565

Depreciation expense
 
$
2,227

 
$
1,663

 
NOTE 12: COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Warranty Expense
The Company's equipment is generally shipped with a one-year warranty against manufacturing defects. The Company establishes reserves for estimated warranty expense when revenue for the related equipment is recognized. The reserve for estimated warranty expense is based upon historical experience and management's estimate of future warranty costs.
The following table reflects the reserve for product warranty activity for the three months ended December 27, 2014 and December 28, 2013
 
 
Three months ended
(in thousands)
 
December 27, 2014
 
December 28, 2013
Reserve for product warranty, beginning of period
 
$
1,542

 
$
1,194

Provision for product warranty
 
199

 
148

Product warranty costs paid
 
(526
)
 
(455
)
Reserve for product warranty, end of period
 
$
1,215

 
$
887


Other Commitments and Contingencies
The following table reflects obligations not reflected on the Consolidated Balance Sheet as of December 27, 2014:
 
 
 
 

 
Payments due by fiscal year
(in thousands)
 
Total
 
2015
 
2016
 
2017
 
2018
 
thereafter
Inventory purchase obligation (1)
 
$
77,658

 
$
77,658

 
$

 
$

 
$

 
$

Operating lease obligations (2)
 
28,537

 
2,892

 
3,414

 
3,039

 
2,566

 
16,626

Total
 
$
106,195

 
$
80,550

 
$
3,414

 
$
3,039

 
$
2,566

 
$
16,626


(1)
The Company orders inventory components in the normal course of its business. A portion of these orders are non-cancelable and a portion may have varying penalties and charges in the event of cancellation.
(2)
The Company has minimum rental commitments under various leases (excluding taxes, insurance, maintenance and repairs, which are also paid by the Company) primarily for various facility and equipment leases, which expire periodically through 2018 (not including lease extension options, if applicable).
Pursuant to ASC No. 840, Leases, for lessee's involvement in asset construction, the Company was considered the owner of the Building during the construction phase of the ADL. The building was completed on December 1, 2013 and Pte


19

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


signed an agreement with the Landlord to lease from the Landlord approximately 198,000 square feet , representing approximately 70% of the Building. Following the completion of construction, we performed a sale-leaseback analysis pursuant to ASC 840-40 and determined that because of our continuing involvement, ASC 840-40 precluded us from derecognizing the asset and associated financing obligation. As such, we reclassified the asset from construction in progress to Property, Plant and Equipment and began to depreciate the building over its estimated useful life of twenty-five years. We concluded that the term of the financing obligation is 10 years. This is equal to the non-cancellable term of our lease agreement with the Landlord. As of December 27, 2014, we recorded a financing obligation of $18.3 million. The financing obligation is not reflected in the table above.
Concentrations
There is no significant customer that represents 10% or more of our net revenue for the three months ended December 27, 2014 and December 28, 2013.
The following table reflects significant customer concentrations as a percentage of total accounts receivable as of December 27, 2014 and December 28, 2013:
 
 
As of
 
 
December 27, 2014
 
December 28, 2013
Haoseng Industrial Co., Ltd
 
19.0
%
 
10.8
%
Siliconware Precision Industries Co. Limited
 
*

 
27.4
%
* Represents less than 10% of total accounts receivable 
NOTE 13: SUBSEQUENT EVENTS
On December 29, 2014, Kulicke & Soffa Holdings B.V. (“KSH”), the Company's wholly owned subsidiary, entered into a Share Sale and Purchase Agreement (the “Agreement”) with Assembléon Holding B.V. Pursuant to the Agreement, KSH agreed to purchase all of the outstanding equity interests of Assembléon B.V. (“Assembléon”), a subsidiary of Assembléon Holding B.V., in an all cash transaction for EUR 80 million (approximately $98 million). Assembléon is a leading technology solutions provider that, together with its subsidiaries, offers assembly equipment, processes and services for the automotive, industrial, and advanced packaging markets. The acquisition expands the Company presence in automotive, industrial and advanced packaging markets.
The acquisition was completed on January 9, 2015. Upon acquisition, Assembléon became a wholly owned subsidiary of the Company. The Company is in the process of determining the purchase price allocation for this acquisition.



20

Table of Contents

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

Forward-Looking Statements
In addition to historical information, this filing contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of 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, wedge and die bonder equipment and for expendable tools.
Generally, words such as “may,” “will,” “should,” “could,” “anticipate,” “expect,” “intend,” “estimate,” “plan,” “continue,” “goal” and “believe,” or the negative of or other variations on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this filing. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.
Forward-looking statements are based on current expectations and involve risks and uncertainties. Our future results could differ significantly from those expressed or implied by our forward-looking statements. These risks and uncertainties include, without limitation, those described below and under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended 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.
OVERVIEW
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 quar


21

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ter. 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 can positively or 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 December 27, 2014, our total cash, cash equivalents and short-term investments were $633.4 million, a $36.3 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 this program will depend on market conditions as well as corporate and regulatory considerations. During the three months ended December 27, 2014, the Company repurchased a total of 0.6 million shares of common stock at a cost of $7.6 million under the Program. As of December 27, 2014, our remaining stock repurchase authorization under the Program was approximately $91.8 million.
On December 29, 2014, Kulicke & Soffa Holdings B.V. (“KSH”), the Company's wholly owned subsidiary, entered into a Share Sale and Purchase Agreement (the “Agreement”) with Assembléon Holding B.V. Pursuant to the Agreement, KSH has agreed to purchase all of the outstanding equity interests of Assembléon B.V. (“Assembléon”), a subsidiary of Assembléon Holding B.V., in an all cash transaction for EUR 80 million (approximately $98 million). Assembléon is a leading technology solutions provider that, together with its subsidiaries, offers assembly equipment, processes and services for the automotive, industrial, and advanced packaging markets. The acquisition expands the Company's presence in automotive, industrial and advanced packaging markets. The acquisition was completed on January 9, 2015 and was funded from the Company's available cash resources. Upon acquisition, Assembléon became a wholly owned subsidiary of the Company.
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.


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Table of Contents

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
Our leading technology for wedge bonder equipment uses ribbon or heavy wire for different applications such as power electronics, automotive and semiconductor applications. 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. 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.
With the acquisition of Assembléon, we have broadened our advanced packaging  solutions to include flip chip, wafer level packaging (WLP), fan-out wafer level packaging (FOWLP), advanced package-on-package, embedded die, and System-in-Package (SiP). The acquisition also enables us to diversify our business in the automotive, medical and industrial markets with advanced surface-mount technology (SMT) solutions.
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.


23

Table of Contents

Products and Services
We supply a range of bonding equipment and expendable tools. The following tables reflect net revenue by business segment for the three months ended December 27, 2014 and December 28, 2013, respectively:

 
 
Three months ended
 
 
December 27, 2014
 
December 28, 2013
(dollar amounts in thousands)
 
Net revenues
 
% of total net revenue
 
Net revenues
 
% of total net revenue
Equipment
 
$
90,956

 
84.7
%
 
$
63,145

 
79.8
%
Expendable Tools
 
16,482

 
15.3
%
 
15,968

 
20.2
%
 
 
$
107,438

 
100.0
%
 
$
79,113

 
100.0
%
 
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.



24

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)
 


25

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 and IConnPS Plus: high-performance ball bonders which can be configured for either gold or copper wire.
The IConnPS LA and IConnPS Plus 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 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 may 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.
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.


26

Table of Contents

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.

RESULTS OF OPERATIONS
The following tables reflect our income from operations for the three months ended December 27, 2014 and December 28, 2013:
 
 
Three months ended
 
 
 
 
(dollar amounts in thousands)
 
December 27, 2014
 
December 28, 2013

 
$ Change
 
% Change
Net revenue
 
$
107,438

 
$
79,113

 
$
28,325

 
35.8
 %
Cost of sales
 
52,704

 
40,748

 
11,956

 
29.3
 %
Gross profit
 
54,734

 
38,365

 
16,369

 
42.7
 %
Selling, general and administrative
 
25,427

 
23,102

 
2,325

 
10.1
 %
Research and development
 
19,581

 
17,471

 
2,110

 
12.1
 %
Operating expenses
 
45,008

 
40,573

 
4,435

 
10.9
 %
Income / (loss) from operations
 
$
9,726

 
$
(2,208
)
 
$
11,934

 
(540.5
)%
Our net revenues for the three months ended December 27, 2014 increased as compared to our net revenues for the three months ended December 28, 2013 largely due to higher customer demand. The semiconductor industry is volatile and our operating results have fluctuated significantly in the past and are expected to continue to do so in the future.  


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Table of Contents

Net Revenue
Approximately 88.9% and 94.1% of our net revenue for the three months ended December 27, 2014 and December 28, 2013, respectively, was for shipments to customer locations outside of the U.S., primarily in the Asia/Pacific region. We expect sales outside of the U.S. to continue to represent a substantial majority of our future revenue.
The following tables reflect net revenue by business segment for the three months ended December 27, 2014 and December 28, 2013:  
 
 
Three months ended
 
 
 
 
(dollar amounts in thousands)
 
December 27, 2014
 
December 28, 2013
 
$ Change
 
% Change
Equipment
 
$
90,956

 
$
63,145

 
$
27,811

 
44.0
%
Expendable Tools
 
16,482

 
15,968

 
514

 
3.2
%
Total net revenue
 
$
107,438

 
$
79,113

 
$
28,325

 
35.8
%
Equipment
The following table reflects the components of Equipment net revenue change between the three months ended December 27, 2014 and December 28, 2013
 
December 27, 2014 vs. December 28, 2013
 
 
Three months ended
(in thousands)
 
Price
 
Volume
 
$ Change
Equipment
 
$
(433
)
 
$
28,244

 
$
27,811

For the three months ended December 27, 2014, the higher Equipment net revenue as compared to the prior year period was primarily due to the higher volume of our ball bonders and wedge bonders. The higher volume of ball bonders and wedge bonders was primarily driven by the strong demand from our customers.
Expendable Tools
The following table reflects the components of Expendable Tools net revenue change between the three months ended December 27, 2014 and December 28, 2013
 
December 27, 2014 vs. December 28, 2013
 
 
Three months ended
(in thousands)
 
Price
 
Volume
 
$ Change
Expendable Tools
 
$
(629
)
 
$
1,143

 
$
514

 
For the three months ended December 27, 2014, the higher Expendable Tools net revenue as compared to the prior year period was primarily due to volume increase in our wire bonding tools business, and partially offset by the price reduction in our wire bonding tools business.
Gross Profit
The following tables reflect gross profit by business segment for the three months ended December 27, 2014 and December 28, 2013
 
 
Three months ended
 
 
 
 
(dollar amounts in thousands)
 
December 27, 2014
 
December 28, 2013
 
$ Change
 
% Change
Equipment
 
$
44,857

 
$
28,672

 
$
16,185

 
56.4
%
Expendable Tools
 
9,877

 
9,693

 
184

 
1.9
%
Total gross profit
 
$
54,734

 
$
38,365

 
$
16,369

 
42.7
%
 


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Table of Contents

The following tables reflect gross profit as a percentage of net revenue by business segment for the three months ended December 27, 2014 and December 28, 2013
 
 
Three months ended
 
Basis Point
 
 
December 27, 2014
 
December 28, 2013
 
Change
Equipment
 
49.3
%
 
45.4
%
 
390

Expendable Tools
 
59.9
%
 
60.7
%
 
(80
)
Total gross margin
 
50.9
%
 
48.5
%
 
240

Equipment
The following table reflects the components of Equipment gross profit change between the three months ended December 27, 2014 and December 28, 2013
 
December 27, 2014 vs. December 28, 2013
 
 
Three months ended
(in thousands)
 
Price
 
Cost
 
Volume
 
$ Change
Equipment
 
$
(433
)
 
$