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EX-31.2 - EXHIBIT 31.2 - KULICKE & SOFFA INDUSTRIES INCq32015ex312.htm
EX-32.2 - EXHIBIT 32.2 - KULICKE & SOFFA INDUSTRIES INCq32015ex322.htm
EX-32.1 - EXHIBIT 32.1 - KULICKE & SOFFA INDUSTRIES INCq32015ex321.htm
EX-31.1 - EXHIBIT 31.1 - KULICKE & SOFFA INDUSTRIES INCq32015ex311.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 June 27, 2015
 
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) 784-6000
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 July 31, 2015, there were 73,045,961 shares of the Registrant's Common Stock, no par value, outstanding.


Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
 
FORM 10 – Q
 
June 27, 2015
 Index
 
 
 
Page Number
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
Item 1.
FINANCIAL STATEMENTS (Unaudited)
 
 
 
 
 
Consolidated Balance Sheets as of June 27, 2015 and September 27, 2014
 
 
 
 
Consolidated Statements of Operations for the three and nine months ended June 27, 2015 and June 28, 2014
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and nine months ended June 27, 2015 and June 28, 2014
 
 
 
 
Consolidated Statements of Cash Flows for the nine months ended June 27, 2015 and June 28, 2014
 
 
 
 
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 2.
UNREGISTERED SALES OF EQUITY SECURITY AND USE OF PROCEEDS
 
 
 
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
 
 
June 27, 2015
 
September 27, 2014
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
475,925

 
$
587,981

Short-term investments
 

 
9,105

Accounts and notes receivable, net of allowance for doubtful accounts of $0 and $143 respectively
 
172,411

 
171,530

Inventories, net
 
78,312

 
49,694

Prepaid expenses and other current assets
 
16,354

 
15,090

Deferred income taxes
 
5,601

 
4,291

Total current assets
 
748,603

 
837,691

 
 
 
 


Property, plant and equipment, net
 
51,923

 
52,755

Goodwill
 
81,272

 
41,546

Intangible assets
 
60,322

 
5,891

Other assets
 
5,354

 
6,565

TOTAL ASSETS
 
$
947,474

 
$
944,448

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
47,907

 
$
35,132

Accrued expenses and other current liabilities
 
47,431

 
43,731

Income taxes payable
 
636

 
2,488

Total current liabilities
 
95,974

 
81,351

 
 
 
 
 
Financing obligation
 
17,634

 
19,102

Deferred income taxes
 
44,567

 
44,963

Other liabilities
 
11,729

 
9,790

TOTAL LIABILITIES
 
$
169,904

 
$
155,206

 
 
 
 
 
Commitments and contingent liabilities (Note 13)
 


 


 
 
 
 
 
SHAREHOLDERS' EQUITY:
 
 

 
 

Preferred stock, without par value:
 
 

 
 

Authorized 5,000 shares; issued - none
 
$

 
$

Common stock, no par value:
 
 

 
 

Authorized 200,000 shares; issued 82,602 and 81,624, respectively; outstanding 73,028 and 76,626 shares, respectively
 
488,495

 
479,116

Treasury stock, at cost, 9,574 and 4,998 shares, respectively
 
(107,659
)
 
(46,984
)
Retained earnings
 
395,678

 
354,866

Accumulated other comprehensive income
 
1,056

 
2,244

TOTAL SHAREHOLDERS' EQUITY
 
$
777,570

 
$
789,242

 
 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
947,474

 
$
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
 
Nine months ended
 
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Net revenue
 
$
164,634

 
$
180,517

 
$
417,299

 
$
373,836

Cost of sales
 
87,063

 
95,360

 
216,424

 
192,642

Gross profit
 
77,571

 
85,157

 
200,875

 
181,194

Selling, general and administrative
 
36,105

 
30,093

 
97,139

 
81,430

Research and development
 
25,380

 
23,480

 
68,133

 
60,277

Operating expenses
 
61,485

 
53,573

 
165,272

 
141,707

Income from operations
 
16,086

 
31,584

 
35,603

 
39,487

Interest income
 
469

 
256

 
1,184

 
878

Interest expense
 
(291
)
 
(316
)
 
(910
)
 
(732
)
Income from operations before income taxes
 
16,264

 
31,524

 
35,877

 
39,633

Income tax (benefit)/expense
 
(8,775
)
 
4,908

 
(4,935
)
 
5,904

Net income
 
$
25,039

 
$
26,616

 
$
40,812

 
$
33,729

 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.33

 
$
0.35

 
$
0.53

 
$
0.44

Diluted
 
$
0.33

 
$
0.34

 
$
0.53

 
$
0.44

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
75,420

 
76,596

 
76,376

 
76,308

Diluted
 
75,891

 
77,605

 
76,778

 
77,086

 
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
 
Nine months ended
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Net income
$
25,039

 
$
26,616

 
$
40,812

 
$
33,729

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
46

 
304

 
(1,200
)
 
(10
)
Unrecognized actuarial gain, Switzerland pension plan, net of tax

 
3

 

 
(9
)
 
46

 
307

 
(1,200
)
 
(19
)
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Unrealized (loss)/gain on derivative instruments, net of tax
(5
)
 
95

 
(778
)
 
95

Reclassification adjustment for (loss)/gain on derivative instruments recognized, net of tax
17

 
(23
)
 
790

 
(23
)
Net decrease from derivatives designated as hedging instruments, net of tax
12

 
72

 
12

 
72

 
 
 
 
 
 
 
 
Total other comprehensive income
58

 
379

 
(1,188
)
 
53

 
 
 
 
 
 
 
 
Comprehensive income
$
25,097

 
$
26,995

 
$
39,624

 
$
33,782

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
 
 
Nine months ended
 
 
June 27, 2015
 
June 28, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income
 
$
40,812

 
$
33,729

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
13,978

 
9,995

Equity-based compensation and employee benefits
 
8,536

 
8,817

Reversal of excess tax benefits from stock-based compensation arrangements
 

 
825

Adjustment for doubtful accounts
 
(143
)
 
(265
)
Adjustment for inventory valuation
 
1,648

 
2,109

Deferred taxes
 
(5,907
)
 
(552
)
Loss on disposal of property, plant and equipment
 

 
46

Unrealized foreign currency transactions
 
(2,170
)
 
52

Changes in operating assets and liabilities, net of assets and liabilities assumed in business combinations:
 
 

 
 

Accounts and notes receivable
 
8,747

 
8,599

Inventory
 
(11,061
)
 
(17,893
)
Prepaid expenses and other current assets
 
1,066

 
4,115

Accounts payable, accrued expenses and other current liabilities
 
(6,741
)
 
30,293

Income taxes payable
 
(3,761
)
 
2,566

Other, net
 
3,342

 
1,753

Net cash provided by operating activities
 
48,346

 
84,189

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Acquisition of business, net of cash acquired
 
(93,153
)
 

Purchases of property, plant and equipment
 
(6,899
)
 
(9,294
)
Purchase of short-term investments
 
(1,630
)
 
(9,173
)
Maturity of short-term investments
 
10,763

 
9,795

Net cash used in investing activities
 
(90,919
)
 
(8,672
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Payment on debts
 
(10,693
)
 

Proceeds from short term loans
 
837

 

Proceeds from exercise of common stock options
 
694

 
1,030

Repurchase of common stock
 
(60,675
)
 

Reversal of excess tax benefits from stock-based compensation arrangements
 

 
(825
)
Net cash (used in)/provided by financing activities
 
(69,837
)
 
205

Effect of exchange rate changes on cash and cash equivalents
 
354

 
(53
)
Changes in cash and cash equivalents
 
(112,056
)
 
75,669

Cash and cash equivalents at beginning of period
 
587,981

 
521,788

Cash and cash equivalents at end of period
 
$
475,925

 
$
597,457

 
 
 
 
 
CASH PAID FOR:
 
 

 
 

Interest
 
$
910

 
$
580

Income taxes
 
$
4,006

 
$
4,270

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 June 27, 2015 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. The Company actively 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 Netherlands, 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 June 27, 2015 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 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.
Inventory reserve provision for the acquired business, Assembléon B.V. (“Assembléon”), is determined based on management's best estimate of future consumption for equipment and spare parts. This estimate is based on historical sales volumes, internal projections and market developments and trends.
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.


7

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


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 or economic trends; and significant changes in market capitalization. During the three and nine months ended June 27, 2015, no triggering events occurred.
Accounting for Impairment of Goodwill
The Company operates two reportable segments: Equipment and Expendable Tools. Goodwill was recorded for the acquisitions of Orthodyne Electronics Corporation ("Orthodyne") and Assembléon in 2009 and 2015, respectively.
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 and nine months ended June 27, 2015, 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 4 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.
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


8

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


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.
Accounting for Business Acquisitions
The Company accounts for business acquisitions in accordance with ASC No. 805, Business Combinations. The fair value of the net assets acquired and the results of operations of the acquired businesses are included in the Unaudited Consolidated Financial Statements from the acquisition date forward. The Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and results of operations during the reporting period. Estimates are used in accounting for, among other things, the fair value of acquired net operating assets, property and equipment, deferred revenue, intangible assets and related deferred tax liabilities, useful lives of plant and equipment, and amortizable lives of acquired intangible assets. Any excess of the purchase consideration over the identified fair value of the assets and liabilities acquired is recognized as goodwill. The valuation of these tangible and identifiable intangible assets and liabilities is subject to further management review and may change materially between the preliminary allocation and end of the purchase price allocation period.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition. The new standard provides for a single five-step model to be applied to all revenue contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. There is no option for early adoption. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. Under the proposal, the new guidance will be effective as of the beginning of our 2018 fiscal year. We are currently evaluating the impact of the new guidance on our financial statements and have not yet selected a transition approach to implement the standard.



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 June 27, 2015 and September 27, 2014:
 
 
As of
(in thousands)
 
June 27, 2015
 
September 27, 2014
Short term investments, available-for-sale:
 
 
 
 
Deposits maturing within one year (1)
 
$

 
$
9,105

 
 
 
 
 
Inventories, net:
 
 

 
 

Raw materials and supplies
 
$
28,197

 
$
22,184

Work in process
 
24,481

 
18,783

Finished goods
 
45,939

 
22,590

 
 
98,617

 
63,557

Inventory reserves
 
(20,305
)
 
(13,863
)
 
 
$
78,312

 
$
49,694

Property, plant and equipment, net:
 
 

 
 

Buildings and building improvements
 
$
33,576

 
$
31,159

Leasehold improvements
 
19,629

 
13,962

Data processing equipment and software
 
28,311

 
27,538

Machinery, equipment, furniture and fixtures
 
51,537

 
45,442

 
 
133,053

 
118,101

Accumulated depreciation
 
(81,130
)
 
(65,346
)
 
 
$
51,923

 
$
52,755

Accrued expenses and other current liabilities:
 
 

 
 

Wages and benefits
 
$
22,671

 
$
21,498

Accrued customer obligations (2)
 
8,920

 
8,999

Commissions and professional fees
 
3,384

 
1,961

Deferred rent
 
2,444

 
2,161

Severance
 
228

 
1,067

Other
 
9,784

 
8,045

 
 
$
47,431

 
$
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 June 27, 2015 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 and nine months ended June 27, 2015 and June 28, 2014.
(2)
Represents customer advance payments, customer credit program, accrued warranty expense and accrued retrofit obligations.

NOTE 3: BUSINESS COMBINATIONS
On January 9, 2015, Kulicke & Soffa Holdings B.V. (“KSH”), the Company's wholly owned subsidiary, acquired all of the outstanding equity interests of Assembléon.
The cash purchase price of approximately $97.4 million (EUR 80 million) consisted of $72.5 million for 100% of the equity of Assembléon and $24.9 million which was used by Assembléon to settle intercompany loans with its parent company.
The acquisition of Assembléon was accounted for in accordance with ASC No. 805, Business Combinations, using the acquisition method. The Company has estimated the preliminary fair value of acquired assets and liabilities as of the date of acquisition based on information available at that time. The valuation of these tangible and identifiable intangible assets and liabilities is subject to further management review and may change materially between the preliminary allocation and end of the purchase price allocation


10

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


period of January 9, 2016. Any changes in these estimates may have a material impact on our Unaudited Consolidated Results of Operations or Unaudited Consolidated Balance Sheets. At June 27, 2015 the Company held $13.4 million (EUR 12 million) in escrow for a period of eighteen months from the acquisition date as security pending the completion of Assembleon Holding B.V.'s obligations as seller under the Agreement.
The following table summarizes the allocation of the assets acquired and liabilities assumed based on the fair values as of the acquisition date and related useful lives of the finite-lived intangible assets acquired:
(in thousands)
January 9, 2015
Accounts receivable
$
9,941

Inventories
19,861

Prepaid expenses and other current assets
2,322

Deferred tax asset
157

Property, plant and equipment
531

Intangibles
61,463

Goodwill
39,726

Deferred income taxes
638

Accounts payable
(14,386
)
Borrowings financial institutions
(9,491
)
Accrued expenses and other current liabilities
(10,561
)
Income taxes payable
(1,933
)
Deferred tax liabilities
(5,115
)
Total purchase price, net of cash acquired
$
93,153

Tangible net assets (liabilities) were valued at their respective carrying amounts, which the Company believes approximate their current fair values at the acquisition date.
The valuation of identifiable intangible assets acquired reflects management’s estimates based on, among other factors, use of established valuation methods. The technology/software and product brand name was determined using the relief from royalty method. Customer relationships were valued by using multi-period excess earnings method. Identifiable intangible assets with definite lives are amortized over the period of estimated benefit using the straight-line method and the estimated useful lives of six to fifteen years. The straight-line method of amortization represents the Company’s best estimate of the distribution of the economic value of the identifiable intangible assets. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. None of the goodwill recorded as part of the acquisition will be deductible for income tax purposes.
In connection with the acquisition of Assembléon, the Company recorded deferred tax liabilities relating to the acquired intangible assets, which is partially offset by the net amount of acquired net operating losses. The net amount of acquired net operating losses comprise of net operating losses less the tax reserves and valuation allowance. The Company has recorded long-term income tax payable due to uncertain tax positions with respect to certain Assembléon entities.
For the three months ended June 27, 2015, the acquired business contributed revenue of $21.1 million and net loss of $0.6 million. For the nine months ended June 27, 2015, the acquired business contributed revenue of $38.0 million and net loss of $4.5 million
During the three and nine months ended June 27, 2015, the Company incurred $0.1 million and $0.9 million of expenses related to the acquisition, respectively, included within selling, general and administrative expense in the consolidated statements of income.
The following unaudited pro forma information presents the combined results of operations as if the acquisition had been completed on September 29, 2013, the beginning of the comparable prior annual reporting period. The unaudited pro forma results include: (i) amortization associated with preliminary estimates for the acquired intangible assets; (ii) recognition of the post-acquisition share-based compensation and other compensation expense; and (iii) the associated tax impact on these unaudited pro forma adjustments.
The unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies or the effect of the incremental costs incurred in integrating the two companies. Accordingly, these unaudited pro forma results are presented for informational


11

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


purpose only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the periods presented, nor are they indicative of future results of operations:
 
Three months ended
 
Nine months ended
(in thousands)
June 27, 2015

 
June 28, 2014

 
June 27, 2015

 
June 28, 2014

Revenue
$
164,634

 
$
210,215

 
$
443,582

 
$
411,529

Net income
25,039

 
28,771

 
35,476

 
30,050

Basic income per common share
0.33

 
0.38

 
0.46

 
0.39

Diluted income per common share
0.33

 
0.37

 
0.46

 
0.39


NOTE 4: GOODWILL AND INTANGIBLE ASSETS
Goodwill
Intangible assets classified as goodwill are not amortized. The Company performs an annual impairment test of its goodwill during the fourth quarter of each fiscal year, which coincides with the completion of its annual forecasting 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 nine months ended June 27, 2015, 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.
In 2009, the Company recorded goodwill when it acquired Orthodyne and added wedge bonder products to its business.
On December 29, 2014, KSH, the Company's wholly owned subsidiary, entered into an agreement with Assembléon Holding B.V. Pursuant to the agreement, KSH purchased all of the outstanding equity interests of Assembléon, a subsidiary of Assembléon Holding B.V., in an all cash transaction for approximately $97.4 million (EUR 80 million). Assembléon, 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 following table summarizes the Company's recorded goodwill as of June 27, 2015:
 
 
As of
(in thousands)
 
June 27, 2015
Balance at September 27, 2014
 
$
41,546

Acquired in business combination
 
39,726

Balance at June 27, 2015
 
$
81,272

Intangible Assets
Intangible assets with determinable lives are amortized over their estimated useful lives. The Company's intangible assets consist primarily of developed technology, customer relationships and trade and brand names.



12

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


The following table reflects net intangible assets as of June 27, 2015 and September 27, 2014
 
 
As of
 
Average estimated
(dollar amounts in thousands)
 
June 27, 2015
 
September 27, 2014
 
useful lives (in years)
Developed technology
 
$
33,200

 
$
33,200

 
7.0 to 15.0
Acquired in business combination
 
40,880

 

 
 
Accumulated amortization
 
(33,379
)
 
(28,458
)
 
 
Net developed technology
 
$
40,701

 
$
4,742

 
 
 
 
 
 
 
 
 
Customer relationships
 
$
19,300

 
$
19,300

 
5.0 to 6.0
Acquired in business combination
 
17,668

 

 
 
Accumulated amortization
 
(20,772
)
 
(19,300
)
 
 
Net customer relationships
 
$
16,196

 
$

 
 
 
 
 
 
 
 
 
Trade and brand names
 
$
4,600

 
$
4,600

 
7.0 to 8.0
Acquired in business combination
 
2,915

 

 
 
Accumulated amortization
 
(4,090
)
 
(3,451
)
 
 
Net trade and brand name
 
$
3,425

 
$
1,149

 
 
 
 
 
 
 
 
 
Other intangible assets
 
$
2,500

 
$
2,500

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

 
$

 
 
 
 
 
 
 
 
 
Net intangible assets
 
$
60,322

 
$
5,891

 
 

The following table reflects estimated annual amortization expense related to intangible assets as of June 27, 2015:
 
As of
(in thousands)
June 27, 2015
Remaining fiscal 2015
$
2,847

Fiscal 2016
6,662

Fiscal 2017
6,087

Fiscal 2018 and onwards
44,726

Total amortization expense
$
60,322

 

NOTE 5: CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents and short-term investments 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.


13

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


Cash and cash equivalents consisted of the following as of June 27, 2015:
(in thousands)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
131,589

 
$

 
$

 
$
131,589

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
185,958

 

 

 
185,958

Time deposits
158,378

 

 

 
158,378

Commercial paper

 

 

 

Total cash and cash equivalents
$
475,925

 
$

 
$

 
$
475,925

The Company did not hold any short-term investments as of June 27, 2015.
Cash, cash equivalents and short-term investments 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 6: 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 and nine months ended June 27, 2015.
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.


14

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


The fair values of our financial assets and liabilities at June 27, 2015 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
$
131,589

 
$
131,589

 
$

 
$

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
185,958

 
185,958

 

 

Time deposits
158,378

 
158,378

 

 

Commercial paper

 

 

 

Total assets
$
475,925

 
$
475,925

 
$

 
$

The fair values 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

 

 

Commercial paper
29,500

 
29,500

 

 

Short-term investments
 
 
 
 
 
 
 
Time deposits
9,105

 
9,105

 

 

Total assets
$
597,086

 
$
597,086

 
$

 
$


NOTE 7: 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 is 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 variability 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.



15

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


There were no outstanding derivative instruments as of September 27, 2014. The fair value of derivative instruments on our Consolidated Balance Sheet as of June 27, 2015 was as follows:
 
As of
(in thousands)
June 27, 2015
 
Notional Amount
 
Fair Value Asset Derivatives(1)
 
Fair Value Liability Derivatives(2)
Derivatives designated as hedging instruments:
 
 
 
 
 
Foreign exchange forward contracts (3)
$
11,097

 
$
12

 
$

Total derivatives
$
11,097

 
$
12

 
$

(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 Sheet.
(2)
Included in accrued expenses and other current liabilities on our Consolidated Balance Sheet.
(3)
Hedged amounts expected to be recognized to income within the next twelve months.

The effects of derivative instruments designated as cash flow hedges in our Consolidated Statements of Income for the three and nine months ended June 27, 2015 and June 28, 2014 are as follows:
(in thousands)
 
Three months ended
 
Nine months ended
 
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Foreign exchange forward contract in cash flow hedging relationships:
 
 
 
 
 
 
 
 
Net (loss)/gain recognized in OCI, net of tax(1)
 
$
(5
)
 
$
95

 
$
(778
)
 
$
95

Net (loss)/gain reclassified from accumulated OCI into income, net of tax(2)
 
$
(17
)
 
$
23

 
$
(790
)
 
$
23

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.

NOTE 8: 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, as well as a 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 ASC No. 840, Leases ("ASC 840"), we have classified the Building on our balance sheet as Property, Plant and Equipment, which we are depreciating over its estimated useful life of 25 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 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.



16

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


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 9: 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. Since 2011, matching contributions to the Plan have been made in cash. 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 and nine months ended June 27, 2015 and June 28, 2014:
 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 27, 2015
 
June 28, 2014

 
June 27, 2015
 
June 28, 2014
Cash
 
$
460

 
$
304

 
$
1,119

 
$
913

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 the Program will depend on market conditions as well as corporate and regulatory considerations. During the three and nine months ended June 27, 2015, the Company repurchased a total of 3.8 million and 4.6 million shares of common stock at a cost of $50.5 million and $60.7 million, respectively. The stock repurchases were recorded in the periods they were delivered, and the payment of $60.7 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, first-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 June 27, 2015 and September 27, 2014
 
 
As of
(in thousands)
 
June 27, 2015
 
September 27, 2014
Gain from foreign currency translation adjustments
 
$
1,999

 
$
3,199

Unrecognized actuarial loss Switzerland pension plan, net of tax
 
(609
)
 
(609
)
Switzerland pension plan curtailment
 
(346
)
 
(346
)
Unrealized gain on hedging
 
12

 

Accumulated other comprehensive income
 
$
1,056

 
$
2,244



17

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


Equity-Based Compensation
As of June 27, 2015, 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 June 27, 2015, 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 that 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 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 and nine months ended June 27, 2015 and June 28, 2014 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.
The following table reflects restricted stock and common stock granted during the three and nine months ended June 27, 2015 and June 28, 2014:
 
 
Three months ended
 
Nine months ended
(shares in thousands)
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Market-based restricted stock
 

 
11

 
232

 
335

Time-based restricted stock
 

 
27

 
484

 
634

Common stock
 
11

 
16

 
35

 
48

Equity-based compensation in shares
 
11

 
54

 
751

 
1,017

The following table reflects total equity-based compensation expense, which includes restricted stock, stock options and common stock, included in the Consolidated Statements of Operations during the three and nine months ended June 27, 2015 and June 28, 2014
 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Cost of sales
 
$
88

 
$
82

 
$
304

 
$
269

Selling, general and administrative
 
1,914

 
2,182

 
6,389

 
6,924

Research and development
 
518

 
471

 
1,843

 
1,624

Total equity-based compensation expense
 
$
2,520

 
$
2,735

 
$
8,536

 
$
8,817



18

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


The following table reflects equity-based compensation expense, by type of award, for the three and nine months ended June 27, 2015 and June 28, 2014:  
 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Market-based restricted stock 
 
$
986

 
$
1,237

 
$
3,330

 
$
3,879

Time-based restricted stock
 
1,321

 
1,250

 
4,565

 
4,225

Performance-based restricted stock 
 
33

 
32

 
98

 
98

Stock options
 

 
6

 
3

 
15

Common stock
 
180

 
210

 
540

 
600

Total equity-based compensation expense
 
$
2,520

 
$
2,735

 
$
8,536

 
$
8,817


NOTE 10: EARNINGS PER SHARE
Basic income 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.
Diluted income per share is calculated using the weighted average number of shares of common stock outstanding during the period and, if there is net income during the period, the dilutive impact of common stock equivalents outstanding during the period.
The following tables reflect a reconciliation of the shares used in the basic and diluted net income per share computation for the three and nine months ended June 27, 2015 and June 28, 2014
 
 
Three months ended
(in thousands, except per share)
 
June 27, 2015
 
June 28, 2014
 
 
Basic
 
Diluted
 
Basic
 
Diluted
NUMERATOR:
 
 
 
 
 
 
 
 
Net income
 
$
25,039

 
$
25,039

 
$
26,616

 
$
26,616

Less: income applicable to participating securities
 

 

 

 

Net income applicable to common shareholders
 
$
25,039

 
$
25,039

 
$
26,616

 
$
26,616

DENOMINATOR:
 
 
 
 
 
 
 
 
Weighted average shares outstanding - Basic
 
75,420

 
75,420

 
76,596

 
76,596

Stock options
 
 
 
67

 
 
 
117

Time-based restricted stock
 
 
 
336

 
 
 
442

Market-based restricted stock
 
 
 
68

 
 
 
450

Weighted average shares outstanding - Diluted
 
 
 
75,891

 
 
 
77,605

EPS:
 
 
 
 
 
 
 
 
Net income per share - Basic
 
$
0.33

 
$
0.33

 
$
0.35

 
$
0.35

Effect of dilutive shares
 
 
 

 
 
 
(0.01
)
Net income per share - Diluted
 
 
 
$
0.33

 
 
 
$
0.34



19

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


 
 
Nine months ended
(in thousands, except per share data)
 
June 27, 2015
 
June 28, 2014
 
 
Basic
 
Diluted
 
Basic
 
Diluted
NUMERATOR:
 
 

 
 

 
 

 
 

Net income
 
$
40,812

 
$
40,812

 
$
33,729

 
$
33,729

Less: income applicable to participating securities
 

 

 

 

Net income applicable to common shareholders
 
$
40,812

 
$
40,812

 
$
33,729

 
$
33,729

DENOMINATOR:
 
 

 
 

 
 

 
 

Weighted average shares outstanding - Basic
 
76,376

 
76,376

 
76,308

 
76,308

Stock options
 
 
 
84

 
 

 
114

Time-based restricted stock
 
 
 
269

 
 

 
345

Market-based restricted stock
 
 
 
49

 
 

 
319

Weighted average shares outstanding - Diluted
 
 

 
76,778

 
 

 
77,086

EPS:
 
 

 
 

 
 

 
 

Net income per share - Basic
 
$
0.53

 
$
0.53

 
$
0.44

 
$
0.44

Effect of dilutive shares
 
 

 

 
 

 

Net income per share - Diluted
 
 

 
$
0.53

 
 

 
$
0.44

  

NOTE 11: INCOME TAXES
The following table reflects the provision for income taxes and the effective tax rate for the nine months ended June 27, 2015 and June 28, 2014
 
Nine months ended
(dollar amounts in thousands)
June 27, 2015
 
June 28, 2014
Income from operations before income taxes
$
35,877

 
$
39,633

Income tax (benefit)/expense
(4,935
)
 
5,904

Net income
$
40,812

 
$
33,729

 
 
 
 
Effective tax rate
(13.8
)%
 
14.9
%
For the nine months ended June 27, 2015, the effective income tax rate differed from the federal statutory tax rate primarily due to tax benefits from research and development expenditures, profits from foreign operations subject to a lower statutory tax rate than the federal rate, and the impact of tax holidays, offset by an increase in valuation allowance against certain foreign deferred tax assets, foreign earnings not permanently reinvested, and foreign withholding taxes. In addition, total discrete tax benefit of $13.7 million was recorded primarily related to the reduction in the deferred tax liabilities as a result of the change in permanent reinvestment assertion for the nine months ended June 27, 2015 due to a business structure reorganization.
For the nine months ended June 28, 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 federal rate and the impact of tax holidays, offset by an increase for deferred tax liabilities on unremitted earnings and additional domestic and foreign expenses or benefits related to returns filed in the period.
The effective tax rate for the period ended June 27, 2015 of (13.8)% decreased from the effective tax rate for the period ended June 28, 2014 of 14.9% and the year ended September 27, 2014 of 18.3% primarily due to a net decrease of deferred tax liabilities on certain unremitted foreign earnings as a result of the change in permanent reinvestment assertion, and tax benefits from research and development expenditures, offset by lower profits in foreign jurisdiction and an increase in valuation allowance against certain foreign deferred tax assets.
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,


20

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


changes in assertion 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.

NOTE 12: SEGMENT INFORMATION
The Company operates two reportable segments: Equipment and Expendable Tools. The Equipment segment manufactures and sells a line of ball bonders, heavy wire wedge bonders, advanced packaging and surface mount technology. The Company also services, maintains, repairs and upgrades its equipment. The financial performance of the acquired business has been included in the Equipment segment from January 9, 2015. 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 and nine months ended June 27, 2015 and June 28, 2014
 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Net revenue:
 
 

 
 

 
 

 
 

       Equipment
 
$
148,987

 
$
165,013

 
$
369,759

 
$
325,770

       Expendable Tools
 
15,647

 
15,504

 
47,540

 
48,066

              Net revenue
 
164,634

 
180,517

 
417,299

 
373,836

Income from operations:
 
 

 
 

 
 

 
 

        Equipment
 
12,849

 
27,804

 
24,602

 
26,217

        Expendable Tools
 
3,237

 
3,780

 
11,001

 
13,270

              Income from operations
 
$
16,086

 
$
31,584

 
$
35,603

 
$
39,487


The following table reflects assets by segment as of June 27, 2015 and September 27, 2014:
 
 
As of
(in thousands)
 
June 27, 2015
 
September 27, 2014
Segment assets:
 
 

 
 

Equipment
 
$
866,931

 
$
839,847

Expendable Tools
 
80,543

 
104,601

Total assets
 
$
947,474

 
$
944,448

 


21

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


The following tables reflect capital expenditures for the nine months ended June 27, 2015 and June 28, 2014, and depreciation expense for the three and nine months ended June 27, 2015 and June 28, 2014:
 
 
Nine months ended
(in thousands)
 
June 27, 2015
 
June 28, 2014
Capital expenditures:
 
 

 
 

Equipment
 
$
4,274

 
$
7,231

Expendable Tools
 
1,435

 
2,365

Capital expenditures
 
$
5,709

 
$
9,596

 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Depreciation expense:
 
 

 
 

 
 

 
 

Equipment
 
$
1,859

 
$
1,518

 
$
5,106

 
$
4,130

Expendable Tools
 
599

 
662

 
1,840

 
1,877

Depreciation expense
 
$
2,458

 
$
2,180

 
$
6,946

 
$
6,007


NOTE 13: 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 and nine months ended June 27, 2015 and June 28, 2014
 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 27, 2015

 
June 28, 2014

 
June 27, 2015
 
June 28, 2014
Reserve for product warranty, beginning of period
 
$
1,849

 
$
885

 
$
1,542

 
$
1,194

Addition from business combination
 

 

 
547

 

Provision for product warranty
 
828

 
784

 
2,065

 
1,284

Product warranty costs paid
 
(705
)
 
(375
)
 
(2,182
)
 
(1,184
)
Reserve for product warranty, end of period
 
$
1,972

 
$
1,294

 
$
1,972

 
$
1,294

Other Commitments and Contingencies
The following table reflects obligations not reflected on the Consolidated Balance Sheet as of June 27, 2015:
 
 
 
 

 
Payments due by fiscal year
(in thousands)
 
Total
 
2015
 
2016
 
2017
 
2018
 
thereafter
Inventory purchase obligation (1)
 
$
86,651

 
$
86,651

 
$

 
$

 
$

 
$

Operating lease obligations (2)
 
31,155

 
1,484

 
4,752

 
3,987

 
3,323

 
17,609

Total
 
$
117,806

 
$
88,135

 
$
4,752

 
$
3,987

 
$
3,323

 
$
17,609


(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


22

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 June 27, 2015, we recorded a financing obligation related to the Building of $17.6 million (see Note 8 above). The financing obligation is not reflected in the table above.
Concentrations
No customer represents 10% or more of our net revenue for the nine months ended June 27, 2015 and June 28, 2014.
The following table reflects significant customer concentrations as a percentage of total accounts receivable as of June 27, 2015 and June 28, 2014:
 
 
As of
 
 
June 27, 2015
 
June 28, 2014
Haoseng Industrial Co., Ltd
 
14.8
%
 
15.3
%
Amkor Technology Inc.
 
12.7
%
 
*

* Represented less than 10% of total accounts receivable







23

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 bonder, advanced packaging and surface mount technology 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,


24

Table of Contents

semiconductor manufacturers prepare for heightened demand by adding or replacing equipment capacity by the end of the September quarter. Occasionally, this results in subsequent reductions in the December quarter. This annual seasonality can occasionally be overshadowed by effects of the broader semiconductor cycle. Macroeconomic factors also affect the industry, primarily through their effect on business and consumer demand for electronic devices, as well as other products that have significant electronic content such as automobiles, white goods, and telecommunication equipment.
Our Equipment segment is primarily affected by the industry's internal cyclical and seasonal dynamics in addition to broader macroeconomic factors that 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 strengthened our balance sheet. As of June 27, 2015, our total cash, cash equivalents and short-term investments were $475.9 million, a $121.2 million decrease from the prior fiscal year end (related primarily to our share repurchase program and our Assembléon acquisition, offset in part by earnings this fiscal period). 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 is funded using the Company's available cash. Under the Program, shares may be repurchased through open market and/or privately negotiated transactions at prices deemed appropriate by management. The timing and amount of repurchase transactions under the Program will depend on market conditions as well as corporate and regulatory considerations. During the three and nine months ended June 27, 2015, the Company repurchased a total of 3.8 million and 4.6 million shares of common stock at a cost of $50.5 million and $60.7 million, respectively, under the Program. As of June 27, 2015, our remaining stock repurchase authorization under the Program was approximately $38.7