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KULICKE & SOFFA INDUSTRIES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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 28, 2013 (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 consolidating our manufacturing facilities. 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 22-------------------------------------------------------------------------------- Table of Contents quarter. Occasionally, this results in subsequent reductions in the December quarter. This annual seasonality can occasionally be overshadowed by effects of the broader semiconductor cycle. Macroeconomic factors also affect the industry, primarily through their effect on business and consumer demand for electronic devices, as well as other products that have significant electronic content such as automobiles, white goods, and telecommunication equipment. Our Equipment segment is primarily affected by the industry's internal cyclical and seasonal dynamics in addition to broader macroeconomic factors that positively 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 may 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 June 28, 2014, our total cash, cash equivalents and short-term investments were $600.1 million, a $75.0 million increase from the prior fiscal year end. We believe this strong cash position will allow us to continue to invest in organic product development and non-organic opportunities. 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 various wire bonder and expendable tools products. To maintain our competitive advantage, we invest in product development activities designed to produce a stream of improvements to existing products and to deliver next-generation products. These investments often focus as much on improvements in the semiconductor assembly process as on specific pieces of assembly equipment or expendable tools. In order to generate these improvements, we often work in close collaboration with customers, end users, and other industry members. In addition to producing technical advances, these collaborative development efforts strengthen customer relationships and enhance our reputation as a technology leader and solutions provider. In addition to gold, silver alloy wire and aluminum wire, our leadership in the industry's use of copper wire for the bonding process is an example of the benefits of our collaborative efforts. By working with customers, material suppliers, and other equipment suppliers, we have developed a series of robust, high-yielding production processes, which have made copper wire widely accepted and significantly reduced the cost of assembling an integrated circuit. Based on our industry leading copper bonding processes and the continued high price of gold, we believe the demand for copper configured wire bonders is likely to remain solid. Our leadership 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 ATPremier Plus. Furthermore, we gain synergies by leveraging technologies between our unique platforms. Our leading technology for wedge bonder equipment uses aluminum ribbon or heavy wire as opposed to fine gold and fine copper wire used in ball bonders. In 2013, we launched a new line of high performance wedge bonder products, PowerFusionPS. The advanced interconnect capabilities of PowerFusionPS improve the processing of high-density power packages, due to an expanded bondable area, wider leadframe capability, superior indexing accuracy and teach mode. We have also initiated the design and development of our next generation hybrid wedge bonder which is due to be released 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 23-------------------------------------------------------------------------------- Table of Contents 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 enable 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 have established a dedicated team to develop advanced packaging bonders for the emerging three-dimensional integrated circuit ("3D IC") market, and in November 2013, we shipped the first TCB (Thermal Compression Bonder) C2S (Chip-to-Substrate) alpha machine to a strategic customer. We have recently shipped the first C2S beta machine to one of our customers. 3D ICs save space, reduce footprint, form factor and enable stacking of separate chips in a single package, thus expanding overall IC functionality. It also improves performance while reducing power consumption. Mobile devices such as smartphones and tablets are the main drivers of this market. We bring the same technology focus to our expendable tools business, driving tool design and manufacturing technology to optimize the performance and process capability of the equipment in which our tools are used. For all our equipment products, expendable tools are an integral part of their process capability. We believe our unique ability to simultaneously develop both equipment and tools is a core strength supporting our products' technological differentiation. Products and Services We supply a range of bonding equipment and expendable tools. The following tables reflect net revenue by business segment for the three and nine months ended June 28, 2014 and June 29, 2013, respectively: Three months ended June 28, 2014 June 29, 2013 % of total net % of total net (dollar amounts in thousands) Net revenues revenue Net revenues revenue Equipment $ 165,013 91.4 % $ 125,103 88.6 % Expendable Tools 15,504 8.6 % 16,078 11.4 % $ 180,517 100.0 % $ 141,181 100.0 % Nine months ended June 28, 2014 June 29, 2013 % of total net % of total net (dollar amounts in thousands) Net revenues revenue Net revenues revenue Equipment $ 325,770 87.1 % $ 316,088 87.5 % Expendable Tools 48,066 12.9 % 45,242 12.5 % $ 373,836 100.0 % $ 361,330 100.0 % Equipment Segment We manufacture and sell a line of ball bonders, heavy wire wedge bonders and wafer level 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. 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. Wafer level bonders mechanically apply bumps to die, typically while still in the wafer format, for some variants of the flip chip assembly process. 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 andhigh productivity IConnPS ProCu Plus High-end copper wire applications demanding advanced process capability and high productivity Large area substrate and matrix applications for IConnPS ProCu LA copper wire Large area substrate and matrix applications for IConnPS ProCu Plus LA copper wire High productivity bonder for low-to-medium pin ConnXPS Plus count applications ConnXPS LED LED applications ConnXPS VLED Vertical LED applications Cost performance large areasubstrate and matrix ConnXPS Plus LA applications AT Premier Plus Advanced wafer level bonding application Wedge bonders 3600Plus Power hybrid and automotive modules using either heavy aluminum wire or PowerRibbon® Hybrid and automotive modules using thin aluminum 3700Plus wire Power semiconductors using either aluminum wire or 7200Plus PowerRibbon® Smaller power packages using either aluminum wire 7200HD or PowerRibbon® Power semiconductors using either aluminum wire or PowerFusionPS TL PowerRibbon® Advanced power packages using either aluminum wire PowerFusionPS HL or PowerRibbon® (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: high-performance ball bonders which can be configured for either gold or copper wire. • The IConnPS LA: high-performance large area ball bonders which can be configured for either gold or copper wire. • The ConnXPS Plus: cost-performance ball bonders which can be configured for either gold or copper wire. • The ConnXPS Plus LA: cost-performance large area ball bonders which can be configured for either gold or copper wire. • The ConnXPS LED and ConnXPS VLED: ball bonders targeted specifically at the fast growing LED market. • The IConnPS ProCu Plus: high-performance copper wire ball bonders for advanced wafer nodes at 28 nanometer and below. • The IConnPS ProCu Plus LA: high-performance large area copper wire ball bonders for advanced wafer nodes at 28 nanometer and below. • The AT Premier Plus: ball bonders which utilizes a modified wire bonding process to mechanically place bumps on devices, while still in a wafer format for variants of the flip chip assembly process. Typical applications include CMOS image sensors, SAW filters, MEMS and high brightness LEDs. These applications are commonly used in most, if not all, smartphones available today in the market. In March 2014, we introduced the IConnPS Plus and IConnPS Plus LA, which offer new capabilities and enhanced features. IConnPS Plus LA is the large area version which extends the bondable width up to 87 millimeter. Our Power Series products are setting new standards in wire bonding. Our ball bonders are capable of performing very fine pitch bonding, as well as creating the complex loop shapes needed in the assembly of advanced semiconductor packages and bonding on the latest silicon node-28 nanometer. Most of our installed base of gold wire bonders can also be retrofitted for copper applications through kits we sell separately. Heavy Wire Wedge Bonders We are the leaders in the design and manufacture of heavy wire wedge bonders for the power semiconductor and automotive power module markets. Heavy wire wedge bonders may use either aluminum wire or aluminum ribbon to connect semiconductor chips in power packages, power hybrids and automotive modules for products such as motor control modules or inverters for hybrid cars. In addition, we see some potential use for our wedge bonder products in high reliability interconnections of rechargeable batteries in hybrid and electric automotive applications. Our portfolio of wedge bonding products includes: • The 3600Plus: high speed, high accuracy wire bonders designed for power modules, automotive packages and other heavy wire multi-chip module applications. • The 3700Plus: wire bonders designed for hybrid and automotive modules using thin aluminum wire. • The 7200Plus: dual head wedge bonders designed specifically for power semiconductor applications. • The 7200HD: heavy wire wedge bonders designed for smaller power packages using either aluminum wire or ribbon. • The PowerFusionPS Semiconductor Wedge Bonders - Configurable in single, dual and multi-head configurations using aluminum wire and PowerRibbonTM: • The PowerFusionPS TL: designed for low-cost, high volume power semiconductor applications. • The PowerFusionPS HL: designed for advanced power semiconductor applications. While wedge bonding traditionally utilizes aluminum wire, all of our heavy wire wedge bonders are also available to be modified to bond aluminum ribbon using our proprietary PowerRibbon® process. Aluminum ribbon offers device makers performance advantages over traditional round wire and is being increasingly used for high current packages and automotive applications. 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 and superior indexing accuracy and teach mode. 26-------------------------------------------------------------------------------- Table of Contents 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, a new professional 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 introduced 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 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 and nine months ended June 28, 2014 and June 29, 2013: Three months ended (dollar amounts in thousands) June 28, 2014 June 29, 2013 $ Change % Change Net revenue $ 180,517 $ 141,181 $ 39,336 27.9 % Cost of sales 95,360 75,267 20,093 26.7 % Gross profit 85,157 65,914 19,243 29.2 % Selling, general and administrative 30,093 31,264 (1,171 ) (3.7 )% Research and development 23,480 15,783 7,697 48.8 % Operating expenses 53,573 47,047 6,526 13.9 % Income from operations $ 31,584 $ 18,867 $ 12,717 67.4 % Nine months ended (dollar amounts in thousands) June 28, 2014 June 29, 2013 $ Change % Change Net revenue $ 373,836 $ 361,330 $ 12,506 3.5 % Cost of sales 192,642 195,071 (2,429 ) (1.2 )% Gross profit 181,194 166,259 14,935 9.0 % Selling, general and administrative 81,430 88,754 (7,324 ) (8.3 )% Research and development 60,277 46,243 14,034 30.3 % Operating expenses 141,707 134,997 6,710 5.0 % Income from operations $ 39,487 $ 31,262 $ 8,225 26.3 % 27-------------------------------------------------------------------------------- Table of Contents Our net revenues for the nine months ended June 28, 2014 increased as compared to our net revenues for the nine months ended June 29, 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. Net Revenue Approximately 96.2% and 95.8% of our net revenue for the three months ended June 28, 2014 and June 29, 2013, respectively, was for shipments to customer locations outside of the U.S., primarily in the Asia/Pacific region. Likewise, approximately 94.1% and 96.5% of our net revenue for the nine months ended June 28, 2014 and June 29, 2013, respectively, was for shipments to customer locations outside of the U.S. 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 and nine months ended June 28, 2014 and June 29, 2013: Three months ended (dollar amounts in thousands) June 28, 2014 June 29, 2013 $ Change % Change Equipment $ 165,013 $ 125,103 $ 39,910 31.9 % Expendable Tools 15,504 16,078 (574 ) (3.6 )% Total net revenue $ 180,517 $ 141,181 $ 39,336 27.9 % Nine months ended (dollar amounts in thousands) June 28, 2014 June 29, 2013 $ Change % Change Equipment $ 325,770 $ 316,088 $ 9,682 3.1 % Expendable Tools 48,066 45,242 2,824 6.2 % Total net revenue $ 373,836 $ 361,330 $ 12,506 3.5 % EquipmentThe following table reflects the components of Equipment net revenue change between the three and nine months ended June 28, 2014 and June 29, 2013: June 28, 2014 vs. June 29, 2013 Three months ended Nine months ended (in thousands) Price Volume $ Change Price Volume $ Change Equipment $ 6,204 $ 33,706 $ 39,910 $ 5,924 $ 3,758 $ 9,682 For the three months ended June 28, 2014, the higher Equipment net revenue as compared to the prior year period was primarily due to the higher volume and pricing on our ball bonders and wedge bonders. The higher volume on ball bonders was primarily due to the strong demand for cost-performance machines. The higher volume on wedge bonders was driven by the sale of the new product family which was introduced in the third quarter of FY2013. In addition to the higher volume, pricing on our ball bonders and wedge bonders were also higher due to favorable product mix. For the nine months ended June 28, 2014, the higher Equipment net revenue as compared to the prior year period was primarily due to the favorable product mix for ball bonders and wedge bonders. 28-------------------------------------------------------------------------------- Table of Contents Expendable Tools The following table reflects the components of Expendable Tools net revenue change between the three and nine months ended June 28, 2014 and June 29, 2013: June 28, 2014 vs. June 29, 2013 Three months ended Nine months ended (in thousands) Price Volume $ Change Price Volume $ Change Expendable Tools $ (1,029 ) $ 455 $ (574 ) $ (567 ) $ 3,391 $ 2,824 For the three months ended June 28, 2014, the lower Expendable Tools net revenue as compared to the prior year period was primarily due to the price reduction in our wire bonding tools business and the adjustment relating to the pricing discounts given to certain distributors that resulted in the decrease in the selling, general and administrative expense ("SG&A") and the revenue in our wedge bonder business. For the nine months ended June 28, 2014, the higher Expendable Tools net revenue as compared to the prior period was primarily due to volume increase in wire bonding business and wedge bonder tools. This was partially offset by price reduction in wire bonding tools business and adjustment of the pricing discounts given to certain distributors as explained above. Gross Profit The following tables reflect gross profit by business segment for the three and nine months ended June 28, 2014 and June 29, 2013: Three months ended (dollar amounts in thousands) June 28, 2014 June 29, 2013 $ Change % Change Equipment $ 76,264 $ 57,471 $ 18,793 32.7 % Expendable Tools 8,893 8,443 450 5.3 % Total gross profit $ 85,157 $ 65,914 $ 19,243 29.2 % Nine months ended (dollar amounts in thousands) June 28, 2014 June 29, 2013 $ Change % Change Equipment $ 151,837 $ 140,884 $ 10,953 7.8 % Expendable Tools 29,357 25,375 3,982 15.7 % Total gross profit $ 181,194 $ 166,259 $ 14,935 9.0 % The following tables reflect gross profit as a percentage of net revenue by business segment for the three and nine months ended June 28, 2014 and June 29, 2013: Three months ended Basis Point June 28, 2014 June 29, 2013 Change Equipment 46.2 % 45.9 % 30 Expendable Tools 57.4 % 52.5 % 490 Total gross margin 47.2 % 46.7 % 50 Nine months ended Basis Point June 28, 2014 June 29, 2013 Change Equipment 46.6 % 44.6 % 200 Expendable Tools 61.1 % 56.1 % 500 Total gross margin 48.5 % 46.0 % 250 29-------------------------------------------------------------------------------- Table of Contents Equipment The following table reflects the components of Equipment gross profit change between the three and nine months ended June 28, 2014 and June 29, 2013: June 28, 2014 vs. June 29, 2013 Three months ended Nine months ended (in thousands) Price Cost Volume $ Change Price Cost Volume $ Change Equipment $ 6,204 $ (2,923 ) $ 15,512 $ 18,793 $ 5,924 $ 2,707 $ 2,322 $ 10,953 For the three months ended June 28, 2014, the higher Equipment gross profit as compared to the prior year period was primarily due to the higher volume on our ball bonders and wedge bonders. The higher volume on ball bonders was primarily due to the strong demand for cost-performance machines. The higher volume on wedge bonders was driven by the sale of the new product family which was introduced in the third quarter of FY2013. In addition to the higher volume, we experienced higher pricing offset by higher cost due to product mix. For the nine months ended June 28, 2014, the higher Equipment gross profit as compared to the prior year period was primarily due to the higher volume and higher pricing on our ball bonders and wedge bonders due to favorable product mix. In addition, the manufacturing costs were lower due to the efficiency from the continued consolidation of our production facilities. Expendable Tools The following table reflects the components of Expendable Tools gross profit change between the three and nine months ended June 28, 2014 and June 29, 2013: June 28, 2014 vs. June 29, 2013 Three months ended Nine months ended (in thousands) Price Cost Volume $ Change Price Cost Volume $ Change Expendable Tools $ (1,029 ) $ 1,161 $ 318 $ 450 $ (567 ) $ 2,474 $ 2,075 $ 3,982 For the three and nine months ended June 28, 2014, the higher Expendable Tools gross profit as compared to the prior year period primarily due to higher volume and lower cost due to higher absorption of the fixed manufacturing costs. This was partially offset by the adjustment relating to the pricing discounts given to certain distributors that resulted in the decrease in the SG&A expense and the revenue in our wedge bonder business. Operating Expenses The following tables reflect operating expenses as a percentage of net revenue for the three and nine months ended June 28, 2014 and June 29, 2013: Three months ended Basis point June 28, 2014 June 29, 2013 change Selling, general & administrative 16.7 % 22.1 % (540 ) Research & development 13.0 % 11.2 % 180 Total 29.7 % 33.3 % (360 ) Nine months ended Basis point June 28, 2014 June 29, 2013 change Selling, general & administrative 21.8 % 24.6 % (280 ) Research & development 16.1 % 12.8 % 330 Total 37.9 % 37.4 % 50 30-------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative ("SG&A") SG&A decreased $1.2 million for the three months ended June 28, 2014 as compared to the three months ended June 29, 2013 primarily due to net impact of the adjustment relating to the pricing discounts given to certain distributors of $1.9 million that resulted in the decrease in the SG&A expense and the revenue, decrease in amortization expenses of $1.0 million due to intangible assets relating to the Orthodyne customer relationships being fully amortized, and a decrease of severance expenses of $0.7 million. This was partially offset by an increase in incentive compensation of $1.4 million due to higher net revenue for the current fiscal quarter and an increase in professional services of $0.9 million. SG&A decreased $7.3 million for the nine months ended June 28, 2014 as compared to the nine months ended June 29, 2013 primarily due to a decrease in amortization expenses of $2.9 million due to the intangible assets relating to the Orthodyne customer relationships being fully amortized, net favorable variance of $1.8 million in foreign exchange rates due to the strengthening of the U.S dollar against the foreign currency denominated liabilities which increased in the current period, net impact of the adjustment of the pricing discounts given to certain distributors of $1.3 million that resulted in the decrease in the SG&A expense and the revenue, a decrease in depreciation expense of $0.7 million as a result of accelerated depreciation being recorded in FY13 relating to the move of the new corporate headquarters in Singapore, and a decrease in staff costs of $0.6 million due to lower headcount. Research and Development ("R&D") R&D expense increased $7.7 million for the three months ended June 28, 2014 as compared to the three months ended June 29, 2013 primarily due to additional investment in the development of new products. R&D expense increased $14.0 million for the nine months ended June 28, 2014 as compared to the nine months ended June 29, 2013, during which we recognized a Research Incentive Scheme for Companies grant of $0.7 million. In the nine months ended June 28, 2014, we invested an additional $13.2 million in the development of new products. Income from Operations For the three months ended June 28, 2014, total income from operations was higher by $12.7 million. This was primarily due to higher revenue and margin for equipment sales as explained above. For the nine months ended June 28, 2014, total income from operations was higher by $8.2 million. This was primarily due to higher revenue and margin for equipment sales as explained above. Interest Income and Expense The following tables reflect interest income and interest expense for the three and nine months ended June 28, 2014 and June 29, 2013: Three months ended (dollar amounts in thousands) June 28, 2014 June 29, 2013 $ Change % Change Interest income $ 256 $ 267 $ (11 ) (4.1 )% Interest expense $ (316 ) $ - $ (316 ) Nine months ended (dollar amounts in thousands) June 28, 2014 June 29, 2013 $ Change % Change Interest income $ 878 $ 629 $ 249 39.6 % Interest expense $ (732 ) $ (1 ) $ (731 ) Interest income for the nine months ended June 28, 2014 was higher as compared to the nine months ended June 29, 2013 due to higher interest income derived from short term investments and a larger cash and cash equivalents balance. Interest expense for the three months and nine months ended June 28, 2014 was attributable to the interest on financing obligation relating to the new building. (Refer to Note 7 of Item 1) 31-------------------------------------------------------------------------------- Table of Contents Provision for Income Taxes The following table reflects the provision for income taxes and the effective tax rate for the nine months ended June 28, 2014 and June 29, 2013: Nine months ended (in thousands) June 28, 2014 June 29, 2013 Income from operations before income taxes $ 39,633 $ 31,890 Provision for income taxes 5,904 2,063 Net income $ 33,729 $ 29,827 Effective tax rate 14.9 % 6.5 % For the nine months ended June 28, 2014, the effective income tax rate differed from the federal statutory rate primarily due to tax from foreign operations at a lower effective tax rate than the U.S. statutory rate and the impact of tax holidays, offset by an increase for deferred taxes on un-remitted earnings, discrete foreign tax liabilities, other U.S. current and deferred taxes and additional domestic and foreign expenses or benefits related to returns filed in the current period. For the nine months ended June 29, 2013, the effective income tax rate differed from the federal statutory rate primarily due to tax from foreign operations at a lower effective tax rate than the U.S. statutory rate, the release of a prior year reserve and the impact of tax holidays, offset by an increase for deferred taxes on un-remitted earnings, other U.S. current and deferred taxes and additional domestic and foreign expenses or benefits related to returns filed in the current period. The effective tax rate for the period ended June 28, 2014 of 14.9% increased from the effective rate for the fiscal period ended September 28, 2013 of 6.5% primarily due to the increased earnings in countries with higher statutory rates, additional discrete foreign tax liabilities and the release of a reserve in the prior period. The Company's future effective tax rate would be affected if earnings were lower than anticipated in countries where it has lower statutory rates and higher than anticipated in countries where it has higher statutory rates, by changes in the valuation of its deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. The Company regularly assesses the effects resulting from these factors to determine the adequacy of its provision for income taxes. LIQUIDITY AND CAPITAL RESOURCES The following table reflects total cash and investments as of June 28, 2014 and September 28, 2013: As of (dollar amounts in thousands) June 28, 2014 September 28, 2013 Change Cash and cash equivalents $ 597,457 $ 521,788 $ 75,669 Percentage of total assets 63.6 % 60.5 % The following table reflects summary Consolidated Statement of Cash Flow information for the nine months ended June 28, 2014 and June 29, 2013: Nine months ended (in thousands) June 28, 2014 June 29, 2013 Net cash provided by operating activities $ 84,189 $ 68,180 Net cash used in investing activities (8,672 ) (647 ) Net cash provided by financing activities 205 868 Effect of exchange rate changes on cash and cash equivalents (53 ) (152 ) Changes in cash and cash equivalents $ 75,669 $ 68,249 Cash and cash equivalents, beginning of period 521,788 440,244 Cash and cash equivalents, end of period $ 597,457 $ 508,493 32-------------------------------------------------------------------------------- Table of Contents Nine months ended June 28, 2014 Continuing Operations Net cash provided by operating activities was primarily the result of net income of $33.7 million, non-cash adjustments of $21.0 million and working capital changes of $29.5 million. The change in working capital was primarily driven by increase in accounts payable of $30.3 million, decrease in accounts receivable of $8.6 million, decrease in the prepaid expenses and other current assets of $4.1 million, increase in income taxes payables of $2.6 million and others of $1.8 million. This was partially offset by a increase in inventories of $17.9 million. The increase in accounts payable and inventories was due to higher purchases during the third quarter of fiscal 2014 in anticipation of an increase in production in the fourth quarter of fiscal 2014. The decrease in accounts receivable was due to cash collections in line with higher sales in the fourth quarter of fiscal 2013 due to variations in the timing of our customer orders within the seasonal cycle, as customers tend to add or replace equipment capacity by the end of the September quarter. The reduction in prepaid expenses and other current assets was due to net refunds of $2.7 million deposit in relation to the Agreement to Develop and Lease (the "ADL") following the execution of the Lease Agreement, and a reduction of $2.7 million in tax refunds offset by higher $0.6 million of goods and services tax. Net cash used by investing activities was primarily due to capital expenditures of $9.3 million and purchase of short-term investments of $9.2 million offset by the maturity of short-term investments of $9.8 million. Net cash provided by financing activities relates to proceeds from the exercise of stock options of $1.0 million offset by reversal of excess tax benefits from stock-based compensation arrangements of $0.8 million. Nine months ended June 29, 2013 Continuing Operations Net cash provided by operating activities was primarily the result of working capital changes, which provided $68.2 million driven by decreases in accounts receivables of $42.7 million due to cash collections in line with higher sales in the fourth quarter of fiscal 2012 due to variations in the timing of our customer orders within the seasonal cycle who tend to add or replace equipment capacity by the end of the September quarter, a reduction in inventories of $10.8 million partially offset by a decrease in accounts payable and accrued expenses of $31.3 million due to lower purchases and global shutdown in the first nine months of fiscal 2013 and decreases in income tax payable of $5.5 million. In addition, net income of $29.8 million plus non-cash adjustments of $22.1 million contributed to net cash provided by operating activities. Net cash used by investing activities was primarily due to capital expenditure of $6.0 million offset by the disposal of a building of $5.3 million. Net cash provided by financing activities relate to proceed from the exercise of stock options. Fiscal 2014 Liquidity and Capital Resource Outlook We expect our fiscal 2014 capital expenditures to be from $12.0 to $13.0 million of which approximately $6.4 million is related to leasehold improvements for our Singapore facility under the ADL. Other expenditures are anticipated to be used for R&D projects, enhancements to our manufacturing operations in Asia and improvements to our information technology infrastructure. We also consider strategic business opportunities from time to time which could require substantial capital outlays, including possible acquisitions, joint ventures, alliances or other business arrangements. We believe that our existing cash and investments and anticipated cash flows from operations will be sufficient to meet our liquidity and capital requirements for at least the next twelve months. Our liquidity is affected by many factors, some based on normal operations of our business and others related to global economic conditions and industry uncertainties, which we cannot predict. We also cannot predict economic conditions and industry downturns or the timing, strength or duration of recoveries. We intend to continue to use our cash for working capital needs and for general corporate purposes. We may seek, as we believe appropriate, additional debt or equity financing which would provide capital for corporate purposes, working capital funding, additional liquidity needs or to fund future growth opportunities. The timing and amount of potential capital requirements cannot be determined at this time and will depend on a number of factors, including our actual and projected demand for our products, semiconductor and semiconductor capital equipment industry conditions, competitive factors, and the condition of financial markets. 33-------------------------------------------------------------------------------- Table of Contents Other Obligations and Contingent Payments Agreement to Develop and Lease and Lease Agreement On May 7, 2012, Kulicke & Soffa Pte Ltd. ("Pte" or the "Tenant"), the Company's wholly owned subsidiary, entered into the ADL with DBS Trustee Limited as trustee of Mapletree Industrial Trust (the "Landlord"). Pursuant to the ADL, the Landlord agreed to develop a building at 23A Serangoon North Avenue 5, #01-01 K&S Corporate Headquarters, Singapore 554369 (the "Building"). The lease has a ten-year non-cancellable initial term (the "Initial Term") and contains options to renew for a further two ten-year terms. The annual rent and service charge for the Initial Term range between approximately $4 million to approximately $5 million Singapore dollars. The Tenant has a right of first refusal for all space that becomes available in the Building, and the Landlord has agreed to make available a certain amount of additional space for rental by the Tenant at the Tenant's option, which may be exercised at certain points during the second half of the Initial Term. Subject to the Tenant renting a minimum amount of space for a certain period, the Tenant has partial surrender rights. In addition, the Tenant has termination rights after renting the Initial Premises (as defined below) for a certain period of time. The Building was completed on December 1, 2013 and Pte signed a Lease Agreement with the Landlord to lease from the Landlord approximately 198,000 square feet (the "Initial Premises"), representing approximately 70% of the Building. 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 were required to perform 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, which therefore 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 6.33% 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. Other Obligations and Contingent Payments In accordance with U.S. generally accepted accounting principles, certain obligations and commitments are not required to be included in the Consolidated Balance Sheets and Statements of Operations. These obligations and commitments, while entered into in the normal course of business, may have a material impact on our liquidity. Certain of the following commitments as of June 28, 2014 are appropriately not included in the Consolidated Balance Sheets and Statements of Operations included in this Form 10-Q; however, they have been disclosed in the table below for additional information. 34-------------------------------------------------------------------------------- Table of Contents The following table reflects obligations and contingent payments under various arrangements as of June 28, 2014: Payments due by fiscal period (in thousands) Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years Current and long-term liabilities: Pension plan obligations $ 1,982 $ - $ - $ - $ 1,982 Severance (1) 3,848 1,290 828 - 1,730 Operating lease retirement obligations 1,536 182 310 - 1,044 Long-term income taxes payable 2,702 - - - 2,702 Total Obligations and Contingent Payments reflected on the Consolidated Financial Statements $ 10,068 $ 1,472 $ 1,138 $ - $ 7,458 Contractual Obligations: Inventory purchase obligations (2) $ 133,542 $ 133,542 $ - $ - $ - Operating lease obligations (3) 29,716 3,396 6,366 5,118 14,836 Total Obligations and Contingent Payments not reflected on the Consolidated Financial Statements $ 163,258 $ 136,938 $ 6,366 $ 5,118 $ 14,836 (1) In accordance with regulations in some of our foreign subsidiaries, we are required to provide for severance obligations that are payable when an employee leaves the Company. (2) We order inventory components in the normal course of our business. A portion of these orders are non-cancellable and a portion may have varying penalties and charges in the event of cancellation. (3) We have minimum rental commitments under various leases (excluding taxes, insurance, maintenance and repairs, which are also paid by us) primarily for various facility and equipment leases, which expire periodically through 2018 (not including lease extension options, if applicable). On May 7, 2012, Pte entered into the ADL with the Landlord. Pursuant to the ADL, the Landlord agreed to develop a Building. The Building was completed on December 1, 2013 and Pte signed a Lease Agreement with the Landlord to lease from the Landlord approximately 198,000 square feet Initial Premises, representing approximately 70% of the Building. The term for the rental of the Initial Premises is 10 years. The Tenant has the option to renew for two additional ten-year terms. The annual rent and service charge for the Initial Term range from approximately $4 million to approximately $5 million Singapore dollars. The Tenant has a right of first refusal for all space that becomes available in the Building and the Landlord has agreed to make available a certain amount of additional space for rental by the Tenant at the Tenant's option which may be exercised at certain points during the second half of the Initial Term. Subject to the Tenant renting a minimum amount of space for a certain period, the Tenant has partial surrender rights. In addition, the Tenant has termination rights after renting the Initial Premises for a certain period of time. 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. As a result of the Company's continued involvement during the lease term, the Company did not fulfill the criteria to apply sale-leaseback accounting under ASC 840. Therefore, at completion, the building remained on the Consolidated Balance Sheet, and the corresponding financing obligation was reclassified to long-term liability. As of June 28, 2014, we recorded a financing obligation of $19.6 million. The financing obligation is not reflected in the table above. Off-Balance Sheet Arrangements Bank Guarantee On May 7, 2012, Pte obtained a bank guarantee from DBS Bank Ltd., which was furnished to the Landlord and expired on May 9, 2013, at which time Pte replaced the bank guarantee with a cash deposit of an equivalent amount. The cash deposit was refunded on December 6, 2013. 35-------------------------------------------------------------------------------- Table of Contents 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 Agreement. The bank guarantee is effective from December 1, 2013 to November 30, 2014. We currently do not have any other off-balance sheet arrangements, such as derivatives, contingent interests or obligations associated with variable interest entities. 36-------------------------------------------------------------------------------- Table of Contents |