Cert no. SCS-COC-00648
To Our Shareholders
I would like to open this annual letter to
Kulicke & Soffa’s shareholders by
returning to a theme I have discussed in
the past few letters; our overarching goal
of structuring K&S “so as to show
compelling financial performance
throughout the semiconductor cycle,
while generating growth by extending
our position as the technology leader in
our marketplace.”
Over the last few years our focus has
been biased towards the financial
performance aspect of these goals,
driving us to divest poorly performing
product lines, consolidate manufacturing
in low cost locations, and reengineer
many of our business process so as to
reduce operating expenses. These sorts
of cost reduction/efficiency
improvement activities are never
finished; the completion of one project
is merely the starting point for the next.
Nonetheless, our progress over the last
few years is such that in 2007 we were
able to rebalance our efforts, increasing
our investments in future growth. Our
acquisition of the Swiss die bonder
maker Alphasem roughly doubles the
TAM of our equipment business. Our
plan for our die bonder business is
centered on the development of a next-
generation die bonder platform,
currently scheduled for launch in 2009.
While the expenses of that program are
a drag on current profitability, we
believe that these investments will more
than pay for themselves in future
profitable, revenue growth.
Our die bonder business typifies the
principle challenge confronting K&S:
finding the appropriate balance between
short-term financial performance,
especially at the bottom of the
semiconductor cycle, and investing in
future growth. Through hard
experience we’ve developed a few
simple principles to help us achieve that
balance.
• Maintain Product Leadership
K&S typically competes on the
basis of technologic leadership.
Even when the semiconductor
industry slips into the slow part
of its cycle, semiconductor
technology development
continues. Feature size
reductions in wafer fabs trickle
down to the back end as a need
for more accurately placed die,
and finer pitch wire bonding,
with longer and lower wire loops.
Portable consumer devices mean
smaller packages and stacked
die. Eight hundred dollar gold
means thinner wires, or
acceleration in the move to
copper wires. These trends, plus
our customer’s inexorable
demands for price reductions
and/or performance increases,
play out in all our products, and
can only be met through
continuing investments in
engineering, sometimes focused
on continuous improvement of
existing products and sometimes
through development of next-
generation products. We have
plenty of both efforts in our
engineering pipeline.
• Stay close to our customers A
major K&S theme over the last
couple of years has been to
broaden our served market.
Especially in 2007 we saw
demand from customers and/or
application niches we previously
underserved. Not only do we
need to solidify these new
relationships, we need to continue
this market share expansion
activity. And just like
engineering, this work is cycle
independent, requiring just as
much effort and investment at the
bottom of the cycle as at the top.
• Lower our costs It’s hard to go
wrong reducing manufacturing
costs or improving organizational
efficiencies so as to deliver higher
levels of customer satisfaction
with lower operating expenses.
• Strengthen the Company’s
balance sheet K&S’ business is
characterized by revenue
cyclicality, short product life
cycles, and rapid changes in
technology. Combined, these
indicate risk. Besides constant
vigilance, our best hedge against
risk is a strong balance sheet.
Today we’re accumulating cash in
anticipation of $130 million in
debt maturing between now and
the middle of 2010 and we’ve set
for ourselves a goal of being at
zero net debt (as opposed to
today’s $81 million of net debt).
We believe we are faithfully honoring
these principles, and are, over the long
run, building a bigger, more profitable
K&S. We’ll be bigger because we’re
enlarging our served markets,
expanding our wire bonder customer
list, and because we added die bonders
to our product line. We’ll be more
profitable as our engineering
investments pay off with the launch of
new products this year, and especially
with the launch of our next-generation
die bonder in 2009, and as other
ongoing investments in cost reduction
mature.
In the short term, measuring the effect
of our efforts on our financial results is
difficult since cyclical changes in
demand overwhelm hard fought gains
in market share or profitability. This is
equally true of our stock price, which
seems more a Wall Street bet on next
quarter’s wire bonder demand, than any
indication of the underlying value of
the Company. Nonetheless, we believe
that as we execute our business plan in
the context of the above described
principles, you will be rewarded
through your ownership of a bigger,
more profitable Kulicke & Soffa.
C. Scott Kulicke
Chairman & Chief Executive Officer
Kulicke & Soffa Industries, Inc.
December 19, 2007
Selected Financial Highlights
(Continuing Operations Only)
For the years ended September 30
(in thousands of U.S dollars, except per share data)
2007
2006
2005
2004
Statement of Operations Data:
Net sales
Research and development expense, net
Interest income (expense), net
Net income after tax
Basic Income Per Share from continuing operations
Diluted Income Per Share from continuing operations
September 29
Balance Sheet Data:
Working Capital
Property, plant and equipment, net
Total assets
Long-term debt
Shareholders' equity (deficit)
Other Selected Data:
Capital expenditures
Depreciation and amortization expense
Return on Invested Capital *
$700,404
$696,311
$475,542
$595,934
50,685
3,990
37,730
$0.67
$0.57
37,657
795
28,495
(1,578)
28,427
(9,357)
77,032
33,337
74,717
$1.40
$1.14
$0.65
$0.52
$1.47
$1.17
2007
2006
2005
2004
$291,759
$248,978
$186,049
$175,953
37,953
512,600
251,412
83,255
28,487
405,501
195,000
32,428
386,496
270,000
35,577
476,958
270,000
79,306
(31,748)
67,020
$5,763
$10,911
17.2%
$9,496
$9,523
36.9%
$7,788
$12,963
23.6%
$9,807
$13,714
55.0%
Notes:
The financial data presented above should be read in conjunction with the consolidated financial statements, related notes, and other financial
information included and incorporated by reference herein. See Item 7. “Management’s Analysis of Financial Condition and Results of
Operations” and Item 8. "Financial Statements and Supplimentary Data" of our Annual Report on Form 10-K for the fiscal year ended
September 29, 2007 included herein.
In addition to historical information, this report, including the chairman's letter to shareholders on the previous two pages, contains statements
relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are subject to the safe harbor provisions created by these
statutes. See Item 1. “Business” and Item 7. “Management’s Analysis of Financial Condition and Results of Operations” of our Annual Report
on Form 10-K for the fiscal year ended September 29, 2007 for a discussion of important factors that could cause actual results to differ
significantly from those expressed or implied by forward-looking statements contained in this report.
* The Company defines Return On Invested Capital (ROIC) as Operating Income divided by adjusted net Invested Capital. Total Assets are
adjusted for discontinued operations' assets held for sale. Net Invested Capital is defined as Total Assets less Current Liabilities. We believe
ROIC is a useful measure in providing investors with information regarding our performance. ROIC is a widely accepted measure of earning
efficiency in relation to capital employed. We believe that increasing the return on capital employed, as measured by ROIC, is an effective way
to sustain and increase shareholder value. Reconcilliation to the most comparable U.S. GAAP measurements are shown on the following page
of this report.
KULICKE AND SOFFA INDUSTRIES, INC.
RECONCILIATION OF RETURN ON INVESTED CAPITAL *
(Continuing Operations Only)
For the years ended September 30
(in thousands of U.S dollars)
Numerator:
Reported Operating Income
Add: Depreciation/Amortization
Less: Gain on sale of assets
Less: Correction of prior years
2007
2006
2005
2004
$36,446
$81,986
$39,751
$102,167
10,911
9,523
4,544
4,301
12,963
1,690
13,714
938
Adjusted Net Operating Income (a)
$47,357
$82,664
$51,024
$114,943
Denominator:
Reported Balance Sheet Data:
Cash & Cash Equivalents
Non-cash Assets
Total assets
Less: Current liabilities
Net invested capital
Less: Cash exceeding $75 million
Less: Current assets of discontinued operations
Less: Non-current assets of discontinued operations
Add: Current liabilities of discontinued operations
169,910
342,690
512,600
142,450
157,283
248,218
405,501
95,090
95,369
291,127
386,496
119,511
95,766
381,192
476,958
100,141
370,150
310,411
266,985
376,817
94,910
82,283
3,832
20,369
23,828
12,704
5,950
20,766
28,057
127,730
8,895
Adjusted Net Invested Capital (b)
275,240
224,296
216,034
209,159
Return On Invested Capital (ROIC) (a)/(b)
17.2%
36.9%
23.6%
55.0%
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 29, 2007
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 number 0-121
KULICKE AND SOFFA INDUSTRIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
PENNSYLVANIA
(State or Other Jurisdiction of Incorporation)
23-1498399
(IRS Employer Identification No.)
1005 VIRGINIA DRIVE, FORT WASHINGTON, PENNSYLVANIA 19034
(Address of principal executive offices)
Registrants telephone number including area code (215) 784-6000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The aggregate market value of the registrant's common stock (its only voting stock and common equity) held by non-affiliates of the registrant as of
March 31, 2007 was approximately $526,792,393 based upon the closing sale price of the common stock on the Nasdaq Global Market (Reference is
made to Part II, Item 5 herein for a statement of assumptions upon which this calculation is based).
As of December 5, 2007 there were 53,269,669 shares of the registrant's common stock, without par value, outstanding.
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement for the 2008 Annual Shareholders' Meeting to be filed on or about January 3, 2008 are incorporated
by reference into Part II, Item 5 and Part III, Items 10, 11, 12, 13 and 14 herein of this Report. Such Proxy Statement, except for the parts therein
which have been specifically incorporated by reference, shall not be deemed "filed" for the purposes of this Report on Form 10-K.
[This page intentionally left blank]
KULICKE AND SOFFA INDUSTRIES, INC.
2007 Annual Report on Form 10-K
Table of Contents
Part I
Page
2
Item 1.
Business
Item 1A. Risk Factors 9
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Submission of Matters to a Vote of Security Holders
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Part III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions and Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Signatures
Part IV
1
19
19
19
20
21
23
42
42
80
80
81
82
82
83
83
83
84
88
Forward-Looking Statements
PART I
In addition to historical information, this filing contains statements relating to future events or our future results. These
statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended
(the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and
are subject to the safe harbor provisions created by statute. Such forward-looking statements include, but are not limited
to, statements that relate to our future revenue, product development, demand forecasts, competitiveness, operating
expenses, cash flows, profitability, gross margins, and benefits expected 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 wire and die bonder equipment and packaging materials.
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 and our future results
could differ significantly from those expressed or implied by our forward-looking statements. These risks and
uncertainties include, without limitation, those described below and under the heading “Risk Factors” within our 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.
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 prediction of actual results.
Item 1. BUSINESS
Kulicke and Soffa Industries, Inc. (“K&S” or the “Company”) designs, manufactures and markets capital equipment
and packaging materials as well as services, maintains, repairs and upgrades equipment, all used to assemble
semiconductor devices. We are currently the world's leading supplier of semiconductor wire bonding assembly
equipment, according to VLSI Research, Inc. Our business is divided into two product segments:
•
•
equipment, and
packaging materials.
We believe we are the only major supplier to the semiconductor assembly industry that provides customers with
semiconductor die bonding and wire bonding equipment along with many of the complementary packaging materials. In
addition, we believe the ability to control both the equipment and packaging material assembly-related products provides
us with a significant competitive advantage and should allow us to develop system solutions to the new technology
challenges inherent in assembling and packaging next-generation semiconductor devices.
On November 3, 2006, we completed the acquisition of Alphasem, a leading supplier of die bonder equipment, from
Dover Technologies International, Inc., a subsidiary of Dover Corporation. The consideration for the acquisition was
approximately $29.3 million in cash including capitalized acquisition costs and after working capital adjustments.
Alphasem is included in our Equipment segment.
2
Our goal is to be both the technology leader and the lowest cost supplier in each of our major lines of business.
Accordingly, we continue to lower our cost structure by consolidating operations, moving certain of our manufacturing
to Asia, moving a portion of our supply chain to lower cost suppliers and designing higher performing, lower cost
equipment. Cost reduction efforts are an important part of our normal ongoing operations and we expect to continue to
further drive down our cost structure, while not diminishing our product quality.
Unless otherwise indicated, amounts provided throughout this Form 10-K relate to continuing operations only.
K&S was incorporated in Pennsylvania in 1956. Our principal offices are located at 1005 Virginia Drive, Fort
Washington, Pennsylvania 19034 and our telephone number is (215) 784-6000. We maintain a website with the
address www.kns.com. We are not including the information contained on our website as a part of, or incorporating it
by reference into, this filing. We make available free of charge (other than an investor’s own Internet access charges)
on or through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and any amendments to these reports, as soon as reasonably practicable after the material is electronically filed
with or otherwise furnished to the Securities and Exchange Commission (“SEC”). Our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are also available on
the SEC website at www.sec.gov.
The fiscal year end for fiscal 2005, 2006 and 2007 was September 30, 2005, September 30, 2006 and September 29,
2007, respectively.
Products and Services
We offer a range of bonding equipment and packaging materials. The table below reflects net revenue for each
business segment for fiscal 2005, 2006 and 2007:
( in th o u s a n d s )
E q u ip m e n t
P a c k a g in g M a te r ia ls
T o ta l
2 0 0 5
$
2 0 1 ,6 0 8
2 7 3 ,9 3 4
F is c a l
2 0 0 6
$
3 1 9 ,7 8 8
3 7 6 ,5 2 3
$
2 0 0 7
3 1 6 ,7 1 8
3 8 3 ,6 8 6
$
4 7 5 ,5 4 2
$
6 9 6 ,3 1 1
$
7 0 0 ,4 0 4
Our equipment sales have been, and are expected to remain, highly volatile due to the semiconductor industry’s need
for new capability and capacity. Packaging Materials unit sales tend to be less volatile, following the trend of total
semiconductor unit production; however, fluctuations in gold prices, which are included in our Packaging Materials
segment, can have a significant impact on Packaging Material net revenues.
See Note 12 to our Consolidated Financial Statements, included in Item 8 of this report, for financial results by
business segment and sales by geographic location.
Equipment
We manufacture and market a line of wire bonders and die bonders. Wire bonders are used to connect very fine wires,
typically made of gold, aluminum or copper, between the bond pads of the die and the leads on its package. Die
bonders are used to attach a semiconductor device, or die, to the package which will house the device. We believe our
equipment offers competitive advantages by providing customers with high productivity/throughput and superior
package quality/process control. In particular, our wire bonding equipment is capable of performing very fine pitch
bonding as well as creating the sophisticated wire loop shapes that are needed in the assembly of advanced
semiconductor packages. Our principal products are:
Integrated Circuit (“IC”) Ball Bonders
Automatic IC ball bonders represent a majority of our semiconductor equipment business. As part of our
competitive strategy, we seek to continually improve our models and periodically introduce new or improved
models of our IC ball bonders. Each new or improved model is designed to increase both productivity and
process capability compared to the predecessor model. Our current models, Maxum Ultra and Maxum Elite ball
bonders improved productivity by approximately 10% over their predecessor models and offer various other
performance improvements.
3
IC Die Bonders
In November 2006, we acquired the Alphasem die bonder product lines, consisting of the SwissLine and
EasyLine models. Die bonders are used by our existing wire bonder customers. We expect to utilize the same
competitive strategy as we use for our wire bonder business, including developing new models which both
improve the productivity of the die bonders and increase the size of the market served by the new models.
Specialty Die Bonders
Our die bonder product line also includes a series of specialty bonders, consisting of several equipment models
based on our die bonder platform. These models are used for various assembly processes including, but not
limited to: die sorting, power device assembly, and microelectromechanical systems (MEMS) assembly.
Specialty Wire Bonders
Our wire bonders target specific markets. Our Model 8098 targets the large area ball bonder market and is
designed for wire bonding hybrid applications, chip on board applications, and other large area applications. We
offer a wafer stud bumper, the AT Premier. The AT Premier is targeted for gold-to-gold interconnect in the flip
chip market. With industry-leading speed and technology, we believe our machine lowers the cost of ownership
for stud bumping, enabling a wider range of applications than previously served. We also manufacture and
market a line of manual wire bonders.
Packaging Materials
We manufacture and market a range of semiconductor packaging materials and expendable tools for the
semiconductor packaging and assembly market. Our packaging materials are designed for use on both our own and our
competitors’ assembly equipment. A wire bonder uses a capillary or wedge tool and bonding wire much like a sewing
machine uses a needle and thread. Our principal products are:
Bonding Wire
We manufacture gold, aluminum and copper wire used in the wire bonding process. This wire is
bonded to the chip surface and package substrate by the wire bonder and becomes a permanent part
of the semiconductor package. We produce wire in a large array of materials, diameters, properties
and packaging to satisfy a wide range of ball bonding, wedge bonding and wafer/stud bumping
applications.
Expendable Tools
Our expendable tools include a wide variety of capillaries, wedges, die collets and wafer saw
blades. These tools are developed for a broad range of applications, providing end-to-end solutions
for our customers. Capillaries and wedges attach the wire to the semiconductor chip, guide the wire
during loop formation, attach the wire to the package substrate and finally cut the wire allowing the
bonding process to be repeated. Die collets are used on die bonding equipment to pick up and place
die onto lead frames or substrates. Saw blades are used to cut silicon wafers into individual
semiconductor die.
Customers
Our major customers include large semiconductor manufacturers and their subcontract assemblers and vertically
integrated manufacturers of electronic systems. Customers may vary from year-to-year based on their capital
investment and operating expense budgets, and overall industry trends.
4
The following chart reflects our top ten end-use customers, based on net revenue, for each of the last three fiscal years:
Fiscal 2007
1. Advanced Semiconductor
Engineering*
Fiscal 2006
1. Advanced Semiconductor
2. ST Microelectronics*
Engineering*
Fiscal 2005
1. Advanced Semiconductor
Engineering*
2. ST Microelectronics*
3. Siliconware Precision Industries 3. STATS ChipPAC
4. Infineon Technologies
5. Intel
6. STATS ChipPAC
7. Samsung
8. Advanced Micro Devices
9. National Semiconductor
10. Amkor Technologies
4. Siliconware Precision Industries
5. Texas Instruments
6. Infineon Technologies
7. United Test and Assembly Center 7. STATS ChipPAC
8. Spansion
9. Samsung
10.National Semiconductor
8. Samsung
9. Hynix Semiconductor Inc.
10. Spansion LLC
2. ST Microelectronics*
3. Siliconware Precision Industries, Ltd.
4. Infineon Technologies
5. United Test and Assembly Center
6. Amkor Technology Inc.
* Accounted for more than 10% of total fiscal year net revenue.
We believe developing long-term relationships with our customers is critical to our success. By establishing these
relationships with semiconductor manufacturers, semiconductor subcontract assemblers, and vertically integrated
manufacturers of electronic systems, we gain insight into our customers’ future IC packaging strategies. This insight
assists us in our efforts to develop material, equipment, and process solutions that address our customers’ future
assembly requirements.
International Operations
Our customers are primarily located in or have operations in the Asia/Pacific region. Approximately 95%, 93% and
96% of our fiscal 2005, 2006 and 2007 net revenues, respectively, were to customer locations outside of the United
States, and we expect sales outside of the United States will continue to represent a substantial majority of our future
revenues.
For a discussion of our financial information about geographic areas, see our Consolidated Financial Statements and
corresponding Notes included in Item 8 of this report.
Sales and Customer Support
We believe providing comprehensive worldwide sales, service, training, and support are important competitive factors
in the semiconductor equipment industry, and we manage these functions through our global customer operations
group. We rely on a combination of a direct sales force, manufacturers’ representatives and distributors for the sale of
our various product lines. We provide timely customer service and support by positioning our service representatives
near customer facilities, which provides customers with the ability to place orders locally and to deal with service and
support personnel who speak the customer’s language and are familiar with local country practices. In order to support
our customers whose semiconductor assembly operations are located primarily outside of the United States, we have
sales, service, and support personnel based in China, Japan, Korea, Malaysia, the Philippines, Singapore, Switzerland,
Taiwan, Thailand, and throughout Europe, and applications labs in China, Israel, Japan, Singapore, Switzerland and
Taiwan. We integrated the die bonder business sales and customer support during the second half of fiscal 2007.
Backlog
The following table reflects our backlog as of September 30, 2006 and September 29, 2007:
(in thousands)
Backlog
As of
September 30, 2006
$
56,000
September 29, 2007
$
105,000
Our backlog consists of customer orders that are scheduled for shipment within the next 12 months. A majority of our
orders are subject to cancellation or deferral by the customer with limited or no penalties. Also, customer demand for
our products can vary dramatically without prior notice. Because of the volatility of customer demand, possibility of
5
customer changes in delivery schedules or cancellations and potential delays in product shipments, our backlog as of
any particular date may not be indicative of revenue for any succeeding period.
Manufacturing
We believe excellence in manufacturing can create a competitive advantage, both through lower costs and superior
responsiveness. In order to achieve these goals, we seek to manage our manufacturing operations through a single
organization and believe fewer, larger factories take advantage of economies of scale and result in cost savings
through lower manufacturing costs.
Equipment
Our equipment manufacturing activities consist primarily of integrating outsourced parts and
subassemblies and testing finished products to customer specifications. During fiscal 2006 and 2007,
most of our wire bonder manufacturing took place in Singapore, with a small number of machines
built in the U.S. Our die bonder manufacturing took place in Switzerland and Suzhou, China. We
believe the outsourcing manufacturing model enables us to minimize our fixed costs and capital
expenditures and focus on product differentiation through technology innovations in system design
and manufacturing quality control. Just-in-time inventory management has reduced our manufacturing
cycle times and reduced our on-hand inventory requirements. We have ISO 9001 certification for our
equipment manufacturing facilities in Singapore, Switzerland and China, and we have ISO 14001
certifications for our equipment manufacturing facilities in Singapore and China.
Packaging Materials
We manufacture expendable tools at facilities in Yokneam, Israel and Suzhou, China, and bonding
wire at facilities in Singapore and Thalwil, Switzerland. We manufacture blades for wafer sawing
in Suzhou, China. Our facilities have the following certifications:
bonding wire facility in Switzerland - ISO 9001
bonding wire facility in Singapore - QS9000 and ISO 14001
bonding tools facility in Yokneam, Israel - ISO 9001 and ISO 14001
bonding tools and dicing blades facility in Suzhou, China - ISO 9001 and ISO 14001
certifications.
•
•
•
•
Research and Product Development
Many of our customers generate technology roadmaps describing the future manufacturing capability requirements
needed to support their product development plans. Our research and product development activities are organized so
that our products anticipate our customers’ requirements. This can happen either through continuous improvement of
our existing products, including upgrades for products already installed in customers’ facilities, or through the creation
of next-generation products. Examples of our continuous improvement strategy include the Maxum Elite and Maxum
Ultra wire bonders and our DuraCap line of bonding tools. Major next-generation development programs are
underway for our wire bonders and die bonders. Whether we proceed via continuous improvement, or via next-
generation technology development, our goal is technology leadership in each of our major product lines.
Research and development expense was $28.5 million, $37.7 million, and $50.7 million during fiscal 2005, 2006 and
2007, respectively. Research and development expenses during fiscal 2007 included our die bonder business.
Intellectual Property
Where circumstances warrant, we seek to obtain patents on inventions governing new products and processes
developed as part of our ongoing research, engineering, and manufacturing activities. We currently hold a number of
United States patents, some of which have foreign counterparts. We believe the duration of our patents generally
exceeds the life cycles of the technologies disclosed and claimed in the patents. Additionally, we believe much of our
important technology resides in our trade secrets and proprietary software.
6
Competition
The market for semiconductor equipment and packaging materials products is intensely competitive. Significant
competitive factors in the semiconductor equipment market include price, as well as speed/throughput, production yield,
process control, and customer support, each of which contribute to lower the overall cost per package being
manufactured. Our major equipment competitors include:
• Wire bonders: ASM Pacific Technology and Shinkawa
• Die Bonders: ASM Pacific Technology, ESEC, Renesas and Shinkawa
Significant competitive factors in the semiconductor packaging materials industry include performance, price,
delivery, product life, and quality. Our significant packaging materials’ competitors include:
• Bonding tools: CoorsTek, PECO and Small Precision Tools, Inc.
• Saw blades: Disco Corporation
• Bonding wire: Heraeus, Nippon Metal, Sumitomo Metal Mining and Tanaka Electronic Industries.
•
In each of the markets we serve, we face competition and the threat of competition from established competitors and
potential new entrants, some of which may have greater financial, engineering, manufacturing, and marketing
resources. Some of our competitors are Asian and European companies that have, and may continue to have, an
advantage over us in supplying products to local customers. Many of these local customers appear to prefer to
purchase from local suppliers, without regard to other considerations.
Environmental Matters
We are subject to various federal, state, local and foreign laws and regulations governing, among other things, the
generation, storage, use, emission, discharge, transportation and disposal of hazardous materials and the health and
safety of our employees. In addition, we are subject to environmental laws which may require investigation and
cleanup of any contamination at facilities we own or operate or at third party waste disposal sites we use or have used.
These laws could impose liability upon us even if we did not know of, or were not responsible for, the contamination.
We have in the past and will in the future incur costs to comply with environmental laws. We are not, however,
currently aware of any material costs or liabilities relating to environmental matters, including any claims or actions
under environmental laws or obligations to perform any cleanups at any of our facilities or any third party waste
disposal sites, that we expect to have a material adverse effect on our business, financial condition or operating results.
It is possible however, that material environmental costs or liabilities may arise in the future.
Employees
As of September 29, 2007, we had 2,646 regular full-time employees and 257 temporary and contract workers
worldwide. Our bonding wire employees in Singapore are represented by a labor union. We believe our employee
relations to be good and that our future success will depend in part on our continued ability to hire and retain qualified
management, marketing and technical employees.
7
Executive Officers of the Company
The following table sets forth certain information regarding the executive officers of the Company as of September 29,
2007. Our executive officers are appointed by and serve at the discretion of the Board of Directors.
Name
C. Scott Kulicke
Charles Salmons
Jagdish (Jack) G. Belani
Maurice E. Carson
Bruce Griffing
Christian Rheault
Age
58
52
54
50
57
42
First Became an Officer
(calendar year)
1976
1992
1999
2003
2004
2005
Position
Chairman of the Board of Directors and Chief Executive Officer
Senior Vice President, Acquisition Integration
Senior Vice President of Packaging Materials segment and Corporate Marketing
Senior Vice President and Chief Financial Officer
Vice President, Engineering
Senior Vice President, Equipment Segment
C. Scott Kulicke has served as Chief Executive Officer since 1979 and Chairman of the Board of Directors since 1984.
His present term as a director expires in 2011. Mr. Kulicke earned a Bachelor of Science degree in Economics from
the Wharton School of Business of the University of Pennsylvania.
Charles Salmons has served as Senior Vice President, Acquisition Integration since September 2006, after serving as
Senior Vice President, Wafer Test (November 2004-September 2006), Senior Vice President, Product Development
(September 2002-November 2004), Senior Vice President Operations (1999 to 2004), General Manager, Wire Bonder
operations (1998-1999), and Vice President of Operations (1994-1998). Mr. Salmons earned a Masters in Business
Administration degree from LaSalle University.
Jagdish (Jack) G. Belani has served as Senior Vice President of Packaging Materials segment and Corporate
Marketing since November 2005, after serving as Vice President of Wire Bonding and Corporate Marketing; Vice
President of Business Units and Marketing, President of the Wire Bonding Division and President of XLAM, our high
density substrate group. Mr. Belani earned a Bachelor of Science degree in chemical engineering from Indian Institute
of Technology, Madras, India; a Masters of Science degree in metallurgical and materials engineering from Illinois
Institute of Technology and a Juris Doctor from the University of Santa Clara.
Maurice E. Carson became Senior Vice President, Chielf Financial Officer (“CFO”) in November 2007 after serving
as Vice President, CFO since September 2003. From 1996 until 2003, Mr. Carson served in various finance positions
culminating as the Vice President, Finance and Corporate Controller for Cypress Semiconductor Corporation. Mr.
Carson earned a Bachelor of Science degree from the University of Colorado and a Masters in Business
Administration degree from the University of Chicago.
Bruce Griffing has served as Vice President, Engineering since September 2004. From 2001 to 2003, Dr. Griffing
served as Vice President and Chief Technology Officer of DuPont Photomask, a micro-imaging solutions company.
Dr. Griffing earned a Bachelor of Science in physics from Miami University, Oxford, Ohio and a Ph.D in Physics from
Purdue University.
Christian Rheault became Senior Vice President, Equipment segment in November 2007 after serving as Vice
President, Equipment segment since 2006. Before that, he served as Vice President and General Manager of our Ball
Bonder Business Unit and Director of Strategic Marketing and Vice President/General Manager of the
Microelectronics Business Unit. Mr. Rheault earned an Electrical Engineering degree from Laval University, Canada
and a DSA (Business Administration Diploma) from Sherbrooke University, Canada.
8
Item 1A. RISK FACTORS
Risks Related to Our Business and Industry
The semiconductor industry is volatile with sharp periodic downturns and slowdowns.
Our operating results are significantly affected by the capital expenditures of large semiconductor manufacturers and
their subcontract assemblers and vertically integrated manufacturers of electronic systems. Expenditures by
semiconductor manufacturers and their subcontract assemblers and vertically integrated manufacturers of electronic
systems depend on the current and anticipated market demand for semiconductors and products that use
semiconductors, including personal computers, telecommunications equipment, consumer electronics, and automotive
goods. Significant downturns in the market for semiconductor devices or in general economic conditions reduce
demand for our products and materially and adversely affect our business, financial condition and operating results.
Historically, the semiconductor industry has been volatile, with periods of rapid growth followed by industry-wide
retrenchment. These periodic downturns and slowdowns have adversely affected our business, financial condition and
operating results. They have been characterized by, among other things, diminished product demand, excess
production capacity, and accelerated erosion of selling prices. These downturns historically have severely and
negatively affected the industry’s demand for capital equipment, including the assembly equipment and the packaging
materials that we sell. There can be no assurances regarding levels of demand for our products, and in any case, we
believe the historical volatility – both upward and downward – will persist.
We may experience increasing price pressure.
Our historical business strategy for many of our products had focused on product performance and customer service
rather than on price. We now continually seek to reduce our cost structure by moving operations to lower cost areas
and by reducing other operating costs. If we are unable to realize prices that allow us to continue to compete on the
basis of performance and service, our financial condition and operating results may be materially and adversely
affected.
Our quarterly operating results fluctuate significantly and may continue to do so in the future.
In the past, our quarterly operating results have fluctuated significantly. We expect quarterly results will continue to
fluctuate. Although these fluctuations are partly due to the volatile nature of the semiconductor industry, they also
reflect other factors, many of which are outside of our control.
Some of the factors that may cause our net revenues and/or operating margins to fluctuate significantly from period to
period are:
• market downturns;
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the mix of products we sell because, for example:
(cid:2) certain lines of equipment within our business segments are more profitable than others; and
(cid:2) some sales arrangements have higher gross margins than others;
cancelled or deferred orders;
competitive pricing pressures may force us to reduce prices;
higher than anticipated costs of development or production of new equipment models;
the availability and cost of the components for our products;
9
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delays in the development and manufacture of our new products and upgraded versions of our products and
market acceptance of these products when introduced;
customers’ delay in purchasing our products due to anticipation that we or our competitors may introduce new or
upgraded products; and
our competitors’ introduction of new products.
Many of our expenses, such as research and development, selling, general and administrative expenses, and interest
expense, do not vary directly with our net revenue. Our research and development efforts include long-term projects
lasting a year or more, which require significant investments. In order to realize the benefits of these projects, we
believe that we must continue to fund them during periods when our revenue has declined. As a result, a decline in our
net revenue would adversely affect our operating results. In addition, if we were to incur additional expenses in a
quarter in which we did not experience comparable increased net revenue, our operating results would decline. In a
downturn, we may have excess inventory, which is required to be written off. Some of the other factors that may cause
our expenses to fluctuate from period-to-period include:
•
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the timing and extent of our research and development efforts;
severance, resizing, and other costs of relocating facilities;
inventory write-offs due to obsolescence; and
increases in the cost of labor or materials.
Because our revenue and operating results are volatile and difficult to predict, we believe consecutive period-to-period
comparisons of our operating results may not be a good indication of our future performance.
We may not be able to rapidly develop, manufacture and gain market acceptance of new and enhanced products
required to maintain or expand our business.
We believe our continued success depends on our ability to continuously develop and manufacture new products and
product enhancements on a timely and cost-effective basis. We must introduce these products and product enhancements
into the market in a timely manner in response to customers’ demands for higher performance assembly equipment,
leading-edge materials customized to address rapid technological advances in integrated circuits, and capital equipment
designs. Our competitors may develop new products or enhancements to their products that offer performance, features
and lower prices that may render our products less competitive. The development and commercialization of new products
requires significant capital expenditures over an extended period of time, and some products that we seek to develop may
never become profitable. In addition, we may not be able to develop and introduce products incorporating new
technologies in a timely manner that will satisfy our customers’ future needs or achieve market acceptance.
Substantially all of our sales and manufacturing operations are located outside of the United States, and we rely on
independent foreign distribution channels for certain product lines; all of which subject us to risks, including risks
from changes in trade regulations, currency fluctuations, political instability and war.
Approximately 95%, 93% and 96% of our net sales for fiscal 2005, 2006 and 2007, respectively, were to customers
located outside of the United States, in particular to customers located in the Asia/Pacific region.
Our future performance will depend on our ability to continue to compete in foreign markets, particularly in the
Asia/Pacific region. These economies have been highly volatile, resulting in significant fluctuation in local currencies,
and political and economic instability. These conditions may continue or worsen, which may materially and adversely
affect our business, financial condition and operating results.
10
We also rely on non-United States suppliers for materials and components used in our products, and nearly all of our
manufacturing operations are located in countries other than the United States. We manufacture our bonders and
bonding wire in Singapore, we manufacture bonding tools in Israel and China, die bonders in Switzerland and China,
bonding wire in Switzerland, and we have sales, service and support personnel in China, Japan, Korea, Malaysia, the
Philippines, Singapore, Switzerland, Taiwan, Thailand and throughout Europe. We also rely on independent foreign
distribution channels for certain of our product lines. As a result, a major portion of our business is subject to the risks
associated with international, and particularly Asia/Pacific, commerce, such as:
•
•
•
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•
•
•
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•
•
•
risks of war and civil disturbances or other events that may limit or disrupt manufacturing and markets;
seizure of our foreign assets, including cash;
longer payment cycles in foreign markets;
international exchange restrictions;
restrictions on the repatriation of our assets, including cash;
significant foreign and United States taxes on repatriated cash;
the difficulties of staffing and managing dispersed international operations;
possible disagreements with tax authorities regarding transfer pricing regulations;
episodic events outside our control such as, for example, an outbreak of Severe Acute Respiratory Syndrome or
influenza;
tariff and currency fluctuations;
changing political conditions;
labor conditions and costs;
foreign governments’ monetary policies and regulatory requirements;
less protective foreign intellectual property laws; and
legal systems which are less developed and which may be less predictable than those in the United States.
Because most of our foreign sales are denominated in U.S. dollars, an increase in value of the U.S. dollar against
foreign currencies, will make our products more expensive than those offered by some of our foreign competitors. Our
ability to compete overseas in the future may be materially and adversely affected by a strengthening of the U.S. dollar
against foreign currencies.
Our international operations also depend upon favorable trade relations between the United States and those foreign
countries in which our customers, subcontractors, and materials suppliers have operations. A protectionist trade
environment in either the United States or those foreign countries in which we do business, such as a change in the
current tariff structures, export compliance or other trade policies, may materially and adversely affect our ability to
sell our products in foreign markets.
11
We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and
cash flows.
Because a significant portion of our business is conducted outside the United States, we face exposure to adverse
movements in foreign currency exchange rates which could have a material adverse impact on our financial results and
cash flows. Historically, our primary exposures have related to net working capital exposures denominated in
currencies other than a foreign subsidiaries’ functional currency, and remeasurement of our foreign subsidiaries’ net
monetary assets from the subsidiaries’ local currency into the subsidiaries’ functional currency. In general, an increase
in the value of the U.S. dollar could require certain of our foreign subsidiaries to record translation and remeasurement
gains. Conversely, a decrease in the value of the U.S. dollar could require certain of our foreign subsidiaries to record
losses on translation and remeasurement. An increase in the value of the U.S. dollar could increase the cost to our
customers of our products in those markets outside the United States where we sell in U.S. dollars, and a weakened
U.S. dollar could increase the cost of local operating expenses and procurement of raw materials. Our primary
exposures include the Swiss Franc, the Chinese Yuan, the Euro, Singapore dollar, Israeli Shekel and the Japanese Yen.
Our board of directors has granted management with limited authority to enter into foreign exchange forward contracts
and other instruments designed to minimize the short term impact currency fluctuations have on our business. We have
entered into foreign exchange forward contracts and expect to enter into additional foreign exchange forward contracts
and other instruments in the future. Our attempts to hedge against these risks may not be successful and may result in a
material adverse impact on our financial results and cash flows.
Rising gold prices increase our working capital requirements.
Liquidity required to support the working capital requirements of our wire business is directly impacted by the price of
gold. As the price of gold rises, our working capital needs increase which reduces our return on invested capital and
limits the amount of cash available for other corporate purposes. Additionally, if the standby letters of credit we use to
support our gold financing arrangement were to become unavailable, we would have to provide new letters of credit or
cash of an equivalent amount as security.
We may not be able to consolidate manufacturing facilities without incurring unanticipated costs and disruptions to
our business.
As part of our ongoing efforts to further reduce our cost structure, we may seek to consolidate our manufacturing
facilities. If this occurred, we may incur significant and unexpected costs, delays and disruptions to our business during
this consolidation process. Because of unanticipated events, including the actions of governments, suppliers, employees
or customers, we may not realize the synergies, cost reductions and other benefits of any consolidation to the extent or
within the timeframe that we currently expect.
Our business depends on attracting and retaining management, marketing and technical employees.
Our future success depends on our ability to hire and retain qualified management, marketing and technical
employees. In particular, we periodically experience shortages of technical personnel. If we are unable to continue to
attract and retain the managerial, marketing and technical personnel we require, our business, financial condition and
operating results could be materially and adversely affected.
Difficulties in forecasting demand for our product lines may lead to periodic inventory shortages or excesses.
We typically operate our business with limited visibility of future demand. As a result, we sometimes experience
inventory shortages or excesses. We generally order supplies and otherwise plan our production based on internal
forecasts for demand. We have in the past, and may again in the future, fail to forecast accurately demand for our
products, in terms of both volume and configuration for either our current or next-generation wire bonders. This has led to
and may in the future lead to delays in product shipments or, alternatively, an increased risk of inventory obsolescence. If
we fail to forecast accurately demand for our products, including assembly equipment and packaging materials, our
business, financial condition and operating results may be materially and adversely affected.
12
Alternative packaging technologies other than wire bonding may render some of our products obsolete.
Alternative packaging technologies have emerged that may improve device performance or reduce the size of an
integrated circuit package, as compared to traditional die and wire bonding. These technologies include flip chip and chip
scale packaging. Some of these alternative technologies eliminate the need for wires to establish the electrical connection
between a die and its package. The semiconductor industry may, in the future, shift a significant part of its volume into
alternative packaging technologies, such as those discussed above, which do not employ our products. If a significant
shift to alternative packaging technologies were to occur, demand for our equipment and related packaging materials may
be materially and adversely affected.
Because a small number of customers account for most of our sales, our revenues could decline if we lose a
significant customer.
The semiconductor manufacturing industry is highly concentrated, with a relatively small number of large semiconductor
manufacturers and their subcontract assemblers and vertically integrated manufacturers of electronic systems purchasing
a substantial portion of our semiconductor assembly equipment and packaging materials. Sales to a relatively small
number of customers account for a significant percentage of our net sales. During fiscal 2005, 2006, and 2007, sales in the
aggregate to Advanced Semiconductor Engineering and ST Microelectronics, our largest customers accounted for 22.6%,
29.0% and 30.6%, respectively, of our net revenue.
We expect that sales of our products to a small number of customers will continue to account for a high percentage of
our net sales for the foreseeable future. Thus, our business success depends on our ability to maintain strong
relationships with our customers. Any one of a number of factors could adversely affect these relationships. If, for
example, during periods of escalating demand for our equipment, we were unable to add inventory and production
capacity quickly enough to meet the needs of our customers, they may turn to other suppliers making it more difficult
for us to retain their business. Similarly, if we are unable for any other reason to meet production or delivery
schedules, particularly during a period of escalating demand, our relationships with our key customers could be
adversely affected. If we lose orders from a significant customer, or if a significant customer reduces its orders
substantially, these losses or reductions may materially and adversely affect our business, financial condition and
operating results.
We depend on a small number of suppliers for raw materials, components and subassemblies. If our suppliers do
not deliver their products to us, we would be unable to deliver our products to our customers.
Our products are complex and require raw materials, components and subassemblies having a high degree of reliability,
accuracy and performance. We rely on subcontractors to manufacture many of these components and subassemblies and
we rely on sole source suppliers for some important components and raw materials, including gold. As a result, we are
exposed to a number of significant risks, including:
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lack of control over the manufacturing process for components and subassemblies;
changes in our manufacturing processes, in response to changes in the market, which may delay our shipments;
our inadvertent use of defective or contaminated raw materials;
the relatively small operations and limited manufacturing resources of some of our suppliers, which may limit their
ability to manufacture and sell subassemblies, components or parts in the volumes we require and at acceptable
quality levels and prices;
reliability or quality problems with certain key subassemblies provided by single source suppliers as to which we
may not have any short term alternative;
shortages caused by disruptions at our suppliers and subcontractors for a variety of reasons, including work stoppage
or fire, earthquake, flooding or other natural disasters;
13
•
•
delays in the delivery of raw materials or subassemblies, which, in turn, may delay our shipments; and
the loss of suppliers as a result of consolidation of suppliers in the industry.
If we are unable to deliver products to our customers on time for these or any other reasons; if we are unable to meet
customer expectations as to cycle time; or if we do not maintain acceptable product quality or reliability, our business,
financial condition and operating results may be materially and adversely affected.
We may acquire or divest businesses or enter into joint ventures or strategic alliances, which may materially affect
our business, financial condition and operating results.
We continually evaluate our portfolio of businesses and may decide to buy or sell businesses or enter into joint
ventures or other strategic alliances. During fiscal 2007, we acquired Alphasem, a manufacturer of die bonders, and
may from time to time in the future seek to acquire or divest other businesses or enter into alliances with other
companies. Significant acquisitions and alliances may increase demands on management, engineering, financial
resources and information and internal control systems. Our success with respect to acquisitions and alliances will
depend, in part, on our ability to manage and integrate acquired businesses and alliances with our existing businesses
and to successfully implement, improve and expand our systems, procedures and controls. In addition, we may divest
existing businesses, which would cause a decline in revenues and may make our financial results more volatile. If we
fail to integrate and manage acquired businesses successfully or to manage the risks associated with divestitures, joint
ventures or other alliances, our business, financial condition and operating results may be materially and adversely
affected.
We may be unable to continue to compete successfully in the highly competitive semiconductor equipment and
packaging materials industries.
The semiconductor equipment and packaging materials industries are very competitive. In the semiconductor
equipment, significant competitive factors include performance, quality, customer support and price. In the
semiconductor packaging materials industry, competitive factors include price, delivery and quality.
In each of our markets, we face competition and the threat of competition from established competitors and potential
new entrants. In addition, established competitors may combine to form larger, better capitalized companies. Some of
our competitors have or may have significantly greater financial, engineering, manufacturing and marketing resources.
Some of these competitors are Asian and European companies that have had, and may continue to have, an advantage
over us in supplying products to local customers who appear to prefer to purchase from local suppliers, without regard
to other considerations.
We expect our competitors to improve their current products’ performance, and to introduce new products and
materials with improved price and performance characteristics. Our competitors may independently develop
technology that is similar to or better than ours. New product and materials introductions by our competitors or by new
market entrants could hurt our sales. If a particular semiconductor manufacturer or subcontract assembler selects a
competitor’s product or materials for a particular assembly operation, we may not be able to sell products or materials
to that manufacturer or assembler for a significant period of time. Manufacturers and assemblers sometimes develop
lasting relationships with suppliers, and assembly equipment providers in our industry often go years without requiring
replacement. In addition, we may have to lower our prices in response to price cuts by our competitors, which may
materially and adversely affect our business, financial condition and operating results. If we cannot compete
successfully, we could be forced to reduce prices, and could lose customers and market share and experience reduced
margins and profitability.
14
Our success depends in part on our intellectual property, which we may be unable to protect.
Our success depends in part on our proprietary technology. To protect this technology, we rely principally on contractual
restrictions (such as nondisclosure and confidentiality provisions) in our agreements with employees, subcontractors,
vendors, consultants and customers and on the common law of trade secrets and proprietary “know-how.” We also rely, in
some cases, on patent and copyright protection. We may not be successful in protecting our technology for a number of
reasons, including the following:
•
•
•
employees, subcontractors, vendors, consultants and customers may violate their contractual agreements, and the
cost of enforcing those agreements may be prohibitive, or those agreements may be unenforceable or more limited
than we anticipate;
foreign intellectual property laws may not adequately protect our intellectual property rights; and
our patent and copyright claims may not be sufficiently broad to effectively protect our technology; our patents or
copyrights may be challenged, invalidated or circumvented; or we may otherwise be unable to obtain adequate
protection for our technology.
In addition, our partners and alliances may also have rights to technology that we develop. We may incur significant
expense to protect or enforce our intellectual property rights. If we are unable to protect our intellectual property rights,
our competitive position may be weakened.
Third parties may claim we are infringing on their intellectual property, which could cause us to incur significant
litigation costs or other expenses, or prevent us from selling some of our products.
The semiconductor industry is characterized by rapid technological change, with frequent introductions of new products
and technologies. Industry participants often develop products and features similar to those introduced by others, creating
a risk that their products and processes may give rise to claims that they infringe on the intellectual property of others. We
may unknowingly infringe on the intellectual property rights of others and incur significant liability for that infringement.
If we are found to have infringed on the intellectual property rights of others, we could be enjoined from continuing to
manufacture, market or use the affected product, or be required to obtain a license to continue manufacturing or using the
affected product. A license could be very expensive to obtain or may not be available at all. Similarly, changing or re-
engineering our products or processes to avoid infringing the rights of others may be costly, impractical or time
consuming.
Occasionally, third parties assert that we are, or may be, infringing on or misappropriating their intellectual property
rights. In these cases, we will defend against claims or negotiate licenses where we consider these actions appropriate.
Intellectual property cases are uncertain and involve complex legal and factual questions. If we become involved in
this type of litigation, it could consume significant resources and divert our attention from our business.
We may be materially and adversely affected by environmental and safety laws and regulations.
We are subject to various federal, state, local and foreign laws and regulations governing, among other things, the
generation, storage, use, emission, discharge, transportation and disposal of hazardous material, investigation and
remediation of contaminated sites and the health and safety of our employees. Increasingly, public attention has
focused on the environmental impact of manufacturing operations and the risk to neighbors of chemical releases from
such operations.
Proper waste disposal plays an important role in the operation of our manufacturing plants. In many of our facilities
we maintain wastewater treatment systems that remove metals and other contaminants from process wastewater. These
facilities operate under permits that must be renewed periodically. A violation of those permits may lead to revocation
of the permits, fines, penalties or the incurrence of capital or other costs to comply with the permits, including
potential shutdown of operations.
15
Compliance with existing or future, land use, environmental and health and safety laws and regulations may: (1) result
in significant costs to us for additional capital equipment or other process requirements, (2) restrict our ability to
expand our operations and/or (3) cause us to curtail our operations. We also could incur significant costs, including
cleanup costs, fines or other sanctions and third-party claims for property damage or personal injury, as a result of
violations of or liabilities under such laws and regulations. We cannot assure you that any costs or liabilities to comply
with or imposed under these laws and regulations will not materially and adversely affect our business, financial
condition and operating results.
We may be unable to generate enough cash to repay our debt.
Our ability to make payments on our indebtedness and to fund planned capital expenditures and other activities will
depend on our ability to generate cash in the future. If our convertible debt is not converted to shares of our common
stock, we will be required to make annual cash interest payments of $2.0 million in fiscal 2008, $1.8 million in fiscal
2009, $1.6 million in fiscal 2010, $1.0 million in fiscal 2011 and $1.0 million in fiscal 2012 on an aggregate $251.4
million of convertible subordinated debt (assuming that we do not purchase any additional outstanding 0.5% Convertible
Notes). Principal payments of $76.4 million, $65.0 million and $110.0 million on the convertible subordinated debt are
due in fiscal 2009, 2010 and 2012, respectively. Our ability to make payments on our indebtedness is affected by the
volatile nature of our business, and general economic, competitive and other factors that are beyond our control. Our
indebtedness poses risks to our business, including that:
•
•
insufficient cash flow from operations to repay our outstanding indebtedness when it becomes due may force us to
sell assets, or seek additional capital, which we may be unable to do at all or on terms favorable to us; and
our level of indebtedness may make us more vulnerable to economic or industry downturns.
We cannot assure you that our business will generate cash in an amount sufficient to enable us to service interest,
principal and other payments on our debt, including the notes, or to fund our other liquidity needs. We are not
restricted under the agreements governing our existing indebtedness from incurring additional debt in the future. If
new debt is added to our current levels, our leverage and our debt service obligations would increase and the related
risks described above could intensify.
We have the ability to issue additional equity securities, which would lead to dilution of our issued and outstanding
common stock.
The issuance of additional equity securities or securities convertible into equity securities will result in dilution of
existing stockholders’ equity interests in us. Our board of directors has the authority to issue, without vote or action of
stockholders, shares of preferred stock in one or more series, and has the ability to fix the rights, preferences,
privileges and restrictions of any such series. Any such series of preferred stock could contain dividend rights,
conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences or other rights
superior to the rights of holders of our common stock. In addition, we are authorized to issue, without stockholder
approval, up to an aggregate of 200 million shares of common stock, of which approximately 53.2 million shares were
outstanding as of September 29, 2007. We are also authorized to issue, without stockholder approval, securities
convertible into either shares of common stock or preferred stock.
Weaknesses in our internal controls and procedures could result in material misstatements in our financial
statements.
Pursuant to the Sarbanes-Oxley Act, management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal controls over financial reporting are processes designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in
accordance with U.S. generally accepted accounting principles. A material weakness is a control deficiency, or
combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of
annual or interim financial statements will not be prevented or detected.
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Our internal controls may not prevent all potential errors or fraud, because any control system, no matter how well
designed and implemented, can only provide reasonable and not absolute assurance that the objectives of the control
system will be achieved. We cannot assure you that we or our independent registered public accountants will not in the
future identify other material weaknesses in our internal controls, which could adversely affect our ability to insure
proper financial reporting and could affect investor confidence in us and the price of our common stock.
Accounting methods, including but not limited to the accounting method for convertible debt securities with net
share settlement, such as our 0.875% Subordinated Convertible Notes, may be subject to change.
In calculating our diluted earnings per share, we currently account for the 0.875% Subordinated Convertible Notes in
accordance with Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force (“EITF”) Issue No.
90-19, Convertible Bonds with Issuer Option to Settle for Cash upon Conversion (“EITF 90-19”). The accounting
method for a convertible debt security that meets the requirements of EITF 90-19 is similar to the accounting for non-
convertible debt. We recognize interest expense at the stated coupon rate, and shares potentially issuable upon
conversion of the debt are excluded from the calculation of diluted earnings per share until the market price of our
common stock exceeds the conversion price (i.e., the conversion price is “in the money”). Once the conversion price is
in the money, the shares that we would issue upon assumed conversion of the debt are included in the calculation of
fully diluted earnings per share using the “treasury stock” method. No separate value is attributed to the conversion
feature of the debt at the time of issuance.
The FASB has issued a proposed Staff Position (“FSP”) APB 14-a, Accounting for Convertible Debt Instruments That
May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-a”) that would apply to
any convertible debt instrument that may be settled in whole or in part with cash upon conversion. If adopted, FSP
APB 14-a would require separate accounting for the debt and equity components of the security. Under the proposed
FSP APB 14-a, the value assigned to the debt at the time of issuance (the “debt component”) would be its estimated
fair value, based on a similar debt issue without the conversion feature. The difference between the debt component
and the par value of the debt would be accounted for as an original discount and included in stockholder’s equity as
paid-in capital (the “equity component”). The original issue discount would be amortized to interest expense over the
life of the debt, with a corresponding accretion of the debt component to its par value. Shares that we would issue upon
assumed conversion of the debt would continue to be included in the calculation of fully diluted earnings per share
using the treasury stock method when the conversion price is in the money.
As compared to the current accounting method, the proposal would reduce the amount recognized as debt and increase
the amount recognized as stockholder’s equity at the time of issuance. The amount of debt recognized at time of
issuance would increase over the life of the notes, with a corresponding reduction of net income and earnings per share
(net of tax), for the amortization of the original issue discount. If the proposed FSP APB 14-a is adopted, we would be
required to adopt it as of the beginning of fiscal 2009, with retrospective application to financial statements for periods
prior to the date of adoption.
We cannot predict whether or not the FASB will adopt the proposed FSP APB 14-a, and we cannot predict the
adoption of any other changes in generally accepted accounting principals that may affect the accounting for
convertible debt securities. Any such change in the accounting method for convertible debt securities could have an
adverse impact on our reported or future results of operations or financial position, and could adversely affect the
trading price of our common stock or the trading price of the notes.
17
Other Risks
Anti-takeover provisions in our articles of incorporation and bylaws, and under Pennsylvania law may discourage
other companies from attempting to acquire us.
Some provisions of our articles of incorporation and bylaws as well as Pennsylvania law may discourage some
transactions where we would otherwise experience a fundamental change. For example, our articles of incorporation and
bylaws contain provisions that:
•
•
•
classify our board of directors into four classes, with one class being elected each year;
permit our board to issue “blank check” preferred stock without stockholder approval; and
prohibit us from engaging in some types of business combinations with a holder of 20% or more of our voting
securities without super-majority board or stockholder approval.
Further, under the Pennsylvania Business Corporation Law, because our shareholders approved bylaw provisions that
provide for a classified board of directors, stockholders may remove directors only for cause. These provisions and some
other provisions of the Pennsylvania Business Corporation Law could delay, defer or prevent us from experiencing a
fundamental change and may adversely affect our common stockholders’ voting and other rights.
Terrorist attacks, or other acts of violence or war may affect the markets in which we operate and our profitability.
Terrorist attacks may negatively affect our operations. There can be no assurance that there will not be further terrorist
attacks against the United States or United States businesses. Terrorist attacks or armed conflicts may directly impact our
physical facilities or those of our suppliers or customers. Our primary facilities include administrative, sales and research
and development facilities in the United States and manufacturing facilities in the United States, Singapore, Switzerland,
China and Israel. Additional terrorist attacks may disrupt the global insurance and reinsurance industries with the result
that we may not be able to obtain insurance at historical terms and levels for all of our facilities. Furthermore, additional
attacks may make travel and the transportation of our supplies and products more difficult and more expensive and
ultimately affect the sales of our products in the United States and overseas. Additional attacks or any broader conflict,
could negatively impact on our domestic and international sales, our supply chain, our production capability and our
ability to deliver products to our customers. Political and economic instability in some regions of the world could
negatively impact our business. The consequences of terrorist attacks or armed conflicts are unpredictable, and we may
not be able to foresee events that could have an adverse effect on our business.
Provisions of our Subordinated Convertible Notes could discourage an acquisition of us by a third party.
Certain provisions of our outstanding Subordinated Convertible Notes could make it more difficult or more expensive for
a third party to acquire us. Upon the occurrence of certain transactions constituting a fundamental change, holders of the
Subordinated Convertible Notes will have the right, at their option, to require us to repurchase all of their notes at a price
equal to 100% of the principal amount of notes to be repurchased, plus accrued and unpaid interest, plus a premium, if
applicable. In addition, pursuant to the terms of the 0.875% Subordinated Convertible Notes, we may not enter into
certain mergers unless, among other things, the surviving entity assumes all of our obligations under the indenture and the
notes.
18
Item 2. PROPERTIES
The following table reflects our major operating facilities:
Facility
Fort Washington,
Pennsylvania
Approximate Size
Function
Products Manufactured
Lease Expiration
Date (4)
88,000 sq. ft. (1)
Corp. headquarters, manufacturing,
technology center, sales and service
Large area bonders
September 2028
Suzhou, China
136,386 sq. ft. (1)
Manufacturing, technology center
Die bonders, capillaries, dicing blades
October 2022
Singapore
83,831 sq. ft. (1)
Manufacturing, technology center
Wire bonders
Singapore
38,405 sq. ft. (1)
Manufacturing, technology center
Bonding wire
Yokneam, Israel
53,820 sq. ft. (2)
Manufacturing, technology center
Capillaries, wedges, die collets
Berg, Switzerland
61,896 sq. ft. (2) Manufacturing, technology center
Die bonders
Thalwil, Switzerland
15,177 sq. ft. (1)
Manufacturing
Bonding wire
August 2008
May 2009
N/A
N/A
(3)
(1) Leased.
(2) Owned.
(3) Cancelable semi-annually upon six months notice.
(4) Includes lease extension periods at the Company's option.
In addition, we rent space for sales and service offices in: China, Germany, Japan, Korea, Malaysia, the Philippines,
Taiwan, Thailand and the U.S. We believe our facilities generally are in good condition.
Item 3. LEGAL PROCEEDINGS
From time to time, we may be a plaintiff or defendant in cases arising out of our business. We cannot assure you of the
results of any pending or future litigation, but we do not believe resolution of these matters will materially or adversely
affect our business, financial condition or operating results.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
19
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the Nasdaq Global Market (“Nasdaq”) under the symbol “KLIC.” The following table
reflects the ranges of high and low sale prices for our common stock as reported on Nasdaq for the stated periods:
Fiscal 2006
Common stock price per share:
High
Low
Fiscal 2007
Common stock price per share:
High
Low
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
9.33
5.95
$
12.50
8.47
$
10.23
7.05
$
9.18
6.50
$
9.67
7.92
$
10.19
8.17
$
11.04
9.11
$
12.46
7.34
On December 5, 2007, there were approximately 441 holders of record of the shares of outstanding common stock. The
payment of dividends on our common stock is within the discretion of our board of directors; however, we have not
historically paid any cash dividends on our common stock. We do not expect to declare cash dividends on our common
stock in the near future, since we intend to retain earnings to finance the growth of our business.
For the purpose of calculating the aggregate market value of shares of our common stock held by nonaffiliates, as shown
on the cover page of this report, we have assumed all of our outstanding shares were held by nonaffiliates except for
shares held by our directors and executive officers. However, this does not necessarily mean that all directors and
executive officers of the Company are, in fact, affiliates of the Company, or there are no other persons who may be
deemed to be affiliates of the Company. Further information concerning the beneficial ownership of our executive
officers, directors and principal shareholders will be included in our proxy statement relating to our 2008 Annual Meeting
of Shareholders to be filed with the SEC on or about January 3, 2008.
Equity Compensation Plan Information
The information required hereunder will appear under the heading “Equity Compensation Plans” in the Company’s Proxy
Statement for the 2008 Annual Shareholders’ Meeting which information is incorporated herein by reference.
Recent Sales of Unregistered Securities and Use of Proceeds
(in thousands, except per share amount)
Period
August 1, 2007 - August 31, 2007 (1)
Total
Total Number of
Shares
Purchased
731
731
Average Price
Paid per share
$
8.20
$
8.20
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
731
Maximum Approximate
Dollar Value of Shares that
May Yet Be Purchased
Under the Plans or Programs
$
-
731
$
-
(1) On May 23, 2007, the board of directors authorized us to use up to $6.0 million of cash from operations to
repurchase shares of our common stock. We completed those repurchases in the fourth fiscal quarter.
20
Item 6. SELECTED FINANCIAL DATA
The following table reflects selected historical consolidated financial data derived from the Consolidated Financial
Statements of Kulicke and Soffa Industries, Inc. and subsidiaries as of and for each of the five fiscal years ended 2003,
2004, 2005, 2006 and 2007. This data should be read in conjunction with our Consolidated Financial Statements,
including notes and other financial information included elsewhere in this report or in annual reports filed previously
by us in respect of the fiscal years identified in the column headings of the tables below.
(in thousands, except per share amounts)
Statement of Operations Data:
Net revenue:
Equipment
Packaging Materials
Total net revenue
Cost of sales:
Equipment
Packaging Materials
Total cost of sales (1)
Operating expenses:
Equipment
Packaging Materials
Gain on sale of assets
Total operating expenses (1)
Income (loss) from operations:
Equipment
Packaging Materials
Gain on sale of assets
Interest income (expense), net
Gain (loss) on early extinguishment of debt
Income (loss) from continuing operations before taxes
Provision for income taxes from continuing operations (2)
Income (loss) from continuing operations
Loss from discontinued operations, net of tax (2)(3)
Net income (loss)
Per Share Data:
Income (loss) from continuing operations (4)
Basic
Diluted
Discontinued operations, net of tax per share: (4)
Basic
Diluted
Net income (loss) per share: (4)
Basic
Diluted
Shares used in per common share calculations: (4)
Basic
Diluted
Balance Sheet Data:
Cash, cash equivalents and short-term investments
Working capital
Total assets
Long-term debt (5) (6)
Shareholders' equity (deficit)
2003
2004
Fiscal
2005
2006
2007
$
198,447
174,606
373,053
$
361,244
234,690
595,934
$
201,608
273,934
475,542
$
319,788
376,523
696,311
$
316,718
383,686
700,404
129,092
132,779
261,871
85,609
31,896
-
117,505
208,616
182,593
391,209
76,159
26,399
-
102,558
115,558
223,903
339,461
65,606
30,724
-
96,330
178,473
321,277
499,750
85,445
33,674
(4,544)
114,575
188,028
331,442
519,470
108,257
36,231
-
144,488
(16,254)
9,931
-
(16,491)
-
(22,814)
8,001
(30,815)
(45,874)
(76,689)
$
76,469
25,698
-
(9,357)
(10,510)
82,300
7,583
74,717
(18,837)
55,880
$
20,444
19,307
-
(1,578)
-
38,173
4,836
33,337
(137,419)
(104,082)
$
55,870
21,572
4,544
795
4,040
86,821
9,789
77,032
(24,862)
52,170
$
20,433
16,013
-
3,990
2,802
43,238
5,508
37,730
-
37,730
$
$
$
(0.62)
(0.62)
$
$
1.47
1.17
$
$
0.65
0.52
$
$
1.40
1.14
$
$
0.67
0.57
$
$
(0.92)
(0.92)
$
$
(0.37)
(0.28)
$
$
(2.67)
(2.03)
$
$
(0.45)
(0.36)
$
-
$
-
$
$
(1.54)
(1.54)
$
$
1.10
0.89
$
$
(2.02)
(1.51)
$
$
0.95
0.78
$
$
0.67
0.57
49,695
49,695
50,746
68,582
51,619
67,662
55,089
68,881
56,221
68,274
$
73,051
125,829
442,861
300,000
97
$
95,766
175,953
476,958
270,000
67,020
$
95,369
186,049
386,496
270,000
(31,748)
$
157,283
248,978
405,501
195,000
79,306
$
169,910
291,759
512,600
251,412
83,255
21
(1) During fiscal 2003, we recorded the following charges as operating expenses in continuing operations: loss on
sale of product lines of $5.3 million; asset impairment of $0.5 million which resulted from the write-down of
assets that were sold and assets that became obsolete; $3.1 million of severance associated with workforce
reductions; and charges for inventory write-downs of $1.7 million (to costs of sales).
During fiscal 2004, we recorded the following charges as operating expenses in continuing operations:
severance charges of $1.9 million; China start-up costs of $0.1 million; inventory write-downs of $0.4 million;
and a reversal of prior year resizing charges of $0.1 million. We also recorded a gain on the sale of assets of $0.9
million within fiscal 2004 operating expenses.
During fiscal 2005, we recorded the following charges as operating expenses in continuing operations:
severance charges of $0.9 million; China start-up costs of $1.2 million; and inventory write-downs of $1.0
million. We also recorded a gain on the sale of assets of $1.7 million within fiscal 2005 operating expenses.
During fiscal 2006, we recorded the following charges in continuing operations: $3.5 million in cost of sales and
$0.8 million in operating expenses for the cumulative adjustment to correct immaterial errors in the consolidated
financial statements; $0.6 million in cost of sales and $4.1 million in operating expenses for SFAS 123R stock
compensation expense; $9.0 million in operating expenses for incentive compensation and a gain on the sale of
assets of $4.5 million in operating expenses.
During fiscal 2007, we recorded the following charges in continuing operations: $0.2 million in cost of sales
and $5.3 million in operating expenses for SFAS 123R stock compensation expense; and $4.6 million in
operating expense for incentive compensation.
(2) The following are the more significant factors which affect our provision for income taxes: implementation of
our international restructuring plan in fiscal 2006 and 2007; volatility in our earnings each fiscal year and
variation in earnings among various tax jurisdictions in which we operate; changes in assumptions regarding
repatriation of earnings; and our provision for various tax exposure items.
(3) Reflects the operations of the Company’s former flip chip business unit and Test business which were sold in
February 2004 and March 2006, respectively.
(4) For fiscal 2003, only the common shares outstanding were used to calculate basic and diluted earnings per
common share because the inclusion of potential common shares would have been anti-dilutive due to the net
loss from continuing operations reported that year. For fiscal 2004, 2005, 2006 and 2007 the exercise of
dilutive stock options and performance-based restricted stock (fiscal 2007, only) and conversion of the
convertible subordinated notes were assumed and $5.2 million, $1.7 million, $1.4 million and $1.3 million,
respectively, of after-tax interest expense related to our convertible subordinated notes was added to the
Company’s net income to determine diluted earnings per share.
(5) Does not include letters of credit.
(6) In December 1999, the Company issued $175.0 million in principal amount of 4.75% Convertible
Subordinated Notes due 2006, which the Company redeemed in their entirety in December 2003. In August
2001, the Company issued $125.0 million in principal amount of 5.25% Convertible Subordinated Notes due
2006, which the Company redeemed in their entirety in August 2004. In December 2003, the Company issued
$205.0 million in principal amount of 0.5% Convertible Subordinated Notes due 2008, of which the
Company repurchased $75.0 million and $53.6 million during fiscal 2006 and 2007, respectively. In June
2004, the Company issued $65.0 million in principal amount of 1.0% Convertible Subordinated Notes due
2010. In June 2007, the Company issued $110.0 million in principal amount of 0.875% Convertible
Subordinated Notes due 2012.
22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In addition to historical information, this filing contains statements relating to future events or our future results. These
statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended
(the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and
are subject to the safe harbor provisions created by statute. Such forward-looking statements include, but are not limited
to, statements that relate to our future revenue, product development, demand forecasts, competitiveness, operating
expenses, cash flows, profitability, gross margins, product prices, and benefits expected 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 continuing demand for wire and die bonder equipment and packaging materials.
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 and our future results
could differ significantly from those expressed or implied by our forward-looking statements. These risks and
uncertainties include, without limitation, those described below and under the heading “Risk Factors” within our 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.
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 prediction of actual results.
Introduction
Kulicke and Soffa Industries, Inc. (the “Company”) designs, manufactures and markets capital equipment and packaging
materials as well as services, maintains, repairs and upgrades equipment, used to assemble semiconductor devices. We are
currently the world’s leading supplier of semiconductor wire bonding assembly equipment, according to VLSI Research,
Inc. Our business is divided into two product segments:
•
•
equipment, and
packaging materials.
We believe we are the only major supplier to the semiconductor assembly industry that provides customers with
semiconductor die bonding and wire bonding equipment along with many of the complementary packaging materials. In
addition, we believe the ability to control both the equipment and packaging material assembly-related products provides
us with a significant competitive advantage and should allow us to develop system solutions to the new technology
challenges inherent in assembling and packaging next-generation semiconductor devices.
On November 3, 2006, we completed the acquisition of Alphasem, a leading supplier of die bonder equipment, from
Dover Technologies International, Inc., a subsidiary of Dover Corporation. The consideration for the acquisition was
approximately $29.3 million in cash including capitalized acquisition costs and after working capital adjustments.
Alphasem is included in our Equipment segment.
23
There can be no assurances regarding levels of demand for our products. In addition, we believe historical volatility –
both upward and downward – will persist.
Our goal is to be both the technology leader and the lowest cost supplier in each of our major lines of business.
Accordingly, we continue to lower our cost structure by consolidating operations, moving certain of our manufacturing
capacity to Asia, moving a portion of our supply chain to lower cost suppliers and designing higher-performing, lower
cost equipment. Cost reduction efforts are an important part of our normal ongoing operations and we expect to continue
to further drive down our cost structure, while not diminishing our product quality.
Beginning in fiscal 2006, to align our external reporting with management’s internal reporting, we no longer include
“Corporate and Other” as a business segment. Costs previously presented separately for this segment, which primarily
consisted of general corporate expenses, have been allocated to our two remaining business segments. The business
segment information for fiscal 2005 has been restated to reflect this change.
The fiscal year end for fiscal 2005, 2006 and 2007 was September 30, 2005, September 30, 2006 and September 29,
2007, respectively.
Discontinued Operations
During the three months ended April 1, 2006, we committed to a plan of disposal and sold our Test business in two
separate transactions as follows:
• On March 3, 2006, we completed the sale of substantially all of the assets and certain of the
liabilities of our Wafer Test business to SV Probe, PTE. Ltd. (“SV Probe”) for initial proceeds of
$10.0 million in cash plus the assumption of accounts payable and certain other liabilities, subject to
a post-closing working capital adjustment that was settled in the three months ended July 1, 2006.
Certain accounts receivable were excluded from the assets sold.
• On March 31, 2006, we completed the sale of substantially all of the assets and certain of the
liabilities of our Package Test business to Antares conTech, Inc., an entity formed by Investcorp
Technology Ventures II, L.P. and its affiliates (collectively “Investcorp”) for initial proceeds of
$17.0 million in cash plus the assumption of accounts payable and certain other liabilities, subject to
a post-closing working capital adjustment that was settled in the three months ended July 1, 2006.
We recorded a loss of $0.8 million on the disposal of our Test business. We sold the Test business to allow
management to strengthen its focus on our core businesses – semiconductor assembly equipment and packaging
materials – and explore growth opportunities in these markets.
As part of the terms of each sale noted above, the associated China-based assets were not transferred to the buyers on
the above referenced closing dates, as neither buyer had a legal entity in China that could accept the transfer of the
China-based assets as of the closing date. The China-based assets associated with the sale to SV Probe were
transferred to SV Probe in September 2006 and the China-based assets associated with the sale to Antares conTech
were transferred to Antares conTech in December 2006, without additional consideration. In addition, we provided
manufacturing and other transition services (invoiced at cost) to SV Probe through September 1, 2006 and provided
these services to Antares conTech through November 2006.
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (“SFAS 144”), the financial results of the Test business have been presented as
discontinued operations in our Consolidated Financial Statements. See Note 2 to our Consolidated Financial
Statements included in Item 8 of this report for further discussion of the divestiture of our Test business.
Unless otherwise indicated, amounts provided throughout this report relate to continuing operations only.
24
Products and Services
We offer a range of bonding equipment and packaging materials. The table below reflects the percentage of our total net
revenues for each business segment:
(dollar amounts in thousands)
Equipment
Packaging Materials
2005
Fiscal
2006
% of Total
Net
Revenues
42%
58%
100%
Net Revenues
$
319,788
376,523
696,311
$
Net Revenues
$
201,608
273,934
475,542
$
2007
% of Total
Net
Revenues
46%
54%
100%
Net Revenues
$
316,718
383,686
700,404
$
% of Total
Net
Revenues
45%
55%
100%
Our equipment sales have been, and are expected to remain, highly volatile due to the semiconductor industry’s need
for new capability and capacity. Packaging Materials unit sales tend to be less volatile, following the trend of total
semiconductor unit production; however, fluctuations in gold prices, which are included in our Packaging Materials
segment, can have a significant impact on Packaging Material net revenues.
See Note 12 to our Consolidated Financial Statements included in Item 8 of this report for financial results by business
segment.
Equipment
We manufacture and market a line of wire bonders and die bonders. Wire bonders are used to connect very fine wires,
typically made of gold, aluminum or copper, between the bond pads of the die and the leads on its package. Die
bonders are used to attach a semiconductor device, or die, to the package which will house the device. We believe our
equipment offers competitive advantages by providing customers with high productivity/throughput and superior
package quality/process control. In particular, our wire bonding equipment is capable of performing very fine pitch
bonding as well as creating the sophisticated wire loop shapes that are needed in the assembly of advanced
semiconductor packages. Our principal products are:
Integrated Circuit (“IC”) Ball Bonders
Automatic IC ball bonders represent a majority of our semiconductor equipment business. As part of our
competitive strategy, we seek to continually improve our models and periodically introduce new or improved
models of our IC ball bonders. Each new or improved model is designed to increase both productivity and
process capability compared to the predecessor model. Our current models, Maxum Ultra and Maxum Elite ball
bonders improved productivity by approximately 10% over their predecessor models and offer various other
performance improvements.
IC Die Bonders
In November 2006, we acquired the Alphasem die bonder product lines, consisting of the SwissLine and
EasyLine models. Die bonders are used by many of our existing wire bonder customers. We expect to utilize the
same competitive strategy as we use for our wire bonder business, including developing new models which both
improve the productivity of the die bonders and increase the size of the market served by the new models.
Specialty Die Bonders
Our die bonder product line also includes a series of specialty bonders, consisting of several equipment models
based on our die bonder platform. These models are used for various assembly processes including, but not
limited to: die sorting, power device assembly, and microelectromechanical systems (MEMS) assembly.
Specialty Wire Bonders
Our wire bonders target specific markets. Our Model 8098 targets the large area ball bonder market and is
designed for wire bonding hybrid applications, chip on board applications, and other large area applications. We
offer a wafer stud bumper, the AT Premier. The AT Premier is targeted for gold-to-gold interconnect in the flip
chip market. With industry-leading speed and technology, the machine lowers the cost of ownership for stud
bumping, enabling a wider range of applications than previously served. We also manufacture and market a line
of manual wire bonders.
25
Packaging Materials
We manufacture and market a range of semiconductor packaging materials and expendable tools for the
semiconductor packaging and assembly market. Our packaging materials are designed for use on both our own and our
competitors’ assembly equipment. A wire bonder uses a capillary or wedge tool and bonding wire much like a sewing
machine uses a needle and thread. Our principal products are:
Bonding Wire
We manufacture gold, aluminum and copper wire used in the wire bonding process. This wire is bonded to the
chip surface and package substrate by the wire bonder and becomes a permanent part of the semiconductor
package. We produce wire in a large array of materials, diameters, properties and packaging to satisfy the most
advanced ball bonding, wedge bonding and wafer/stud bumping applications.
Expendable Tools
Our expendable tools include a wide variety of capillaries, wedges, die collets and wafer saw blades. These tools
are developed for a broad range of applications, providing end-to-end solutions for our customers. Capillaries
and wedges attach the wire to the semiconductor chip, guide the wire during loop formation, attach the wire to
the package substrate and finally cut the wire allowing the bonding process to be repeated. Die collets are used
on die bonding equipment to pick up and place die onto lead frames or substrates. Saw blades are used to cut
silicon wafers into individual semiconductor die.
Critical Accounting Policies
The preparation of consolidated financial statements requires us to make assumptions, estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and disclosures of contingent assets and
liabilities as of the date of the consolidated financial statements. On an on-going basis, we evaluate estimates,
including but not limited to, those related to accounts receivable, reserves for excess and obsolete inventory, carrying
value and lives of fixed assets, goodwill and intangible assets, valuation allowances for deferred tax assets and
deferred tax liabilities, repatriation of unremitted foreign subsidiary earnings, pension benefit liabilities, equity-based
compensation expense, resizing, warranties, and litigation. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable. As a result, we make judgments regarding the carrying
values of our assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies, which have been reviewed with the Audit Committee, affect our
more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Our revenue recognition policy is in accordance with Staff Accounting Bulletin (“SAB”) No. 104, Revenue
Recognition (“SAB 104”). We recognize revenue when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the price is fixed or determinable, the collectibility is reasonably assured, and
we have satisfied equipment installation obligations and received customer acceptance, or are otherwise released from
our installation or customer acceptance obligations. In the event terms of the sale provide for a lapsing customer
acceptance period, we recognize revenue based upon the expiration of the lapsing acceptance period or customer
acceptance, whichever occurs first. Our standard terms are Ex Works (Kulicke & Soffa factory), with title transferring
to our customer at our loading dock or upon embarkation. We have a small percentage of sales with other terms, and
revenue is recognized in accordance with the terms of the related customer purchase order. Revenue related to services
is recognized upon performance of the services requested by a customer. Revenue for extended maintenance service
contracts with a term more than one month is recognized on a prorated straight-line basis over the term of the contract.
Our business is subject to contingencies related to customer orders as follows:
26
• Right of Return: A large portion of our revenue comes from the sale of machines used in the
semiconductor assembly process. Other product sales relate to consumable products, which are sold
in high-volume quantities, and are generally maintained at low stock levels at our customer’s
facility. Customer returns have historically represented a very small percentage of customer sales
on an annual basis. Our policy is to provide an allowance for customer returns based upon our
historical experience and management assumptions.
• Warranties: Our products are generally shipped with a one-year warranty against manufacturer’s
defects. We recognize a liability for estimated warranty expense when revenue for the related
product is recognized. The estimated liability for warranty expense is based upon historical
experience and our estimates of future expenses.
• Conditions of Acceptance: Sales of our consumable products and bonding wire generally do not
have customer acceptance terms. In certain cases, sales of our equipment products do have
customer acceptance clauses which may require the equipment to perform in accordance with
customer specifications or when installed at the customer’s facility. In such cases, if the terms of
acceptance are satisfied at our facility prior to shipment, the revenue for the equipment will be
recognized upon shipment. If the terms of acceptance are satisfied at our customers’ facilities, the
revenue for the equipment will be not be recognized until acceptance, which typically consists of
installation and testing, is received from the customer.
• Price Protection: We do not provide price protection to our customers.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from our customers’ failure to make
required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. We are also subject to concentrations of customers
and sales to a few geographic locations, which could also impact the collectibility of certain receivables. If economic
or political conditions were to change in some of the countries where we do business, it could have a significant
impact on the results of our operations, and our ability to realize the full value of our accounts receivable.
Inventory Reserve
We generally provide reserves for obsolete inventory and for inventory considered to be in excess of demand. In
addition, we generally record as accrued expense inventory purchase commitments in excess of demand. Demand is
generally defined as eighteen months forecasted future consumption for equipment, twelve months historical
consumption for packaging materials and twenty-four months historical consumption for spare parts. The forecasted
demand is based upon internal projections, historical sales volumes, customer order activity, and a review of
consumable inventory levels at our customers’ facilities. We communicate forecasts of our future demand to our
suppliers and adjust commitments to those suppliers accordingly. If required, we record additional reserves for the
difference between the carrying value of our inventory and the lower of cost or market value, based upon assumptions
about future demand, market conditions and the next cyclical market upturn. If actual market conditions are less
favorable than our projections, additional inventory reserves may be required. We review and physically dispose of
excess and obsolete inventory on a regular basis.
Valuation of Long-lived Assets
Our long-lived assets primarily include property, plant and equipment and goodwill. In accordance with the provisions
of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), our goodwill is not amortized. The standard
also requires that an impairment test be performed to support the carrying value of goodwill at least annually, and
whenever events occur that may impact the carrying value of goodwill. The fair value of our goodwill is based upon
our estimates of future cash flows and other factors. We manage and value our intangible technology assets in the
aggregate, as one asset group, not by individual technology.
In accordance with SFAS 144, our 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. This standard 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
27
amount of an asset or asset group is not recoverable if 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. SFAS 144 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 the expected historical 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.
Income Taxes
We record a valuation allowance to reduce our deferred tax assets to the amount we expect is more likely than not to
be realized. While we have considered future taxable income and our ongoing tax planning strategies in assessing the
need for the valuation allowance, if we were to determine that we would be able to realize our deferred tax assets in
the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should we determine we would not be able to realize all or part of our
net deferred tax assets in the future, an adjustment to the deferred tax asset would decrease income in the period such
determination was made. In fiscal 2002 and 2003, we established a valuation allowance against our deferred tax assets
generated from our U.S. net operating losses. In fiscal 2004, 2005, 2006 and 2007, we reversed the portion of the
valuation allowance that was equal to the U.S. federal income tax expense on our U.S. income for that fiscal year or
related to our plans to repatriate certain unremitted foreign earnings. Due to the restructuring of our international
operations in fiscal 2006 and fiscal 2007 and the significant historic volatility of our Equipment segment, which will
be the primary income source for the U.S. in the future, we do not believe it is more likely than not the remaining
deferred tax assets will be realized.
Significant judgment is required in determining our annual tax rate and in evaluating our tax positions. We establish
reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions
are subject to challenge and that we may not succeed. We are currently subject to multiple tax audits; however, we
believe it is unlikely the result of any of these audits would result in expense greater than our reserves. An adverse
ruling could result in a significant cash outlay.
Equity-based Compensation
Beginning October 1, 2005 we account for equity-based compensation under the provisions of SFAS No. 123R, Share-
Based Payments (“SFAS 123R”). SFAS 123R requires the recognition of the fair value of equity-based compensation
in net income. The fair value of our stock option awards are estimated using a Black-Scholes option valuation model.
This model requires the input of highly subjective assumptions and elections, including expected stock price volatility
and the estimated life of each award. In addition, the calculation of compensation cost requires that we 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 we have elected to use the straight-line method for awards granted after the
adoption of SFAS 123R and continue to use a graded vesting method for awards granted prior to the adoption of SFAS
123R. Prior to the adoption of SFAS 123R, we accounted for our stock option grants under the provisions of
Accounting Principles Board (“APB”) Opinion No. 25, Accounting For Stock Issued to Employees (“APB 25”), and
provided pro forma footnote disclosures as required by SFAS No. 148, Accounting For Stock-Based Compensation —
Transition and Disclosure, which amends SFAS No. 123, Accounting For Stock-Based Compensation. Pro forma net
income and pro forma net income per share disclosed in the notes to our Consolidated Financial Statements for fiscal
years prior to 2006 were estimated using a Black-Scholes option valuation model. As a result of the adoption of SFAS
123R, we can recognize a benefit from equity-based compensation in paid-in-capital if an incremental tax benefit is
realized after all other tax attributes currently available to us have been utilized.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (“FIN 48”), an interpretation of SFAS No. 109, Accounting for Income Taxes (“SFAS
109”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS 109. FIN 48 prescribes a two-step process to determine the amount of tax benefit
to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon
examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then measured to
determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest
28
amount of benefit that is greater than 50% likely of being realized upon settlement. We are required to adopt FIN 48 in
first quarter of fiscal 2008. We do not expect the adoption of FIN 48 to have a material impact on our consolidated
results of operations and financial condition.
In September 2006, the Securities and Exchange Commission (“SEC”) issued SAB No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Current Year Misstatements (“SAB 108”). SAB 108 requires analysis of
misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in
assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB 108 is effective for
annual financial statements issued for fiscal years ending after November 15, 2006. The adoption of SAB 108 in fiscal
2007 did not have any material impact on our consolidated results of operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 clarifies the
definition of fair value, establishes a framework for measuring fair value and expands disclosures on fair value
measurements. This Statement is effective for financial statements issued for fiscal years beginning after
November 15, 2007; however, the FASB is considering a partial deferral of the effective date of SFAS 157. We are
currently evaluating the potential impact of SFAS 157 on our consolidated results of operations and financial
condition.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans—An Amendment of FASB Statements No. 87, 88, 106, and 132R (“SFAS 158”). SFAS 158
requires an employer to: (i) recognize in its statement of financial position an asset for a plan’s overfunded status or a
liability for a plan’s underfunded status; (ii) measure a plan’s assets and its obligations that determine its funded status
as of the end of the employer’s fiscal year; and (iii) recognize changes in the funded status of a defined benefit
postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income
similar to the additional minimum pension liability adjustment previously required under SFAS No. 87, Employers
Accounting for Pensions. The requirements listed under (i) and (iii) above are effective for annual fiscal years ending
after December 15, 2006, and the requirement listed under (ii) above is effective as of December 31, 2008.
The adoption of SFAS 158 did not have a material impact on our consolidated results of operations and financial
condition in fiscal 2007, and will not have a material impact on our consolidated results of operations and financial
condition in fiscal 2008.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities – Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to
measure many financial instruments and certain other items at fair value at specified election dates. Under SFAS 159,
any unrealized holding gains and losses on items for which the fair value option has been elected are reported in
earnings at each subsequent reporting date. If elected, the fair value option (1) may be applied instrument by
instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (2) is
irrevocable (unless a new election date occurs); and (3) is applied only to entire instruments and not to portions of
instruments. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins on or before
November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. We are currently evaluating
the potential impact of SFAS 159 on our consolidated results of operations and financial condition.
The FASB has issued a proposed Staff Position (“FSP”) APB 14-a, Accounting for Convertible Debt Instruments That
May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-a”) that would apply to
any convertible debt instrument that may be settled in whole or in part with cash upon conversion. If adopted, FSP
APB 14-a would require separate accounting for the debt and equity components of the security. Under the proposed
FSP APB 14-a, the value assigned to the debt at the time of issuance (the “debt component”) would be its estimated
fair value, based on a similar debt issue without the conversion feature. The difference between the debt component
and the par value of the debt would be accounted for as an original discount and included in stockholder’s equity as
paid-in capital (the “equity component”). The original issue discount would be amortized to interest expense over the
life of the debt, with a corresponding accretion of the debt component to its par value. If the proposed FSP APB 14-a
is adopted, we would be required to adopt it as of the beginning of fiscal 2009, with retrospective application to
financial statements for periods prior to the date of adoption. FSP APB 14-a has not yet been finalized, and the actual
requirements under FSP may be modified prior to its final adoption. We cannot predict whether or not the FASB will
adopt the proposed FSP APB 14-a, and we cannot predict the adoption of any other changes in generally accepted
accounting principals that may affect the accounting for convertible debt securities.
29
Results of Operations for fiscal 2006 and 2007
The following table reflects bookings and backlog as of September 30, 2006 and September 29, 2007:
(in thousands)
Bookings
Backlog
As of
September 30, 2006
$
660,900
$
56,000
September 29, 2007
$
749,600
$
105,000
Bookings and Backlog A booking is recorded when a customer order is reviewed and it is determined that all
specifications can be met, production (or service) can be scheduled, a delivery date can be set, and the customer meets
our credit requirements. Our backlog consists of customer orders that are scheduled for shipment within the next 12
months. A majority of our orders are subject to cancellation or deferral by the customer with limited or no penalties.
Also, customer demand for our products can vary dramatically without prior notice. Because of the volatility of
customer demand, possibility of customer changes in delivery schedules or cancellations and potential delays in
product shipments, our bookings and backlog as of any particular date may not be indicative of revenues for any
succeeding period. Bookings and backlog amounts prior to November 3, 2006 did not include our die bonder business.
Net Revenue
The following table reflects net revenues by business segment:
Fiscal
(dollar amounts in thousands)
Equipment
Packaging materials
Total
2006
319,788
376,523
696,311
$
$
2007
316,718
383,686
700,404
$
$
$ Change
(3,070)
$
7,163
4,093
$
% Change
-1.0%
1.9%
0.6%
Net Revenue
amount of gold metal value included in our Packaging Materials revenue in fiscal 2006 was $278.8 million compared
to $291.7 million in fiscal 2007. These same amounts are included in the cost of sales.
Included in the net revenue for the Packaging Materials segment is gold metal value. The total
Our customers are primarily located in or have operations in the Asia/Pacific region. Approximately 93% and 96% of
our fiscal 2006 and 2007 net revenues, respectively, were to customer locations outside of the United States, and we
expect sales outside of the United States to continue to represent a substantial majority of our future revenues.
The following table reflects the components of Equipment net revenue change from fiscal 2006 to 2007:
(in thousands)
Equipment
Price
(22,475)
$
Fiscal 2006 vs. 2007
Volume
Change
$
19,405
$
(3,070)
Equipment
The decrease in net revenue was primarily due to our IC ball bonders selling price falling by 8.5%.
This decrease is due to customer mix as we sold a higher proportion of machines to our customers who are
subcontractors and distributors in fiscal 2007 as compared to fiscal 2006. The increase in volume of $19.4 million was
due to our newly acquired IC die bonder business partially offset by lower volume from our specialty wire bonders.
The following table reflects the components of Packaging Materials net revenue variance from fiscal 2006 to 2007:
(in thousands)
Packaging materials
Price
Fiscal 2006 vs. 2007
Volume
Change
$
41,927
$
(34,764)
$
7,163
Packaging Materials
The increase in Packaging Material net revenue is primarily due to a 14.7% increase in the
price of gold. For fiscal 2007, gold pass through increased from $278.8 million in fiscal 2006 to $291.7 million in
fiscal 2007. The increase in net revenue was partially offset by decreases in the wire business volume due increased
focus on higher margin customers and higher market demand for more durable consumables.
30
Gross Profit
The following table reflects gross profit by business segment:
(dollar amounts in thousands)
Equipment
Packaging materials
Total
2006
141,315
55,246
196,561
$
$
Fiscal
2007
128,690
52,244
180,934
$
$
$ Change
$
(12,625)
(3,002)
(15,627)
$
% Change
-8.9%
-5.4%
-8.0%
The following table reflects gross profit as a percentage of net revenue by business segment:
Equipment
Packaging materials
Total
Fiscal
2006
2007
44.2%
14.7%
28.2%
40.6%
13.6%
25.8%
Basis Point Change
(356)
(106)
(240)
The following table reflects the components of Equipment gross profit variance from fiscal 2006 to 2007:
(in thousands)
Equipment
Price
(22,475)
$
Fiscal 2006 vs. 2007
Cost
Volume
Change
$
6,819
$
3,031
$
(12,625)
Equipment
The net decrease in Equipment gross profit was primarily due to an 8.5% decrease in the selling
price of IC ball bonders. In addition, we experienced a favorable $6.8 million decrease in cost due to our continuous
effort to reduce IC ball bonder expenses, and a favorable $3.0 million net volume increase due to our newly acquired
IC die bonder business partially offset by lower volume from our specialty die bonders. Fiscal 2006 gross profit
included a one time $3.5 million favorable correction of errors.
The following table reflects the components of Packaging Materials gross profit change from fiscal 2006 to 2007:
(in thousands)
Packaging materials
Price
$
41,927
Fiscal 2006 vs. 2007
Cost
(39,002)
$
Volume
(5,927)
$
Change
$
(3,002)
The net decrease in Packaging Material gross profit was primarily due to a 5.0% decrease in
Packaging Materials
capillary unit sales and 3.6% decrease in capillary average selling prices. The decrease in volume is due to market
acceptance of more durable consumables while the decrease in average selling price can be attributed to the overall
industry dynamic of continual price reductions. This impact was partially offset by higher gross margins in the wire
business where both pricing and costs improved.
Operating Expenses
The following table reflects operating expenses:
(dollar amounts in thousands)
Selling, general and administrative
Research and development
Gain on sale of assets
Total
2006
2007
$ Change
% Change
Fiscal
$
$
$
81,462
37,657
(4,544)
114,575
93,803
50,685
-
144,488
$
$
$
12,341
13,028
4,544
29,913
15.1%
34.6%
-100.0%
26.1%
31
The following table reflects operating expenses as a percentage of net revenue:
Selling, general and administrative
Research and development
Gain on sale of assets
Total
Selling, general and administrative
2006
11.7%
5.4%
-0.7%
16.5%
Fiscal
2007
13.4%
7.2%
0.0%
20.6%
Change
1.7%
1.8%
0.7%
4.2%
The increase in selling, general and administrative (“SG&A”) expenses of $12.3 million in fiscal 2007 compared to the
previous year was primarily due to the addition of the die bonder business.
Research and development
The increase in research and development expenses of $13.0 million in fiscal 2007 compared to previous year was
primarily due to the addition of the die bonder business.
Gain on sale of assets
For fiscal 2006, the $4.5 million net gain on sale of assets represents the gain recognized on the sale of the land and
building of our former corporate headquarters location in Willow Grove, Pennsylvania.
Income from Operations
The following table reflects income from continuing operations by business segment:
Fiscal
(dollar amounts in thousands)
Equipment
Packaging materials
Gain on sale of assets
Total
Equipment
2006
$
55,870
21,572
4,544
81,986
$
2007
20,433
16,013
-
36,446
$
$
$ Change
$
(35,437)
(5,559)
(4,544)
(45,540)
$
% Change
-63.4%
-25.8%
-100.0%
-55.5%
For fiscal 2007, income from operations for our equipment business segment decreased $35.4 million due to the
continued investment in the die bonder business as well as this segment absorbing increased allocation of our SG&A
expenses that were previously allocated to divested businesses.
Packaging Materials
For fiscal 2007, income from operations for our packaging materials business segment decreased $5.6 million due to
our increased investment in engineering of each of the business units as well as this segment absorbing increased
allocation of our SG&A expenses that were previously allocated to divested businesses.
Interest Income and Expense
(dollar amounts in thousands)
Interest income
Interest expense
Fiscal
2006
$
3,921
(3,126)
2007
$
6,866
(2,876)
$ Change
$
2,945
250
% Change
75.1%
-8.0%
Interest income during fiscal 2007 was higher than fiscal 2006 due to higher rates of return on invested cash balances
and higher invested cash balances. Interest expense in both fiscal 2006 and 2007 primarily reflects interest on our
Convertible Subordinated Notes. The higher interest expense in fiscal 2006 reflected interest expense on the sale-
leaseback of our former corporate headquarters.
32
Gain on Early Extinguishment of Debt
In fiscal 2006, we exchanged a total of 3.6 million shares of our common stock and $26.4 million of cash for $75.0
million (face value) of our 0.5% Convertible Subordinated Notes outstanding, and in accordance with APB No. 26,
Early Extinguishment of Debt (“APB 26”), we recorded a gain on early extinguishment of debt of $4.0 million, net of
deferred amortization costs written off of $1.3 million. The exchanges included a number of shares that was less than
the original number of shares issuable under the conversion terms. In fiscal 2007, we purchased in the open market
$53.6 million (face value) of our 0.5% Convertible Subordinated Notes outstanding for net cash of $50.4 million. We
recorded a gain of extinguishment of debt of $2.8 million, net of deferred amortization costs written off of $0.4
million.
Provision for Income Taxes
Our provision for income taxes from continuing operations for fiscal 2007 reflects income tax expense of $5.5 million,
which primarily consists of $1.3 million for federal alternative minimum taxes, $2.2 million for state income taxes,
$3.5 million of income tax expense for additional foreign and domestic income tax exposures, $0.1 for foreign
withholding taxes and is offset by $1.6 million for potential repatriation of foreign earnings. Our tax expense in fiscal
2006 reflects income tax expense on income in foreign jurisdictions, foreign income tax exposures, foreign
withholding taxes, potential repatriation of foreign earnings, federal alternative minimum taxes and state taxes.
Our effective tax rate of 12.7% for fiscal 2007 is lower than the U.S. statutory rate of 35% primarily due to the reversal
of the valuation allowance associated with our domestic deferred tax assets due to current year operating results. The
reversal of the valuation allowance is limited to the deferred tax assets utilized in the current fiscal year, as we do not
believe sufficient positive evidence exists with respect to our ability to generate sufficient future earnings to utilize
these deferred tax assets. We continue to maintain a valuation allowance against our remaining deferred tax assets as
we do not believe it is more likely than not that the remaining deferred tax assets will be realized due to the
restructuring of international operations in fiscal 2006 and fiscal 2007 and the significant historic volatility of our
Equipment segment, which will be the primary source for the U.S. in the future.
Our future effective tax rate would be affected if earnings were lower than anticipated in countries where we have
lower statutory rates and higher than anticipated in countries where we have higher statutory rates by changes in the
valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or
interpretations thereof. We regularly assess the effects resulting from these factors to determine the adequacy of our
provision for income taxes.
Loss from Discontinued Operations, net of tax
In fiscal 2006, discontinued operations consisted of our former test interconnect business unit (see the description of
the sale of this business in the introduction to this Management’s Discussion Analysis of Financial Condition and
Results of Operations).
The Test business was sold in fiscal 2006, but had net revenue of $42.7 million through the date of sale. The loss from
the Test business’ operations for fiscal 2006 was $24.9 million, including a loss on disposal of $0.8 million, net of a
benefit from income taxes of $1.4 million. Included in the loss from discontinued operations are operating losses of
$10.6 million, and accrued severance and facilities costs of approximately $6.4 million and $6.1 million, respectively.
The facilities costs of $6.1 million are net of estimated sublease income from the affected facilities. These estimates of
sublease income are subject to change, and such changes could result in an increase or decrease to the estimated
facilities charges previously recorded. These payments are expected to be paid out through September 2012. The
major classes of Test assets and liabilities sold included: $12.3 million in accounts receivable; $9.8 million in
inventory; $12.7 million in property, plant and equipment; and $5.2 million in accounts payable.
33
The following table reflects accrued expenses recorded, and included in continuing operations, in fiscal 2007 for
obligations associated with the discontinuation of the Test business:
(in thousands)
As of September 30, 2006
Change in estimate included in continuing operations
Payment of obligations
As of September 29, 2007
Results of Operations for fiscal 2005 and 2006
Severance and
related benefits
$
1,538
43
(1,581)
-
$
The following table reflects bookings and backlog as of September 30, 2005 and 2006:
Facilities
$
Total
$
5,454
1,570
(1,763)
5,261
6,992
1,613
(3,344)
5,261
$
$
(in thousands)
Bookings
Backlog
As of
September 30, 2005
$
516,200
$
91,500
September 30, 2006
$
660,900
$
56,000
Bookings and Backlog. A booking is recorded when a customer order is reviewed and it is determined that all
specifications can be met, production (or service) can be scheduled, a delivery date can be set, and the customer meets
our credit requirements. Our bookings and backlog as of any date may not be indicative of net revenues for any
succeeding period, since the timing of deliveries may vary and orders generally are subject to delay or cancellation.
Net Revenues
The following table reflects net revenues by business segment:
Fiscal
(dollar amounts in thousands)
Equipment
Packaging materials
Total
2005
201,608
273,934
475,542
$
$
2006
319,788
376,523
696,311
$
$
$ Change
118,180
$
102,589
220,769
$
% Change
58.6%
37.5%
46.4%
Included in the revenue for the Packaging Materials segment is gold metal value. The total amount of gold metal value
included in our Packaging Materials revenue in fiscal 2006 is $278.8 million compared to $183.8 million in fiscal
2005. These same amounts are included in the cost of sales.
Our customers are primarily located in or have operations in the Asia/Pacific region. Approximately 95% and 93% of
our fiscal 2005 and 2006 net revenues, respectively, were to customer locations outside of the United States in the
Asia/Pacific region, and we expect sales outside of the United States to continue to represent a substantial majority of
our future revenues.
Equipment
For fiscal 2006, net revenue for the equipment segment increased $118.2 million or 58.6% to $319.8 million from
$201.6 million in fiscal 2005. The increase in revenue was due to a 75.1% increase in unit sales of our automatic ball
bonders, caused by increased industry-wide demand for backend semiconductor equipment. Average selling prices
(“ASP”) decreased 1.5% compared to fiscal 2005. Fiscal 2005 included significant volume of a customized product to
a customer with a much higher ASP than a traditional ball bonder.
Packaging Materials
For fiscal 2006, net revenue for the packaging materials segment increased $102.6 million or 37.5% to $376.5 million
from $273.9 million in fiscal 2005. This increase in net revenue primarily resulted from a $100.5 million increase in
wire revenue. Of the $100.5 million increase in wire revenue, $34.9 million was due to increased volumes of wire sold
(measured in Kft) and $65.6 million was due to an increase in gold wire ASP primarily caused by an increase in the
price of gold. Gold wire selling prices are heavily dependent upon the price of gold and can fluctuate significantly
from period to period.
34
Gross Profit
The following table reflects gross profit by business segment:
(dollar amounts in thousands)
Equipment
Packaging materials
Total
2005
% Sales
Fiscal
$
86,050
50,031
136,081
$
42.7%
18.3%
28.6%
2006
141,315
55,246
196,561
$
$
% Sales
44.2%
14.7%
28.2%
Overall, gross profit for fiscal 2006 increased $60.5 million to $196.6 million from $136.1 million in fiscal 2005. This
higher gross profit is primarily due to increased industry-wide demand, particularly for automatic ball bonders sold
within our equipment segment.
Equipment
For fiscal 2006, our equipment segment gross profit increased $55.3 million, compared to fiscal 2005, as industry-
wide demand for automatic ball bonders increased sharply. Gross margin increased to 44.2% in fiscal 2006 from
42.7% in fiscal 2005. The increase in gross margin was mainly due to a 0.3% reduction in material cost.
Approximately $3.5 million of our equipment segment’s fiscal 2006 gross profit included a cumulative adjustment to
correct an immaterial error (See Notes 1 and 16 to our Consolidated Financial Statements).
Packaging Materials
For fiscal 2006, our packaging materials segment gross profit increased $5.2 million to $55.2 million from $50.0
million in fiscal 2005. This increase was primarily due to increased sales of gold wire and expendable tools. Our
packaging materials gross margin declined to 14.7% from 18.3% for the year ago period. This decline in gross margin
was primarily due to a 31.5% increase in the cost of gold during fiscal 2006, compared to the same period a year ago.
The 46.6% increase in wire sales also contributed to the decline in gross margins during fiscal 2006, compared to the
same period a year ago.
Operating Expenses
The following table reflects operating expenses:
(dollar amounts in thousands)
Selling, general and administrative
Research and development
Gain on sale of assets
Total
Fiscal
2005
69,525
28,495
(1,690)
96,330
$
$
% Sales
14.6%
6.0%
-0.4%
20.3%
$
2006
81,462
37,657
(4,544)
114,575
$
% Sales
11.7%
5.4%
-0.7%
16.5%
SG&A expenses of $81.5 million for fiscal 2006 increased $11.9 million compared to the SG&A expenses of $69.5
million in fiscal 2005. This increase was primarily due to an increase in incentive compensation of $9.0 million, and
the recording of $3.0 million of stock-based compensation expense associated with the adoption of SFAS 123R in
fiscal 2006. Incentive compensation expense is recorded when net income and certain other performance targets are
achieved.
Research and development expenses for fiscal 2006 increased $9.2 million to $37.7 million from $28.5 million in
fiscal 2005. The increase was primarily due to costs associated with the development of the next generation ball
bonder and stock based compensation associated with the adoption of SFAS 123R.
For fiscal 2006, the $4.5 million net gain on sale of assets represents the gain recognized on the sale of the land and
building of our former corporate headquarters location in Willow Grove, Pennsylvania. For fiscal 2005, the $1.7
million net gain on sale of assets primarily consists of the gain on the sale of our wedge bonding technology of $1.6
million.
35
Income from Operations
The following table reflects income from operations by business segment:
(dollar amounts in thousands)
Equipment
Packaging materials
Gain on sale of assets
Total
2005
$
20,444
19,307
-
39,751
Fiscal
2006
$
%
Sales
10.1%
7.0%
-
55,870
21,572
4,544
81,986
%
Sales
17.5%
5.7%
0.7%
11.8%
$
8.4%
$
For fiscal 2006, we had income from operations of $82.0 million, compared to income from operations of $39.8
million in fiscal 2005. This change was primarily due to a $220.8 million increase in sales caused by increased
industry-wide demand for automatic ball bonders.
Equipment
For fiscal 2006, income from operations for our equipment business segment increased $35.4 million due to increased
industry-wide demand for our automatic ball bonders.
Packaging Materials
Income from operations for our packaging materials business segment increased $2.3 million primarily due to higher
volumes of wire sold and an increase in gold wire average selling price caused by an increase in the price of gold.
Interest Income and Expense
(dollar amounts in thousands)
Interest income
Interest expense
Fiscal
2005
2006
$ Change
% Change
$
2,228
(3,806)
$
3,921
(3,126)
$
1,693
680
76%
-18%
Interest income during fiscal 2006 was $1.7 million higher than in fiscal 2005 due to higher rates of return on invested
cash balances and higher invested cash balances. Interest expense in fiscal 2006 was $0.7 million lower than fiscal
2005. Interest expense in both the current and prior fiscal year primarily reflects interest on our Convertible
Subordinated Notes. The reduction in interest expense in fiscal 2006 was primarily due to the repurchase of a portion
of our outstanding 0.5% Convertible Subordinated Notes having an aggregate principal outstanding amount of $75.0
million.
Gain on Early Extinguishment of Debt
In fiscal 2006, we exchanged a total of 3.6 million shares of our common stock and $26.4 million of cash for $75.0
million (face value) of our Convertible Subordinated Notes outstanding. In accordance with APB 26, we recorded a
gain on early extinguishment of debt of $4.0 million, net of deferred amortization costs written off of $1.3 million, as
the exchanges included a number of shares that was less than the number of shares issuable under the original
conversion terms.
Provision for Income Taxes
Our provision for income taxes from continuing operations for fiscal 2006 reflects income tax expense of $9.8 million,
which primarily consists of $1.3 million for federal alternative minimum taxes, $2.0 million for state income taxes,
$2.0 million for income taxes on income earned in foreign jurisdictions, $3.6 million of income tax expense for
additional foreign income tax exposures, $0.6 million for potential repatriation of foreign earnings, and $0.3 for
foreign withholding taxes. Our tax expense in fiscal 2005 reflects income tax expense on income in foreign
jurisdictions, foreign income tax exposures and potential repatriation of foreign earnings.
36
Our future effective tax rate would be affected if earnings are lower than anticipated in countries where we have lower
statutory rates and higher than anticipated in countries where we have higher statutory rates by changes in the
valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or
interpretations thereof. We regularly assess the effects resulting from these factors to determine the adequacy of our
provision for income taxes.
Loss from Discontinued Operations, net of tax
In fiscal 2005 and 2006, our discontinued operations consisted of our former Test interconnect business unit (see the
description of the sale of this business in the introduction to this Management’s Discussion Analysis of Financial
Condition and Results of Operations).
The Test business was sold in fiscal 2006, but had net revenue of $42.7 million through the date of sale. This former
segment reported net revenue of $85.7 million in fiscal 2005. The loss from the Test business’ operations for fiscal
2006 was $24.9 million, including a loss on disposal of $0.8 million, net of a benefit from income taxes of $1.4
million. Included in the loss from discontinued operations are operating losses of $10.6 million, and accrued
severance and facilities costs of approximately $6.4 million and $6.1 million, respectively. The facilities costs of $6.1
million are net of estimated sublease income from the affected facilities. These estimates of sublease income are
subject to change, and such changes could result in an increase or decrease to the estimated facilities charges
previously recorded. These payments are expected to be paid out through September 2012. The loss from the Test
business’ operations for fiscal 2005 was $137.4 million. The major classes of Test assets and liabilities sold included:
$12.3 million in accounts receivable; $9.8 million in inventory; $12.7 million in property, plant and equipment; and
$5.2 million in accounts payable.
The following table reflects accrued expenses recorded in fiscal 2006 for obligations associated with the
discontinuation of the Test business are presented below:
(in thousands)
Provisions recorded in fiscal 2006
Payment of obligations
As of September 30, 2006
LIQUIDITY AND CAPITAL RESOURCES
Severance and
related benefits
Facilities
Total
$
$
$
6,355
(4,817)
1,538
6,138
(684)
5,454
12,493
(5,501)
6,992
$
$
$
The following table reflects cash, cash equivalents and short term investments as of September 30, 2006 and
September 29, 2007:
$ Change
$
16,604
(1,973)
(2,004)
12,627
$
(dollar amounts in thousands)
Cash and cash equivalents
Restricted cash *
Short-term investments
Total
Percentage of total assets
* Used to support letters of credit.
As of
September 30, 2006
133,967
$
1,973
21,343
157,283
39%
$
September 29, 2007
150,571
$
-
19,339
169,910
33%
$
37
The following table reflects summary Consolidated Statement of Cash Flow information for fiscal 2006 and 2007:
(in thousands)
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash and cash equivalents
Net cash provided by continuing operations
Cash provided by (used in):
Operating activities
Investing activities
Net cash provided by (used in) discontinued operations:
Changes in cash and cash equivalents
Fiscal
2006
2007
$
78,122
(16,920)
(19,606)
(62)
41,534
(15,002)
27,980
12,978
54,512
$
$
35,107
(29,952)
14,385
408
19,948
(3,344)
-
(3,344)
16,604
$
Fiscal 2006 The net cash provided by operating activities from continuing operations in fiscal 2006 of $78.1 million
was primarily attributable to income from continuing operations of $77.0 million plus non-cash expenses/income of
$8.2 million that was partially offset by net changes in operating assets and liabilities of $7.1 million. The net outflow
of cash from operating assets and liabilities of $7.1 million was primarily due to the paydown of accounts payable
partially offset by a reduction in accounts receivable. Including the net cash used in discontinued operations of $15.0
million, net cash provided by operating activities was $63.3 million in fiscal 2006.
The net cash used in investing activities from continuing operations of $16.9 million consists of purchases of short-
term investments totaling $36.6 million and capital expenditures of $9.5 million offset in part by the net proceeds from
the sale of marketable securities of $29.8 million. Including the net cash provided by discontinued operations of $28.0
million, which represents primarily the proceeds from the sale of the Test business, net cash provided by investing
activities was $11.0 million in fiscal 2006.
The net cash used in financing activities of $19.6 million includes $26.6 million of cash used in the early
extinguishment of $75.0 million (face value) of our 0.5% Convertible Subordinated Notes that is partially offset by
proceeds from the exercise of employee stock options of $7.0 million.
Fiscal 2007 Fiscal 2007 net cash provided by operating activities from continuing operations was primarily
attributable to net income of $37.7 million plus non-cash expenses/income of $15.8 million partially offset by net
changes in operating assets and liabilities of $16.6 million. The net outflow of cash from operating assets and
liabilities of $16.6 million was primarily due to increases in accounts receivable of $43.9 million and inventories of
$11.1 million offset by a decrease in accounts payable and accrued expenses of $42.2 million.
Net cash for investing activities of $28.2 million, net of $1.1 million of cash acquired, was used for the purchase of
Alphasem. In addition, net cash used in investing activities from continuing operations during fiscal 2007 consisted of
purchases of short-term investments totaling $37.3 million and capital expenditures of $5.8 million offset in part by the
net proceeds from the sale of marketable securities of $39.3 million.
Net cash provided by financing activities for fiscal 2007 included $106.4 million proceeds from the issuance of $110
million (face value) of our 0.875% Convertible Subordinated Notes due 2012. In addition, fiscal 2007 net cash used in
financing activities included $50.4 million for the repurchase of $53.6 million (face value) of our 0.5% Convertible
Subordinated Notes and $46.1 million for the repurchase of our common stock.
Net cash used in discontinued operations for fiscal 2007 represents severance and facility payments related to our
former Test business.
38
Fiscal 2008 Outlook During the next twelve months, we expect to generate cash from operations through our net
income and reduction in our working capital. We expect our fiscal 2008 capital expenditure needs to be approximately
$10.0 million to $14.0 million, and will be primarily used for the implementation of a new worldwide software system
and for our operations infrastructure at our Asia/Pacific locations. We will continue to use our excess cash to purchase
our Convertible Subordinated Notes prior to maturity, purchase shares of our common stock in open market
transactions, and/or fund our future growth opportunities.
To manage working capital associated with projected gold purchases for our Packaging Materials segment, we may
enter into gold forward contracts in the future.
Convertible Subordinated Notes
The following table reflects debt, consisting of Convertible Subordinated Notes, as of September 30, 2006 and
September 29, 2007:
Rate
0.500%
1.000%
0.875%
Payment Dates
of each year
May 30 and November 30
June 30 and December 30
June 1 and December 1
Conversion
Price
$
$
$
20.33
12.84
14.36
Maturity
Date
November 30, 2008
June 30, 2010
June 1, 2012
(in thousands)
As of
September 30, 2006
$
130,000
65,000
-
195,000
$
September 29, 2007
$
76,412
65,000
110,000
251,412
$
Total
0.5% Convertible Subordinated Notes
During fiscal 2004, we issued $205.0 million aggregate principal amount of 0.5% Convertible Subordinated Notes
which are general obligations of the Company and are subordinated to all senior debt. The notes rank equally with our
other Convertible Subordinated Notes. There are no financial covenants associated with the notes and there are no
restrictions on incurring additional debt or issuing or repurchasing our securities.
During 2006, we purchased $75.0 million (face value) of the outstanding 0.5% Convertible Subordinated Notes for
consideration consisting of 3.6 million shares of common stock with an aggregate fair value of $42.7 million and $26.7
million in cash. In accordance with APB 26, we recorded a net gain of $4.0 million, net of deferred financing cost of
$1.3 million.
During fiscal 2007, we purchased in the open market $53.6 million (face value) of the outstanding notes for net cash of
$50.4 million. In accordance with APB 26, we recognized a net gain of $2.8 million, net of deferred financing costs of
$0.4 million.
1.0% Convertible Subordinated Notes
During 2004, we issued $65.0 million aggregate principal amount of 1.0% Convertible Subordinated Notes. The
conversion rights of the notes may be terminated if the closing price of our common stock has exceeded 140% of the
conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days. The notes
are general obligations of the Company and are subordinated to all senior debt. The notes rank equally with our other
Convertible Subordinated Notes. There are no financial covenants associated with the notes and there are no
restrictions on incurring additional debt or issuing or repurchasing our securities.
0.875% Convertible Subordinated Notes
On June 6, 2007, we issued $110 million aggregate principal amount of 0.875% Convertible Subordinated Notes due
2012, including exercise of the initial purchaser’s over-allotment option for $10 million aggregate principal amount.
Net proceeds from the issuance were $106.4 million. The 0.875% Convertible Subordinated Notes were issued
pursuant to an indenture dated as of June 6, 2007, between the Company and The Bank of New York, as trustee. The
0.875% Convertible Subordinated Notes are unsecured subordinated obligations of the Company. Debt issuance costs
of $3.6 million were incurred in connection with the issuance of the 0.875% Convertible Subordinated Notes and will
be amortized to expense over 60 months.
39
Holders of the 0.875% Convertible Subordinated Notes may convert their notes based on an initial conversion rate of
approximately 69.6621 shares per $1,000 principal amount of notes (equal to an initial conversion price of
approximately $14.355 per share) only under the following circumstances: (1) during specified periods, if the price of
the Company’s common stock exceeds specified thresholds; (2) during specified periods, if the trading price of the
0.875% Convertible Subordinated Notes is below a specified threshold; (3) at any time on or after May 1, 2012 or
(4) upon the occurrence of certain corporate transactions. The initial conversion rate will be adjusted for certain events.
We presently intend to satisfy any conversion of the 0.875% Convertible Subordinated Notes with cash up to the
principal amount of the 0.875% Convertible Subordinated Notes and, with respect to any excess conversion value,
with shares of our common stock. We have the option to elect to satisfy the conversion obligations in cash, common
stock or a combination thereof.
The 0.875% Convertible Subordinated Notes will not be redeemable at the Company’s option. Holders of the 0.875%
Convertible Subordinated Notes will not have the right to require us to repurchase their 0.875% Convertible
Subordinated Notes prior to maturity except in connection with the occurrence of certain fundamental change
transactions. The 0.875% Convertible Subordinated Notes may be accelerated upon an event of default as described in
the Indenture and will be accelerated upon bankruptcy, insolvency, appointment of a receiver and similar events with
respect to the Company.
In connection with the issuance of the 0.875% Convertible Subordinated Notes, on June 6, 2007, we entered into a
registration rights agreement with Banc of America Securities LLC, as the initial purchaser (the “Registration Rights
Agreement”). Pursuant to the Registration Rights Agreement, we filed a shelf registration statement with the Securities
and Exchange Commission covering resale of the 0.875% Convertible Subordinated Notes and the shares of our
common stock issuable upon conversion of the 0.875% Convertible Subordinated Notes within 120 days after issuance
of the 0.875% Convertible Subordinated Notes. The shelf registration statement became effective on September 10,
2007.
Other Obligations and Contingent Payments
Under 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 September 29, 2007 are appropriately not included in the Consolidated Balance Sheet and
Statements of Operations included in this Form 10-K; however, they have been disclosed in the following table for
additional information.
The following table identifies obligations and contingent payments under various arrangements as of September 29,
2007:
(in thousands)
Contractual Obligations:
Long-term debt
Total Obligations reflected on the
Consolidated Financial Statements
Contractual Obligations:
Interest expense related to long term debt
Operating lease obligations *
Inventory Purchase obligations
Commercial Commitments:
Gold supply agreement
Standby Letters of Credit
Total Obligations and Commitments not reflected on the
Consolidated Financial Statements
* Does not include lease extension options, if applicable.
Total
Less than
1 year
Payments due by period
3 - 5
years
1 - 3
years
More than
5 years
$
251,412
$
-
$
141,412
$
110,000
$
-
$
251,412
$
-
$
141,412
$
110,000
$
-
7,325
33,453
67,431
17,758
1,030
1,984
5,901
67,431
17,758
1,030
3,416
7,917
-
-
-
1,925
6,523
-
-
-
-
13,112
-
-
-
$
126,997
$
94,104
$
11,333
$
8,448
$
13,112
40
The following table reflects long-term debt as of September 29, 2007:
Type
0.5 % Convertible Subordinated Notes
1.0 % Convertible Subordinated Notes
0.875 % Convertible Subordinated Notes
Maturity Date
November 30, 2008
June 30, 2010
June 1, 2012
Par Value
(in thousands)
76,412
65,000
110,000
251,412
$
$
$
$
Fair Value as of
September 29, 2007
(quoted market price, in
thousands)
$
$
$
$
72,018
59,475
97,350
228,843
Standard &
Poor's rating
B-
B-
Not rated
In addition to the obligations identified in the above table, the following long-term liabilities are recorded in our
Consolidated Balance Sheet as of September 29, 2007: obligation to our Switzerland pension plan of $3.5 million, post
employment foreign severance obligations of $3.0 million; and operating lease retirement obligations of $1.7 million.
Exclusive of the pension plan which is discussed below, timing of the ultimate payment of these obligations was
uncertain as of September 29, 2007.
Benefits under our U.S. non-contributory defined benefit pension plan were frozen as of December 31, 1995. During
fiscal 2007, we sought the necessary government approvals to transfer the plan’s assets and obligations to an insurance
carrier, and we made a $1.9 million cash contribution to fully fund the plan. We expect the plan termination to be
completed in fiscal 2008. Participant benefits will not be adversely impacted by the termination of this plan. When the
termination is completed, we expect to recognize a one-time non-cash pre-tax expense of approximately $9.3 million
associated with recognizing unamortized net losses.
Our operating lease obligations as of September 29, 2007 represent obligations due under various facility and
equipment leases with terms up to fifteen years in duration (not including lease extension options, if applicable).
Inventory purchase obligations represent outstanding purchase commitments for inventory components ordered in the
normal course of business. The gold supply financing guarantee includes gold inventory purchases we are obligated to
pay for upon shipment of fabricated gold to our customers. In lieu of security deposits, we support this guarantee with
letters of credit from an uncommitted credit facility.
We also provide standby letters of credit which represent obligations in lieu of security deposits for employee benefit
programs and a customs bond.
We believe that our existing cash reserves and anticipated cash flows from operations will be sufficient to meet our
liquidity and capital requirements for at least the next twelve months. However, our liquidity is affected by many
factors, some based on normal operations of the business and others related to industry uncertainties, global economic
conditions, and volatility in the commodity markets. The liquidity required to support the working capital needs of our
wire business is directly affected by the price of gold.
We may seek, as we believe appropriate, additional debt or equity financing to provide capital for corporate purposes.
We may also seek additional debt or equity financing for the refinancing or redemption of existing debt, to repurchase
our common stock and/or to fund strategic business opportunities, including possible acquisitions, joint ventures,
alliances or other business arrangements which could require substantial capital outlays. The timing and amount of
such potential capital requirements cannot be determined at this time and will depend on a number of factors,
including demand for our products, semiconductor and semiconductor capital equipment industry conditions,
competitive factors, the condition of financial markets and the nature and size of strategic business opportunities which
we may elect to pursue.
41
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates primarily from our investments in certain available-for-sale securities. Our
available-for-sale securities consist primarily of fixed income investments (corporate bonds, commercial paper and
U.S. Treasury and Agency securities). We continually monitor our exposure to changes in interest rates and credit
ratings of issuers with respect to our available-for-sale securities and target an average life to maturity of less than
eighteen months. Accordingly, we believe that the effects of changes in interest rates and credit ratings of issuers are
limited and would not have a material impact on our financial condition or results of operations. As of September 29,
2007, we had a non-trading investment portfolio of fixed income securities, excluding those classified as cash and cash
equivalents, of $19.3 million (see Note 6 of the Company’s Consolidated Financial Statements). If market interest rates
were to increase immediately and uniformly by 10% from levels as of September 29, 2007, the fair market value of the
portfolio would decline by less than $100,000.
Our international operations are exposed to changes in foreign currency exchange rates due to transactions
denominated in currencies other than the location’s functional currency. We are also exposed to foreign currency
fluctuations due to remeasurement of the net monetary assets of our Israel and Singapore operations’ local currencies
into the location’s functional currency, the U.S. dollar, and our operations in China, Japan and Switzerland have
translation exposures from the U.S. dollar to their respective functional currencies. Based on our overall currency rate
exposure as of September 29, 2007, we do not believe that a near term 10% appreciation or depreciation in the foreign
currency portfolio to the U.S. dollar would have a material impact on our financial position, results of operations or
cash flows. Our board has granted management with limited authority to enter into foreign exchange forward contracts
and other instruments designed to minimize the short term impact currency fluctuations have on our business. We may
enter into additional foreign exchange forward contracts and other instruments in the future. Our attempts to hedge
against these risks may not be successful and may result in a material adverse impact on our financial results and cash
flows.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Kulicke and Soffa Industries, Inc. listed in the index appearing under Item 15
(a)(1) herein are filed as part of this Report under this Item 8.
42
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Kulicke and Soffa Industries, Inc.:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material
respects, the financial position of Kulicke and Soffa Industries, Inc., and its subsidiaries (the "Company") at September 29, 2007
and September 30, 2006, and the results of their operations and their cash flows for each of the three years in the period ended
September 29, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 29,
2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements
and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial
statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our
audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 9 the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) "Share Based
Payment" during the year ended September 30, 2006.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, Management has
excluded Alphasem from its assessment of internal control over financial reporting as of September 29, 2007, because it was
acquired by the Company in a purchase business combination during 2007. We have also excluded Alphasem from our audit of
internal control over financial reporting. Alphasem is a wholly-owned subsidiary whose total assets and total revenues represent
9.4% and 5%, respectively, of the related consolidated financial statement amounts as of and for the year ended September 29,
2007.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 10, 2007
43
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents
Restricted cash
Short-term investments
Accounts and notes receivable, net of allowance for doubtful
accounts of $3,068 and $1,713, respectively
Inventories, net
Prepaid expenses and other current assets
Deferred income taxes
Current assets of discontinued operations
TOTAL CURRENT ASSETS
Property, plant and equipment, net
Goodwill
Intangible assets
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable
Accrued expenses
Income taxes payable
TOTAL CURRENT LIABILITIES
Long term debt
Other liabilities
Deferred income taxes
TOTAL LIABILITIES
Commitments and contingent liabilities (Note 14)
SHAREHOLDERS' EQUITY:
Preferred stock; without par value:
Authorized - 5,000 shares; issued - none
Common stock, no par value:
Authorized 200,000 shares; issued 57,208 and 58,128, respectively;
Outstanding 57,208 and 53,218 shares, respectively
Treasury stock, at cost, 4,910 shares
Accumulated deficit
Accumulated other comprehensive loss
TOTAL SHAREHOLDERS' EQUITY
As of
September 30, 2006
September 29, 2007
$
133,967
1,973
21,343
$
150,571
-
19,339
120,651
47,866
10,446
3,990
3,832
344,068
177,512
68,955
14,201
3,631
-
434,209
28,487
29,684
-
3,262
405,501
$
37,953
33,212
500
6,726
512,600
$
$
42,881
32,970
19,239
95,090
$
82,615
37,170
22,665
142,450
195,000
10,640
25,465
326,195
251,412
12,335
23,148
429,345
-
-
277,194
-
(191,824)
(6,064)
79,306
288,714
(46,118)
(154,094)
(5,247)
83,255
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
405,501
$
512,600
The accompanying notes are an integral part of these consolidated financial statements.
44
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Net revenue
Cost of sales
Gross profit
Selling, general and administrative
Research and development
Gain on sale of assets
Operating expenses
Income from operations
Interest income
Interest expense
Gain on extinguishment of debt
Income from continuing operations before income taxes
Provision for income taxes from continuing operations
Income from continuing operations
Loss from discontinued operations, net of tax
Net income (loss)
Income per share from continuing operations:
Basic
Diluted
Loss per share from discontinued operations:
Basic
Diluted
Net income (loss) per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
2005
$
475,542
339,461
136,081
Fiscal
2006
$
696,311
499,750
196,561
$
2007
700,404
519,470
180,934
93,803
50,685
-
144,488
81,462
37,657
(4,544)
114,575
81,986
36,446
69,525
28,495
(1,690)
96,330
39,751
2,228
(3,806)
-
38,173
4,836
33,337
(137,419)
(104,082)
$
3,921
(3,126)
4,040
86,821
9,789
77,032
(24,862)
52,170
$
6,866
(2,876)
2,802
43,238
5,508
37,730
-
37,730
$
$
0.65
0.52
$
$
1.40
1.14
$
$
0.67
0.57
$
$
(2.67)
(2.03)
$
$
(0.45)
(0.36)
$
$
-
-
$
$
(2.02)
(1.51)
$
$
0.95
0.78
$
$
0.67
0.57
51,619
67,662
55,089
68,881
56,221
68,274
The accompanying notes are an integral part of these consolidated financial statements.
45
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
Less: Loss from discontinued operations
Income from continuing operations
Adjustments to reconcile income from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization
Equity-based compensation and non-cash employee benefits
Gain on early extinguishment of debt
Gain on sale of assets
Provision for doubtful accounts
Provision for inventory valuations
Deferred taxes
Contribution to U.S. defined benefit pension plan
Changes in operating assets and liabilities, net of businesses acquired or sold:
Accounts receivable
Inventory
Prepaid expenses and other assets
Accounts payable and accrued expenses
Income taxes payable
Other, net
Net cash provided by continuing operations
Net cash used in discontinued operations
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Alphasem, net of $1,111 cash acquired
Proceeds from sales of investments classified as available for sale
Purchase of investments classified as available for sale
Purchases of property, plant and equipment
Proceeds from sale of assets
Changes in restricted cash, net
Net cash provided by (used in) continuing operations
Net cash provided by (used in) discontinued operations
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from debt offering
Proceeds from exercise of common stock options
Payments on borrowings, including capitalized leases
Purchase of treasury stock
Borrowings associated with direct financing arrangement
Net cash provided by (used in) continuing operations
Net cash used in discontinued operations
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Changes in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
CASH PAID DURING THE PERIOD FOR:
Interest
Income taxes
2005
Fiscal
2006
2007
$
(104,082)
(137,419)
33,337
$
52,170
(24,862)
77,032
$
37,730
-
37,730
12,963
2,847
-
(1,690)
601
2,699
(3,905)
-
(36,105)
(1,381)
(683)
7,084
5,034
(216)
20,585
(23,271)
(2,686)
-
55,615
(37,907)
(7,788)
1,690
1,876
13,486
(3,220)
10,266
9,523
6,264
(4,040)
(4,544)
(656)
1,034
560
-
8,549
(2,794)
819
(18,260)
2,045
2,590
78,122
(15,002)
63,120
-
29,775
(36,607)
(9,496)
-
(592)
(16,920)
27,980
11,060
10,911
6,993
(2,802)
-
477
2,262
(1,993)
(1,901)
(43,872)
(11,125)
(3,902)
42,179
3,426
(3,276)
35,107
(3,344)
31,763
(28,155)
39,308
(37,315)
(5,763)
-
1,973
(29,952)
-
(29,952)
-
1,097
-
-
10,622
11,719
-
11,719
(177)
19,122
60,333
79,455
$
-
7,028
(26,634)
-
-
(19,606)
-
(19,606)
(62)
54,512
79,455
133,967
$
106,409
4,527
(50,433)
(46,118)
-
14,385
-
14,385
408
16,604
133,967
150,571
$
$
$
1,707
5,824
$
$
1,538
5,016
$
$
1,363
3,554
The accompanying notes are an integral part of these consolidated financial statements.
46
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
(in thousands)
Balances as of September 30, 2004
Employer contribution to the Company's 401(k) plan (1)
Employer contribution to Company's pension plan
Exercise of stock options
Components of comprehensive loss:
Net loss (1)
Translation adjustment
Unrealized loss on investments, net
Minimum pension liability (net of taxes of $215)
Total comprehensive loss
Balances as of September 30, 2005
Employer contribution to the Company's 401(k) plan (1)
Employer contribution to Company's pension plan
Exercise of stock options
Equity-based compensation expense
Debt repurchase
Components of comprehensive income:
Net income (1)
Translation adjustment
Unrealized loss on investments, net
Minimum pension liability (no tax impact)
Total comprehensive income
Balances as of September 30, 2006
Employer contribution to the Company's 401(k) plan
Issuance of stock for services rendered
Exercise of stock options
Tax benefit from exercise of stock options
Equity-based compensation expense
Purchase of treasury stock
Impact of U.S. pension plan contribution
Impact of SFAS 158 adoption
Components of comprehensive income:
Net income
Translation adjustment
Unrealized loss on investments, net
Minimum pension liability (no tax impact)
Total comprehensive income
Balances as of September 29, 2007
(1) Includes continuing and discontinued operations.
Common Stock
Amount
$
Shares
51,162
213,847
Treasury
Stock
$
-
Accumulated
Deficit
(139,912)
$
Other
Comprehensive
Income (Loss)
$
(6,915)
Shareholders'
Equity (Deficit)
$
67,020
281
215
323
1,958
1,524
1,097
(104,082)
590
36
109
51,981
$
218,426
$
-
$
(243,994)
$
(6,180)
1,958
1,524
1,097
(104,082)
590
36
109
(103,347)
(31,748)
$
215
200
1,212
3,600
1,898
1,804
7,028
5,362
42,676
52,170
320
5
(209)
57,208
$
277,194
$
-
$
(191,824)
$
(6,064)
$
1,898
1,804
7,028
5,362
42,676
52,170
320
5
(209)
52,286
79,306
126
37
757
1,143
360
4,428
99
5,490
(4,910)
(46,118)
37,730
5,902
(5,902)
259
4
554
53,218
$
288,714
$
(46,118)
$
(154,094)
$
(5,247)
1,143
360
4,428
99
5,490
(46,118)
5,902
(5,902)
37,730
259
4
554
38,547
83,255
$
The accompanying notes are an integral part of these consolidated financial statements.
47
KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
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.
During the quarter ended April 1, 2006, the Company sold its Test business. In accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS
144”), the financial results of the Test business, including certain balance sheet amounts relating to this business, have
been classified as discontinued operations in the consolidated financial statements for all periods presented (see Note
2).
Fiscal Year
The fiscal year end for fiscal 2005, 2006 and 2007 was September 30, 2005, September 30, 2006 and September 29,
2007, respectively.
Nature of Business
The Company designs, manufactures and markets capital equipment and packaging materials and services, maintains,
repairs and upgrades assembly equipment. The Company’s operating results depend upon the capital and operating
expenditures of semiconductor manufacturers and subcontract assemblers 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 periodic downturns and slowdowns which have a severe negative effect on
the semiconductor industry’s demand for semiconductor capital equipment, including assembly equipment
manufactured and marketed by the Company and, to a lesser extent, packaging materials such as those sold by the
Company. Over time, these downturns and slowdowns have also 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.
Management Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The more significant areas involving the use of estimates in these
financial statements include allowances for uncollectible accounts receivable, reserves for excess and obsolete
inventory, carrying value and lives of fixed assets, goodwill, valuation allowances for deferred tax assets, deferred tax
liabilities for undistributed earnings of certain foreign subsidiaries, tax contingencies, pension benefit liabilities,
warranty expense and liabilities, share-based payments and litigation. Actual results could differ from those estimated.
Vulnerability to Certain Concentrations
Financial instruments, which may subject the Company to concentrations of credit risk as of September 30, 2006 and
September 29, 2007 consisted primarily of investments and trade receivables. The Company manages credit risk
associated with investments by investing its excess cash in investment grade debt instruments of the U.S. Government,
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 to
take advantage of trends in yields and interest rates. The Company’s trade receivables result primarily from the sale of
semiconductor equipment, related accessories and replacement parts, packaging materials and test interconnect
products (recorded in discontinued operations) to a relatively small number of large manufacturers in a highly
concentrated industry. The Company continually assesses the financial strength of its customers to reduce the risk of
loss. Write-offs of uncollectible accounts have historically not been significant.
48
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less when purchased
to be cash equivalents.
Investments
Investments, other than cash equivalents, are classified as “trading,” “available-for-sale” or “held-to-maturity”, in
accordance with SFAS No. 115, Accounting for Certain Investments in Debt and 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 customer’s 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 also is subject to
concentrations of customers and sales to a few geographic locations, which may also impact the collectibility of
certain receivables. If economic or political conditions were to change in the countries where the Company does
business, it could have a significant impact on the results of its operations, and its ability to realize the full value of its
accounts receivable.
Inventories
Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in first-out basis) or
market value, except for certain gold inventories on hand that are stated at market value which approximates actual
cost (along with a corresponding liability) in accordance with the terms of the Company’s gold supply financing
agreement. The Company generally provides reserves for obsolete inventory and for inventory considered to be in
excess of demand. In addition, we generally record as accrued expense inventory purchase commitments in excess of
demand. Demand is generally defined as eighteen months forecasted future consumption for equipment, twelve
months historical consumption for packaging materials and twenty-four months historical consumption for spare parts.
The forecasted demand is based upon internal projections, historical sales volumes, customer order activity and a
review of consumable inventory levels at customers’ facilities. The Company communicates forecasts of its future
demand to its suppliers and adjusts commitments to those suppliers accordingly. If required, the Company reserves for
the difference between the carrying value of its inventory and the lower of cost or market value, based upon
assumptions about future demand, market conditions and the next cyclical market upturn. If actual market conditions
are less favorable than its projections, additional inventory reserves may be required.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. The cost of additions and those improvements which increase the
capacity or lengthen the useful lives of assets are capitalized while repair and maintenance costs are expensed as
incurred. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives as follows:
buildings 25 to 40 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.
49
Long-Lived Assets
The Company’s long-lived assets primarily include property, plant and equipment and goodwill. In accordance with
the provisions of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), the Company’s goodwill is not
amortized. The standard also requires that an impairment test be performed to support the carrying value of goodwill at
least annually, and whenever events occur that may impact the carrying value of goodwill. The fair value of the
Company’s goodwill is based upon our estimates of future cash flows and other factors. The Company manages and
values its intangible technology assets in the aggregate, as one asset group, not by individual technology.
In accordance with SFAS 144, 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. This standard 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 if 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. SFAS 144 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 the expected historical 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.
Foreign Currency Translation
The majority of the Company’s business is transacted in U.S. dollars, however, the functional currency of some of the
Company’s subsidiaries is their local currency. For the Company’s subsidiaries that have 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)), in accordance with SFAS No. 52, Foreign Currency Translation. 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. Net exchange and
transaction losses were $0.1 million, $0.6 million, and $0.1 million, for fiscal 2005, 2006 and 2007, respectively.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, Revenue
Recognition (“SAB 104”). The Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed or determinable, the collectibility is reasonably
assured, and it has completed its equipment installation obligations and received customer acceptance, or is otherwise
released from its installation or customer acceptance obligations. In the event terms of the sale provide for a lapsing
customer acceptance period, revenue is recognized based upon the expiration of the lapsing acceptance period or
customer acceptance, whichever occurs first. The Company’s standard terms are Ex Works (the Company’s factory),
with title transferring to its customer at the Company’s loading dock or upon embarkation. The Company has a small
percentage of sales with other terms, and revenue is recognized in accordance with the terms of the related customer
purchase order. Revenue related to services is recognized upon performance of the services requested by a customer
order. Revenue for extended maintenance service contracts with a term more than one month is recognized on a
prorated straight-line basis over the term of the contract.
Shipping and handling costs billed to customers are recognized in net revenue. Shipping and handling costs are
included in cost of sales.
Research and Development
The Company charges all research and development costs associated with the development of new products to expense
when incurred.
50
Income Taxes
Deferred income taxes are determined using the liability method in accordance with SFAS No. 109, Accounting for
Income Taxes (“SFAS 109”). No provision is made for U.S. income taxes on the portion of undistributed earnings of
foreign subsidiaries which are indefinitely reinvested in foreign operations. The Company records a valuation
allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. Significant judgment
is required in determining the Company’s annual tax rate and in evaluating tax positions. The Company establishes
reserves when, despite its belief that the tax return positions are fully supportable, it is believed that certain positions
are subject to challenge and the Company may not succeed. The Company is currently subject to multiple tax audits
and believes it is unlikely the result of any of these audits would result in expense greater than current reserves. An
adverse ruling could result in a significant cash outlay.
Environmental Expenditures
Future environmental remediation expenditures are recorded in operating expenses when it is probable that a liability
has been incurred and the amount of the liability can be reasonably estimated. Accrued liabilities do not include claims
against third parties and are not discounted.
Earnings per Share
Earnings per share are calculated in accordance with SFAS No. 128, Earnings Per Share. Basic earnings per share
include only the weighted average number of common shares outstanding during the period. Diluted earnings per share
include the weighted average number of common shares and the dilutive effect of stock options, performance stock
and share unit awards and subordinated convertible notes outstanding during the period, when such instruments are
dilutive.
Accounting for Leases
In accordance with SFAS No. 98, Accounting for Leases (“SFAS 98”), the Company accounts for a sale-leaseback
transaction involving real estate as a sale-leaseback transaction if the transaction includes the following:
•
•
•
a normal leaseback, as described in SFAS 98;
payment terms and provisions that adequately demonstrate the buyer-lessor's initial and continuing
investment in the property; and
payment terms and provisions that transfer all of the other risks and rewards of ownership as demonstrated by
the absence of any other continuing involvement by the seller-lessee.
For all other lease transactions, the Company accounts for the sale by the deposit method or as a direct financing
arrangement in accordance with SFAS 98.
Extinguishment of Debt
In accordance with APB No.26, Early Extinguishment of Debt (“APB 26”), gains and losses from the extinguishment
of debt are included in income (loss) from operations unless the extinguishment is both unusual in nature and
infrequent in occurrence, in which case the gain or loss would be presented as an extraordinary item.
Equity-Based Compensation
Beginning October 1, 2005, the Company accounts for equity based compensation under the provisions of SFAS
No. 123R, Share-Based Payments (“SFAS 123R”). SFAS 123R requires the recognition of the fair value of equity-
based compensation in net income. The fair value of the Company’s stock option awards are estimated using a Black-
Scholes option valuation model. This model requires the input of highly subjective assumptions and elections
including expected stock price volatility and the estimated life of each award. In addition, the calculation of
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 SFAS 123R and continue to use a
graded vesting method for awards granted prior to the adoption of SFAS 123R. Prior to the adoption of SFAS 123R,
51
the Company accounted for its stock option grants under the provisions of APB Opinion No. 25, Accounting For Stock
Issued to Employees (“APB 25”), and provided pro forma footnote disclosures as required by SFAS No. 148,
Accounting For Stock-Based Compensation — Transition and Disclosure (“SFAS 148”), which amends SFAS
No. 123, Accounting For Stock-Based Compensation. Pro forma net income and pro forma net income per share
disclosed in Note 9 below were estimated using a Black-Scholes option valuation model. As a result of the adoption of
SFAS 123R, the Company can recognize a benefit from equity-based compensation in paid-in-capital since an
incremental tax benefit is realized after all other tax attributes currently available have been utilized.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (“FIN 48”), an interpretation of SFAS 109. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. FIN 48
prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be
evaluated to determine the likelihood that it will be sustained upon examination. If the tax position is deemed “more-
likely-than-not” to be sustained, the tax position is then measured to determine the amount of benefit to recognize in
the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50% likely of
being realized upon settlement. The Company is required to adopt FIN 48 in its first quarter of fiscal 2008. The
Company does not expect the adoption of FIN 48 in fiscal 2008 to have a material impact on its consolidated results of
operations and financial condition.
In September 2006, the Securities and Exchange Commission (“SEC”) issued SAB No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Current Year Misstatements (“SAB 108”). SAB 108 requires analysis of
misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in
assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB 108 is effective for
annual financial statements issued for fiscal years ending after November 15, 2006. The adoption of SAB 108 in fiscal
2007 did not have any material impact on the Company’s consolidated results of operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 clarifies the
definition of fair value, establishes a framework for measuring fair value and expands disclosures on fair value
measurements. This Statement is effective for financial statements issued for fiscal years beginning after
November 15, 2007; however, the FASB is considering a partial deferral of the effective date of SFAS 157. The
Company is currently evaluating the potential impact of SFAS 157 on its consolidated results of operations and
financial condition.
In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans—An Amendment of FASB Statements No. 87, 88, 106, and 132R (“SFAS 158”). SFAS
158 requires an employer to: (i) recognize in its statement of financial position an asset for a plan’s overfunded status
or a liability for a plan’s underfunded status; (ii) measure a plan’s assets and its obligations that determine its funded
status as of the end of the employer’s fiscal year; and (iii) recognize changes in the funded status of a defined benefit
postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income
similar to the additional minimum pension liability adjustment previously required under SFAS No. 87, Employers
Accounting for Pensions (“SFAS 87”). The requirements listed under (i) and (iii) above are effective for annual fiscal
years ending after December 15, 2006, and the requirement listed under (ii) above is effective as of December 31,
2008. The adoption of SFAS 158 did not have a material impact on the Company’s consolidated results of operations
and financial condition in fiscal 2007, and will not have a material impact on the Company’s consolidated results of
operations and financial condition in fiscal 2008 (see Note 10).
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities – Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to
measure many financial instruments and certain other items at fair value at specified election dates. Under SFAS 159,
any unrealized holding gains and losses on items for which the fair value option has been elected are reported in
earnings at each subsequent reporting date. If elected, the fair value option (1) may be applied instrument by
instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (2) is
irrevocable (unless a new election date occurs); and (3) is applied only to entire instruments and not to portions of
instruments. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins on or before
November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. The Company is currently
evaluating the potential impact of SFAS 159 on its consolidated results of operations and financial condition.
52
The FASB has issued a proposed Staff Position (“FSP”) APB 14-a, Accounting for Convertible Debt Instruments That
May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-a”) that would apply to
any convertible debt instrument that may be settled in whole or in part with cash upon conversion. If adopted, FSP
APB 14-a would require separate accounting for the debt and equity components of the security. Under the proposed
FSP APB 14-a, the value assigned to the debt at the time of issuance (the “debt component”) would be its estimated
fair value, based on a similar debt issue without the conversion feature. The difference between the debt component
and the par value of the debt would be accounted for as an original discount and included in stockholder’s equity as
paid-in capital (the “equity component”). The original issue discount would be amortized to interest expense over the
life of the debt, with a corresponding accretion of the debt component to its par value. If the proposed FSP APB 14-a
is adopted, we would be required to adopt it as of the beginning of fiscal 2009, with retrospective application to
financial statements for periods prior to the date of adoption. FSP APB 14-a has not yet been finalized, and the actual
requirements under FSP may be modified prior to its final adoption. The Company cannot predict whether or not the
FASB will adopt the proposed FSP APB 14-a, and cannot predict the adoption of any other changes in generally
accepted accounting principals that may affect the accounting for convertible debt securities.
NOTE 2: DISCONTINUED OPERATIONS
During the three months ended April 1, 2006, the Company committed to a plan of disposal and sold its Test business
in two separate transactions as follows:
1. On March 3, 2006, the Company completed the sale of substantially all of the assets and certain of
the liabilities of its Wafer Test business to SV Probe, PTE. Ltd. (“SV Probe”) for initial proceeds of
$10.0 million in cash plus the assumption of accounts payable and certain other liabilities, subject to
a post-closing working capital adjustment that was settled in the three months ended July 1, 2006.
Certain accounts receivable were excluded from the assets sold.
2. On March 31, 2006, the Company completed the sale of substantially all of the assets and certain of
the liabilities of its Package Test business to Antares conTech, Inc., an entity formed by Investcorp
Technology Ventures II, L.P. and its affiliates (collectively “Investcorp”) for initial proceeds of
$17.0 million in cash plus the assumption of accounts payable and certain other liabilities, subject to
a post-closing working capital adjustment that was settled in the three months ended July 1, 2006.
During fiscal 2006, the Company recorded a loss of $0.8 million on the disposal of its Test business.
As part of the terms of each sale noted above, the associated China-based assets were not transferred to the buyers on
the above referenced closing dates, as neither buyer had a legal entity in China that could accept the transfer of the
China-based assets as of the closing date. The China-based assets associated with the sale to SV Probe were
transferred to SV Probe in September 2006 and the China-based assets associated with the sale to Antares conTech
were transferred to Antares conTech in December 2006, without additional consideration. In addition, the Company
provided manufacturing and other transition services (invoiced at cost) to SV Probe through September 1, 2006 and
provided these services to Antares conTech through November 2006.
In accordance with SFAS 144, the financial results of the Test business have been presented as discontinued
operations in the condensed consolidated financial statements for all periods presented.
As of September 30, 2006, inventory and property, plant and equipment for the Company’s discontinued operations
were $2.1 million and $1.7 million, respectively. The Company had no discontinued operations assets or liabilities as
of September 29, 2007.
53
The Company did not incur a gain or loss from discontinued operations during fiscal 2007. The following table reflects
operating results of the discontinued operations for fiscal 2005 and 2006:
(in thousands)
Net revenue
Loss from discontinued operations before taxes
Tax benefit
Loss from discontinued operations, net of tax
Fiscal
2005
2006
$
85,732
(138,298)
(879)
(137,419)
$
$
42,698
(29,925)
(5,063)
(24,862)
$
Due to the existence of assets impairment triggers, during the third quarter of fiscal 2005 the Company performed
interim impairment tests on the Test business goodwill and other long-lived tangible and intangible assets. These
triggers included the identification of difficulties in the development of new products, challenges in the introduction of
these products, and greater than expected losses incurred by the segment. Based on this impairment analysis, a
goodwill impairment charge totaling $51.8 million was recorded to fully write off the Test business goodwill. The fair
value of the reporting unit goodwill was determined by discounting the projected future cash flows from this reporting
unit (the fair value of the reporting unit) and then performing an allocation of this fair value to the fair value of the
tangible and identifiable intangible assets of the reporting unit, with the residual representing the implied fair value of
the goodwill.
The Company also tested the identifiable intangible assets (other than goodwill) of the segment for impairment during
fiscal 2005 by comparing the carrying value of the identifiable intangible assets to the sum of the undiscounted cash
flows expected to result from the segment, in accordance with SFAS 144. Based on these analyses, the Company
determined the carrying value of the identifiable intangible assets was not recoverable. As such, impairment charges
totaling $48.8 million were recorded during fiscal 2005 to completely write off the customer account and complete
technology assets of the segment. The fair value of the identifiable other intangible assets was calculated using the
present value of estimated future cash flows of the segment.
The following table reflects changes in the carrying value of goodwill and intangible assets, associated with the
Company’s Test business and included in discontinued operations:
(in thousands)
Balance as of September 30, 2005
Additions
Impairment charge
Amortization
Balance as of September 30, 2006
Customer
Accounts
25,339
$
-
(22,530)
(2,809)
$
-
Complete
Technology
28,706
$
1,000
(26,290)
(3,416)
$
-
Total
Intangible
Assets
$
54,045
1,000
(48,820)
(6,225)
$
-
The $1.0 million addition in the segment’s Complete Technology intangible assets during fiscal 2005 was for a
technology license to be used in the development of new products. The aggregate amortization expense related to these
intangible assets for fiscal 2005 was $6.2 million.
The following table reflects accrued expenses recorded in fiscal 2006 and 2007 for obligations associated with the
discontinuation of the Test business:
(in thousands)
Provisions recorded included in discontinuing operations
Payment of obligations
Balance as of September 30, 2006 *
Change in estimate included in continuing operations
Payment of obligations
Balance as of September 29, 2007 *
* Included in continuing operations.
$
Severance and
related benefits
6,355
(4,817)
1,538
43
(1,581)
$
-
Facilities
Total
$
$
6,138
(684)
5,454
1,570
(1,763)
5,261
12,493
(5,501)
6,992
1,613
(3,344)
5,261
$
$
Facility estimates are subject to change, and such changes could result in an increase or decrease to the estimated
facilities charges previously recorded. Payments of facility obligations are expected to be paid out through September
2012.
54
NOTE 3 – PURCHASE OF ALPHASEM
On November 3, 2006, the Company completed the acquisition of Alphasem, a leading supplier of die bonder
equipment, from Dover Technologies International, Inc. (“Dover”), a subsidiary of Dover Corporation. The
consideration for the acquisition was approximately $29.3 million in cash including capitalized acquisition costs and
after working capital adjustment. In accordance with SFAS No. 141, Business Combinations (“SFAS 141”), the
Company has accounted for the acquisition under the purchase method of accounting. Accordingly, the results of
operations of Alphasem, since the acquisition date, have been included in the Company’s interim Consolidated
Statements of Operations. Alphasem is included in the Company’s Equipment segment.
As of the date of acquisition, the fair value of assets and liabilities acquired, which excludes goodwill, was
approximately $24.6 million, excluding cash acquired of $1.1 million, consisting of $15.0 million of net working
capital, $12.9 million of plant, property & equipment, intangible assets and other assets, and $3.3 million of other
liabilities. The Company engaged an independent third party appraiser to assist management with determining the fair
market values for acquired land, buildings and other intangible assets of Alphasem. Pro forma information has not
been disclosed as the impact of this acquisition was not material. Included in other accounts receivable on the
Consolidated Balance Sheet as of September 29, 2007 is $4.4 million owed by Dover to the Company for working
capital adjustments related to the Company’s acquisition of the die bonder business (see Note 7). The allocation of the
purchase price for this acquisition is final with the exception of inventory amounts guaranteed under the purchase
agreement. Any adjustments to the inventory guarantee estimates could be material to the value of goodwill. Purchase
accounting will be completed during the first quarter of fiscal 2008.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed, after purchase
accounting adjustments, as of the acquisition date:
(in thousands)
Cash and cash equivalents
Accounts and notes receivable *
Inventories
Other current assets
Plant, property & equipment
Intangible assets (see Note 4)
Deferred tax asset - non-current
Total assets acquired
Current liabilities
Other liabilities
Total liabilities assumed
Net assets acquired
Cost of Alphasem including cash acquired
Goodwill (see Note 4)
As of
November 3, 2006
$ 1,111
12,537
11,353
1,253
11,793
660
509
39,216
(10,146)
(3,332)
(13,478)
25,738
29,266
$ 3,528
* Includes $4.4 million owed by Dover as of November 3, 2006.
NOTE 4: GOODWILL AND INTANGIBLE ASSETS
Intangible assets classified as goodwill and those with indefinite lives are not amortized. Intangible assets with
determinable lives are amortized over their estimated useful life. The Company performs an annual impairment test of
its goodwill and indefinite-lived intangible assets at the end of the fourth quarter of each fiscal year, which coincides
with the completion of its annual forecasting process. The Company performed its annual impairment test in the fourth
quarter of fiscal 2007 and no impairment charge was required. The Company also tests for impairment between annual
tests if a “triggering” event occurs that may have the effect of reducing the fair value of a reporting unit or its
intangible assets below their respective carrying values. No triggering events occurred during fiscal 2007 that would
have the effect of reducing the fair value of goodwill below its carrying value. When conducting its goodwill
impairment analysis, the Company calculates its potential impairment charges based on the two-step test identified in
SFAS 142 and using the estimated fair value of the respective reporting units. The Company uses the present value of
future cash flows from the respective reporting units to determine the estimated fair value of the reporting unit and the
implied fair value of goodwill.
55
The following table reflects goodwill as of September 30, 2006 and September 29, 2007:
(in thousands)
Packaging Materials segment
Equipment segment *
Total
* See Note 3 regarding goodwill.
As of
September 30, 2006
$
29,684
-
29,684
$
September 29, 2007
$
29,684
3,528
33,212
$
The following table reflects the intangible asset balance as of September 29, 2007:
(in thousands)
Trademarks and technology licenses (see Note 3)
Accumulated amortization
Net
As of
September 29, 2007
$
660
(160)
500
$
During fiscal 2007, the Company recorded $0.2 million of amortization expense related to its intangible assets.
The following table reflects future amortization expense relating to intangible assets for the next three fiscal years:
Fiscal Year
2008
2009
2010
(in thousands)
$
175
175
150
NOTE 5: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table reflects the components of Accumulated Other Comprehensive Loss, reflected in the Consolidated
Balance Sheets, as of September 30, 2006 and September 29, 2007:
(in thousands)
Gain from foreign currency translation adjustments
Unrealized gain (loss) on investments, net of taxes
Minimum pension liability, net of tax
Unrecognized actuarial net loss
Accumulated other comprehensive loss
NOTE 6: INVESTMENTS
As of
September 30, 2006
$ 394
(2)
(6,456)
-
$ (6,064)
September 29, 2007
$ 653
2
-
(5,902)
$ (5,247)
As of September 30, 2006 and September 29, 2007, all short-term investments were classified as available-for-sale. The
following table reflects investments, excluding cash equivalents, as of September 30, 2006 and September 29, 2007:
Available-for-sale:
As of September 30, 2006:
Government and Corporate debt securities with original maturities of less than one year
Total short-term investments classified as available for sale
Fair
Value
(in thousands)
Unrealized Unrealized
Gains
Losses
Cost
Basis
$
$
21,343
21,343
1
$
$
1
$
$
(3)
(3)
$
$
21,345
21,345
As of September 29, 2007:
Government and Corporate debt securities with original maturities of less than one year
Total short-term investments classified as available for sale
$
$
19,339
19,339
4
$
$
4
$
$
(2)
(2)
$
$
19,337
19,337
56
In fiscal 2006, the Company purchased $36.6 million of securities it classified as available-for-sale and sold $29.8
million of available-for-sale securities. In fiscal 2007, the Company purchased $37.3 million of securities it classified
as available-for-sale and sold $39.3 million of available-for-sale securities. The Company had restricted cash of $2.0
million as of September 30, 2006, which was used to support letters of credit. No restricted cash was required as of
September 29, 2007.
NOTE 7: BALANCE SHEET COMPONENTS
Inventories
The following table reflects inventories as of September 30, 2006 and September 29, 2007:
(in thousands)
Raw materials and supplies
Work in process
Finished goods
Inventory reserves
Total
Accounts and notes receivable, net
As of
September 30, 2006
35,951
$
8,476
11,025
55,452
(7,586)
47,866
$
September 29, 2007
48,136
$
13,667
15,580
77,383
(8,428)
68,955
$
The following table reflects accounts receivable, net as of September 30, 2006 and September 29, 2007:
As of
(in thousands)
Customer accounts receivable
Other accounts receivable
Allowance for doubtful accounts
Net
September 30, 2006
123,626
$
93
123,719
(3,068)
120,651
$
September 29, 2007
174,617
$
4,608
179,225
(1,713)
177,512
$
Included in other accounts receivable as of September 29, 2007 is $4.4 million owed by Dover to the Company related to
the Company’s acquisition of the die bonder business (see Note 3). Allowance for doubtful accounts decreased from fiscal
2006 to fiscal 2007 primarily due to write offs of uncollectible accounts.
Property, plant and equipment, net
The following table reflects property, plant and equipment (“PP&E”) as of September 30, 2006 and September 29, 2007:
(in thousands)
Land
Buildings and building improvements
Machinery and equipment
Leasehold improvements
Accumulated depreciation
Net
As of
September 30, 2006
$
117
5,120
109,494
12,855
127,586
(99,099)
28,487
$
September 29, 2007
$
2,385
13,711
71,377
11,009
98,482
(60,529)
37,953
$
During fiscal 2005, 2006 and 2007, the Company recorded $17.4 million, $8.2 million, and $9.5 million, respectively, of
depreciation expense related to its PP&E. During fiscal 2007, fully depreciated PP&E which was no longer in use was
written off resulting in an approximately $42.0 million decrease in gross PP&E and the related accumulated depreciation.
In addition during fiscal 2007, gross PP&E increased $11.8 million due to the acquisition of the die bonder business (see
Note 3).
57
Accrued expenses
The following table reflects accrued expenses as of September 30, 2006 and September 29, 2007:
(in thousands)
Wages and benefits
In-transit inventory from vendors
Inventory purchase commitment accruals
Customer advances
Warranty
Contractual commitments on closed facilities
Professional fees and services
Severance
Other
Total
NOTE 8: DEBT OBLIGATIONS
As of
September 30, 2006
14,077
$
2,019
-
1,776
712
2,466
878
4,613
6,429
32,970
$
September 29, 2007
14,574
$
3,197
3,156
2,213
1,975
1,722
1,412
1,377
7,544
37,170
$
The following table reflects long-term debt as of September 30, 2006 and September 29, 2007:
Type
Convertible Subordinated Notes
Convertible Subordinated Notes
Convertible Subordinated Notes
Fiscal Year
of Maturity
2009
2010
2012
Conversion
Price
$20.33
$12.84
$14.36
(in thousands)
As of
Rate
0.500%
1.000%
0.875%
Total
September 30, 2006
130,000
$
65,000
-
195,000
$
$
September 29, 2007
76,412
65,000
110,000
251,412
$
During fiscal 2005, 2006 and 2007, the Company recorded $1.5 million, $1.3 million, and $1.2 million, respectively, of
amortization expense related to issue costs from its Convertible Subordinated Notes.
0.5% Convertible Subordinated Notes
During fiscal 2004, the Company issued $205.0 million aggregate principal amount of 0.5% Convertible Subordinated
Notes in a private placement to qualified institutional investors. The notes are general obligations of the Company and
are subordinated to all senior debt. The notes rank equally with the Company’s other Convertible Subordinated Notes.
There are no financial covenants associated with the notes and there are no restrictions on incurring additional debt or
issuing or repurchasing the securities.
During 2006, the Company purchased $75.0 million (face value) of the outstanding 0.5% Convertible Subordinated
Notes for consideration consisting of 3.6 million shares of common stock with an aggregate fair value of $42.7 million
and $26.7 million in cash. The Company recorded a net gain of $4.0 million, net of deferred financing cost of $1.3
million. During fiscal 2007, the Company purchased in the open market $53.6 million (face value) of the outstanding
notes for net cash of $50.4 million and recognized a net gain of $2.8 million, net of deferred financing costs of $0.4
million.
1.0% Convertible Subordinated Notes
During 2004, the Company issued $65.0 million aggregate principal amount of 1.0% Convertible Subordinated Notes
in a private placement to qualified institutional investors. No principal payments are required until maturity. The
conversion rights of these notes may be terminated on or after June 30, 2006 if the closing price of the Company’s
common stock has exceeded 140% of the conversion price then in effect for at least 20 trading days within a period of
30 consecutive trading days. The notes are general obligations of the Company and are subordinated to all senior debt.
The notes rank equally with the Company’s other Convertible Subordinated Notes. There are no financial covenants
associated with the notes and there are no restrictions on incurring additional debt or issuing or repurchasing the
securities.
58
0.875% Convertible Subordinated Notes
On June 6, 2007, the Company issued $110.0 million aggregate principal amount of 0.875% Convertible Subordinated
Notes due 2012, including exercise of the initial purchaser’s over-allotment option for $10.0 million aggregate
principal amount. Net proceeds from the issuance were $106.4 million. The 0.875% Convertible Subordinated Notes
were issued pursuant to an indenture dated as of June 6, 2007, between the Company and The Bank of New York, as
trustee. The 0.875% Convertible Subordinated Notes are unsecured subordinated obligations of the Company. Debt
issuance costs of $3.6 million incurred in connection with the offering of the 0.875% Subordinated Convertible Notes
will be amortized to expense over 60 months.
Holders of the 0.875% Convertible Subordinated Notes may convert their notes based on an initial conversion rate of
approximately 69.6621 shares per $1,000 principal amount of notes (equal to an initial conversion price of
approximately $14.355 per share) only under the following circumstances: (1) during specified periods, if the price of
the Company’s common stock exceeds specified thresholds; (2) during specified periods, if the trading price of the
0.875% Convertible Subordinated Notes is below a specified threshold; (3) at any time on or after May 1, 2012 or
(4) upon the occurrence of certain corporate transactions. The initial conversion rate will be adjusted for certain events.
The Company presently intends to satisfy any conversion of the 0.875% Convertible Subordinated Notes with cash up
to the principal amount of the 0.875% Convertible Subordinated Notes and, with respect to any excess conversion
value, with shares of the Company’s common stock. The Company has the option to elect to satisfy its conversion
obligations in cash, common stock or a combination thereof.
The 0.875% Convertible Subordinated Notes are not redeemable at the Company’s option. Holders of the 0.875%
Convertible Subordinated Notes do not have the right to require the Company to repurchase their 0.875% Convertible
Subordinated Notes prior to maturity except in connection with the occurrence of certain fundamental change
transactions. The 0.875% Convertible Subordinated Notes may be accelerated upon an event of default as described in
the Indenture and will be accelerated upon bankruptcy, insolvency, appointment of a receiver and similar events with
respect to the Company.
In connection with the issuance of the 0.875% Convertible Subordinated Notes, on June 6, 2007, the Company entered
into a registration rights agreement with Banc of America Securities LLC, as the initial purchaser (the “Registration
Rights Agreement”). Pursuant to the Registration Rights Agreement, the Company filed a shelf registration statement
with the Securities and Exchange Commission covering resale of the 0.875% Convertible Subordinated Notes and the
shares of its common stock issuable upon conversion of the 0.875% Convertible Subordinated Notes within 120 days
after issuance of the 0.875% Convertible Subordinated Notes. The shelf registration statement became effective on
September 10, 2007.
Sale-leaseback
In accordance with SFAS 98, during fiscal 2005, the Company recorded debt of $10.6 million, as part of accounting
for a sale-leaseback transaction as a direct financing arrangement. Monthly lease payments of $0.1 million, which are
allocated by the Company to interest expense and amortization of the debt, were paid through May 2006 at which time
a $4.5 million gain on the sale of the land and building was recognized, and the land, building and remaining debt
outstanding were removed from the Company’s Consolidated Financial Statements. Interest expense was calculated
using the Company’s incremental borrowing rate, which was estimated to be 6.0%.
NOTE 9: SHAREHOLDERS' EQUITY
Treasury Stock
During fiscal 2007, the Company repurchased 4.9 million shares of its common stock for $46.1 million in open market
transactions. The Company used $40.0 million of the net proceeds from the private offering of its 0.875% Convertible
Subordinated Notes pursuant to Rule 144A under the Securities Act of 1933, as amended, to repurchase 4.2 million
shares of its common stock. On May 23, 2007, the Company’s Board of Directors authorized a plan to use up to $6.0
million of cash from operations to repurchase additional shares of its common stock and the Company completed those
repurchases during the fourth quarter of fiscal 2007.
59
Defined Benefit Pension Plan
The following table reflects shares of Company common stock issued and contributed to the Company’s defined benefit
pension plan (see Note 10):
Fiscal 2005
Fiscal 2006
Fiscal 2007
* Fair value based upon the market price at the time of contribution.
401(k) Retirement Income Plan
Number of
Common Shares
215,000
200,000
None
Fair Value*
(in thousands)
1,534
$
1,804
--
The following table reflects the Company’s matching contributions to the 401(k) retirement income plan which were
made in the form of issued and contributed shares of Company common stock:
Fiscal 2005
Fiscal 2006
Fiscal 2007
* Fair value based upon the market price at the time of contribution.
Equity-Based Compensation
Number of
Common Shares
281,000
215,000
126,000
Fair Value*
(in thousands)
1,960
$
1,898
1,143
As of September 29, 2007, the Company had six equity-based employee compensation plans (the “Employee Plans”)
and three director compensation plans (the “Director Plans”) (collectively, the “Plans”), under which stock options,
performance-based share awards (collectively, “performance-based restricted stock”) or common stock have been
granted at 100% of the market price of the Company’s common stock on the date of grant. The Company has granted
performance-based restricted stock from the Company’s approved 2006 Equity Plan, which is part of the Employee
Plans. Each share of performance-based restricted stock granted from this Plan reduces the aggregate number of stock
options that may be granted under this Plan by two shares. Stock options and performance-based restricted stock
granted under the Plans vest at such dates as are determined in connection with their issuance, but not later than five
years from the date of grant and stock options expire ten years from date of grant. Upon share option exercise or upon
attainment of designated performance goals, new shares of the Company’s common stock are issued.
Beginning October 1, 2005, the Company accounts for equity-based compensation in accordance with the provisions
of SFAS 123R, using the modified prospective basis transition method. Under this method, equity-based compensation
expense recognized in fiscal 2006 and 2007 includes: (a) compensation expense for all share-based payments granted
prior to, but not yet vested as of October 1, 2005 (effective date of SFAS 123R), based on the grant date fair value
estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense for all share-based
payments granted subsequent to October 1, 2005, based on the grant date fair value estimated using the Black-Scholes
option pricing model under the provisions of SFAS 123R. The Company recognizes compensation expense for awards
granted after September 30, 2005 on a straight-line basis over the requisite service period.
The Company follows the non-substantive vesting method 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. Equity-based compensation expense recognized in the consolidated statements of operations for fiscal
2006 and 2007 is based upon awards ultimately expected to vest. In accordance with SFAS 123R, forfeitures have
been estimated at the time of grant and were estimated based upon historical experience. The Company reviews the
forfeiture rate periodically and makes adjustments as necessary. If the actual forfeiture rate at the end of the vesting
period is lower than had been estimated, additional compensation expense will be recorded. If the actual forfeiture rate
at the end of the period is higher than had been estimated, the Company will record a recovery of compensation
expense previously recorded.
60
The following table reflects the weighted-average assumptions for the Black-Scholes option pricing model used to
estimate the fair value of stock options granted to employees for fiscal 2005 (pro forma purposes), 2006 and 2007:
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected life (in years)
Weighted-average fair value at grant date
2005
NA
83.52%
3.32%
5
$4.81
Fiscal
2006
NA
51.35%
4.50%
5
$4.04
2007
NA
58.03%
4.56%
5
$4.37
Expected volatility for the fiscal 2006 and 2007 is based upon historical volatility, implied volatility of the Company’s
market traded options, and the implied volatility of the convertible feature of the Company’s convertible debt securities.
Fiscal 2005 volatility was calculated based solely on the historical volatility of the Company’s common stock. Expected
life is based upon historical exercise patterns. The risk-free interest rate is calculated using the U.S. Treasury yield curves
in effect at the time of grant, commensurate with the expected life of the options.
The following table reflects shares of commons stock reserved for issuance and available for grant under the equity
compensation plans as of September 29, 2007:
(in thousands)
Employee Plans
Director Plans
Employee equity-based compensation
Available for Grant
Reserved for
Issuance
14,850
1,280
2006 Plan
2,037
N/A
2007 Plan
N/A
243
Other Equity
Plans
2,379
280
Prior to October 1, 2005, the Company accounted for the Plans under the recognition and measurement provisions of
APB 25, and related Interpretations, as permitted by SFAS 123, as amended by SFAS No. 148. No equity-based
employee compensation expense was recognized in the Consolidated Statements of Operations in fiscal years prior to
fiscal 2006, as all options granted under those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant.
The following tables reflects the effects on the net loss and the net loss per share for fiscal 2005, as if the Company
had applied the fair value recognition provisions of SFAS 123 to options granted under the Company’s stock option
plans. For purposes of this pro forma disclosure, the value of the options is estimated using the Black-Scholes option
pricing model and amortized to expense over the options’ vesting periods:
(in thousands, except per share data)
Net loss (including discontinued operations), as reported
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects
Pro forma net loss
Net loss per share:
Basic-as reported
Basic-pro forma
Diluted - as reported
Diluted - pro forma
Fiscal 2005
$
(104,082)
(12,742)
(116,824)
$
$
$
$
$
(2.02)
(2.26)
(1.51)
(1.70)
61
The following table reflects total equity-based compensation expense, which includes employee stock options and
performance-based restricted stock, included in the Consolidated Statements of Operations for fiscal 2006 and 2007:
Fiscal
(in thousands)
Cost of sales
Selling, general and administrative
Research and development
Stock-based compensation expense in continuing operations
Tax effect of stock-based compensation expense
Effect of stock-based compensation in continuing operations, net of tax
Stock-based compensation in discontinued operations, net of tax
Net effect of stock-based compensation expense
The following table reflects outstanding and exercisable employee options for fiscal 2005, 2006 and 2007:
2006
$
2007
$
619
2,996
1,121
4,736
-
4,736
626
5,362
236
3,678
1,576
5,490
-
5,490
-
5,490
$
$
(in thousands )
Number of
Shares
Weighted Average
Exercise Price
Average
Remaining
Contractual
Life in Years
$
(in thousands)
Aggregate
Intrinsic Value
$
1,200
4,542
2,858
Options outstanding as of September 30, 2004
Granted
Exercised
Terminated or cancelled
Options outstanding as of September 30, 2005
Granted
Exercised
Terminated or cancelled
Options outstanding as of September 30, 2006
Granted
Exercised
Terminated or cancelled
Options outstanding as of September 29, 2007
Options vested and expected to vest as of September 29, 2007
Options exercisable as of September 29, 2007
In the money exercisable options as of September 29, 2007
8,160
3,686
(386)
(1,187)
10,273
245
(1,300)
(1,813)
7,405
1,154
(739)
(811)
7,009
6,826
4,720
2,964
10.90
7.16
3.82
10.88
9.82
7.73
5.88
11.11
10.11
9.04
5.85
12.24
10.05
10.16
10.92
$
$
$
5.2
4.7
3.8
$
$
$
6,038
5,916
4,727
On average, 20% of stock options granted by the Company become vested each year, and on average, 15% of stock
options granted by the Company are forfeited each year. Intrinsic value of stock options exercised is determined by
calculating the difference between the market value of the Company’s stock price at the time an option is exercised
and the exercise price, multiplied by the number of shares. The intrinsic value of stock options outstanding and stock
options exercisable is determined by calculating the difference between the Company’s closing stock price on the last
trading day of fiscal 2007 and the exercise price of in-the-money stock options, multiplied by the number of
underlying shares. During fiscal 2007, the Company received $4.5 million in cash from the exercise of stock options.
As of September 29, 2007, total unrecognized compensation cost related to unvested employee stock options was $4.0
million, which will be amortized over the weighted average remaining service period of approximately 2.2 years.
62
The following table reflects outstanding and exercisable employee stock options as of September 29, 2007:
Options Outstanding
Options Exercisable
Range of Exercise Prices
$2.09 - $2.95
$5.10 - $7.31
$7.84 - $9.04
$9.20 - $12.23
$12.89 - $14.38
$16.12 - $18.41
$32.06
(in thousands )
Options
Outstanding
540
2,124
1,114
1,179
1,240
801
11
7,009
Weighted Average
Remaining
Contractual Life
in Years
Weighted
Average
Exercise
Price
(in thousands)
Options
Exercisable
Weighted
Average
Exercise
Price
4.4
5.9
8.8
5.4
2.2
2.7
0.5
5.2
$
2.95
7.06
8.47
11.64
13.77
16.56
32.06
10.05
$
540
1,178
60
893
1,237
801
11
4,720
$
2.95
7.01
8.29
11.81
13.77
16.56
32.06
10.92
$
On October 1, 2007, the Company granted to certain employees 492,000 shares of performance-based restricted stock,
of which 472,000 were outstanding as of September 29, 2007. These shares vest on September 30, 2009 subject to
certain performance conditions. As of September 29, 2007, total unrecognized compensation cost related to unvested
performance-based restricted stock was $1.4 million, which will be amortized over the remaining service period of 2.0
years.
The following table reflects the assumptions used to estimate the fair value of performance-based restricted stock for
fiscal 2007:
Expected forfeiture rate
Estimated attainment of performance goals
Fiscal 2007
8.8%
72.0%
There was no performance-based restricted stock issued or outstanding in fiscal 2005 or fiscal 2006.Non-employee
director equity-based compensation
In fiscal 2007, the Company’s board of directors adopted and the shareholders approved, the 2007 Equity Plan for
Non-Employee Directors (the “2007 Plan”). The 2007 Plan provides for the grant of common shares to each non-
employee director upon initial election to the board and on the first business day of each calendar quarter while serving
on the board. The grant to a non-employee director upon initial election to the board, and each quarterly grant, shall be
that number of common shares closest in value to, without exceeding, $30,000. During fiscal 2007, the Company
issued 36,618 shares of common stock, valued at $360,000, in accordance with the 2007 Plan.
63
The following table reflects outstanding non-employee director stock options for fiscal 2005, 2006 and 2007:
Weighted Average
Exercise Price
Average
Remaining
Contractual
Life in Years
(in thousands)
Aggregate
Intrinsic Value
$
Options outstanding as of September 30, 2004
Granted
Exercised
Terminated or cancelled
Options outstanding as of September 30, 2005
Granted
Exercised
Terminated or cancelled
Options outstanding as of September 30, 2006
Granted
Exercised
Terminated or cancelled
Options outstanding as of September 29, 2007
Options vested and expected to vest as of September 29, 2007
Options exercisable as of September 29, 2007
In the money exercisable options as of September 29, 2007
NOTE 10: EMPLOYEE BENEFIT PLANS
U.S. Plans
(in thousands)
Number of Shares
510
60
(10)
-
560
42
(17)
-
585
-
(18)
(39)
528
528
428
57
15.19
2.50
6.09
-
14.42
5.16
6.10
-
14.42
-
5.80
13.25
14.79
14.17
15.97
$
$
$
$
6
79
60
4.6
3.2
3.9
$
$
$
238
238
176
The Company has a non-contributory defined benefit pension plan (the “U.S. pension plan”) covering all U.S.
employees who were employed on September 30, 1995. The benefits for this U.S. pension plan were based on the
employees’ years of service and the employees’ compensation during the earlier of the three calendar years before
retirement or the three years before December 31, 1995. Effective December 31, 1995, the benefits under the U.S.
pension plan were frozen, and therefore, accrued benefits no longer changed as a result of an employee’s length of
service or compensation.
The Company contributed to the U.S. pension plan shares of Company common stock with a value of $1.5 million in
fiscal 2005 and $1.8 million in fiscal 2006. These values were based on the market price at the time of the
contribution.
In February 2007, the Company’s Board of Directors approved the termination of the U.S. pension plan. During fiscal
2007, the Company sought the necessary government approvals to transfer the U.S. pension plan’s assets and
obligations to an insurance carrier. The Company expects the U.S. pension plan termination to be completed in fiscal
2008. Participant benefits will not be adversely impacted by this termination.
In July 2007, the Company made a $1.9 million cash contribution to fully fund the U.S. pension plan. The U.S.
pension plan subsequently purchased a group annuity contract on a revocable basis, pending approval of the proposed
plan termination by the Pension Benefit Guaranty Corporation (“PBGC”) and issuance of a favorable determination
letter by the Internal Revenue Service (“IRS”). As of September 29, 2007, the PBGC review period expired, but the
IRS determination letter is still pending. Accordingly, there has not been an irrevocable commitment and a settlement
has not occurred.
64
On September 29, 2007, the Company adopted the reporting and disclosure provisions of SFAS 158 which requires,
among other things, the recognition of the funded status of each applicable pension plan on the Consolidated Balance
Sheet. In accordance with SFAS 158, each over funded pension plan is recognized as an asset and each under funded
pension plan is recognized as a liability. The initial impact of implementing SFAS 158, as well as the future changes to
the funded status, is recognized as a component of comprehensive income similar to the additional minimum pension
liability adjustment previously required under SFAS 87.
The following table reflects the U.S. pension plan’s transition year disclosure information for fiscal 2007:
(in thousands)
Amount recognized prior to application of SFAS 158:
Fiscal 2007
Prepaid benefit cost
Funded status
Change in amount recognized due to SFAS 158
$
$
9,329
19
(9,310)
The following table reflects an itemized breakdown of the changes due to SFAS 158:
(in thousands)
Prepaid benefit cost
Asset reflecting U.S. pension plan's funded status
Accumulated other comprehensive income (pre tax)
Net amount reflected on the Consolidated Balance Sheet
SFAS 132*
9,329
$
N/A
-
9,329
$
Fiscal 2007
Change
$
(9,329)
19
9,310
$
-
SFAS 158
N/A
19
9,310
9,329
$
SFAS 132, Employers’ Disclosures About Pension and Other Postretirement Benefits (“SFAS 132”).
65
The following table reflects the U.S. pension plan’s activity for fiscal 2005, 2006 and 2007:
(dollar amounts in thousands)
Change in projected benefit obligation
Projected benefit obligations at the beginning of the year
Interest cost
Benefits paid
Actuarial loss
Projected benefit obligations at the end of the year
Change in plan assets
Fair value of plan assets at the beginning of the year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at the end of the year
Net amount recognized
Funded status
Unrecognized actuarial loss
Net amount recognized
Amounts recognized in statement of financial position
Noncurrent assets
Accrued benefit liability
Accumulated other comprehensive income (pre tax)
Net amount recognized at the end of the year
Amounts recognized in accumulated other comprehensive income
Unrecognized transition obligation (asset)
Prior service cost (credit)
Actuarial net loss
Net amount recognized in accumulated other comprehensive income
Components of net periodic pension cost
Interest cost
Expected return on plan assets
Amortization of actuarial net loss
Total net periodic pension cost
Weighted average assumptions at the end of the year
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase
* Not applicable due to the December 31, 1995 benefit freeze
2005
Fiscal
2006
2007
$
$
$
$
$
$
$
$
$
19,667
1,114
(832)
1,233
21,182
15,316
1,969
1,524
(832)
17,977
21,182
1,206
(871)
783
22,300
17,977
1,317
1,804
(871)
20,227
22,300
1,275
(1,027)
940
23,488
20,227
2,406
1,901
(1,027)
23,507
$
$
$
$
$
(3,205)
9,671
6,466
$
$
(2,073)
9,880
7,807
$
$
19
NA
19
$
-
(3,205)
9,671
6,466
$
-
$
(2,073)
9,880
7,807
$
$
-
-
$
19
19
$
-
-
9,671
9,671
$
$
-
-
9,880
9,880
$
$
-
-
9,310
9,310
$
$
$
$
1,114
(1,262)
636
488
1,206
(1,510)
767
463
$
$
$
1,275
(1,615)
718
378
5.50%
8.00%
*
5.75%
8.00%
*
6.15%
6.15%
*
Prior to the purchase of the group annuity contract during fiscal 2007, the discount rate was established based on
prevailing market rates for high quality fixed income instruments that, if the pension benefit obligations were settled at
the measurement date, would provide the necessary future cash flows to pay the benefit obligations when due.
Following the purchase of the group annuity contract, the discount rate was set to equal the discount rate utilized by
the group annuity contract insurance carrier to value the plan liability as of September 29, 2007, since this rate reflects
an arms-length settlement of the obligation.
66
Net periodic pension cost for the current year is based on assumptions at the valuation date of the prior year.
Amounts expected to be recognized in U.S. net periodic pension expense during fiscal 2008 include:
(in thousands)
Actuarial net loss
Prior service cost
630
$
-
The accumulated benefit obligation for the U.S. pension plan was $22.3 million and $23.5 million at September 30,
2006 and September 29, 2007, respectively.
The following table reflects the U.S. pension plan’s weighted average asset allocation by asset category as of fiscal
2005, 2006 and 2007.
Plan assets:
Equity securities (1)
Debt securities
Other (2)
Total
September 30, 2005
66%
32%
2%
100%
Percentage of Plan assets as of
September 30, 2006
66%
33%
1%
100%
September 29, 2007
0%
0%
100%
100%
(1) Equity securities include Kulicke and Soffa Industries, Inc. common stock with a fair value of $1.6 million
(9% of U.S. pension plan assets), $1.8 million (9% of U.S. pension plan assets) and $0.0 million as of
September 30, 2005, 2006 and September 29, 2007, respectively.
(2) Other includes the group annuity contract as of September 29, 2007.
Prior to the U.S. pension plan’s purchase of the group annuity contract, the Company adopted an investment policy for
its U.S. pension plan assets which emphasized capital appreciation, and secondarily, dividend and interest income. The
Company’s primary goal was to grow the U.S. pension plan’s assets for the benefit of the plan participants and their
beneficiaries. To achieve this, the U.S. pension plan retained a professional investment advisor and invested U.S.
pension plan assets in equity and fixed income securities.
In July 2007, the U.S. pension plan sold these investments and used the net proceeds, along with available cash, to
purchase the group annuity contract.
The Company does not expect to make any contributions to the U.S. pension plan in fiscal 2008.
The following table reflects estimated future U.S. pension plan benefit payments for each of the next five fiscal years
and the following five fiscal years in aggregate, if the Company does not receive a favorable determination letter from
the IRS:
Fiscal year:
2008
2009
2010
2011
2012
2013 - 2017
Other U.S. Plan
(in thousands)
1,066
$
1,113
1,138
1,144
1,206
6,714
The Company has a 401(k) retirement income plan. This plan allows for employee contributions and matching
Company contributions in varying percentages, depending on employee age and years of service, ranging from 50% to
175% of the employees’ contributions. The Company’s contributions under the 401(k) retirement income plan totaled
$2.1 million, $2.0 million and $1.1 million in fiscal 2005, 2006 and 2007 respectively, and were satisfied by
contributions of shares of Company common stock, valued at the market price on the date of the matching
contribution.
67
Switzerland Plan
On November 3, 2006, the Company purchased Alphasem, a Switzerland corporation. Per Switzerland regulations,
Alphasem sponsored a Switzerland pension plan covering active employees whose minimum benefits are guaranteed.
This Switzerland pension plan has been funded to the legal requirement, and the Company is current in all required
pension contributions. However, in accordance with U.S. generally accepted accounting principles of pension
accounting, even though the Switzerland pension plan is fully funded for local statutory purposes, the Switzerland
pension plan must be treated as an under-funded defined benefit plan for U.S. reporting, since the fair value of the
plan’s assets is less than the plan’s projected benefit obligation.
On September 29, 2007, the Company adopted the recognition and disclosure provisions of SFAS 158, the effects of
which are described below:
(in thousands)
Amount recognized prior to application of SFAS 158:
Fiscal 2007
Accrued benefit cost
Funded status
Change in amount recognized due to SFAS 158
$
(3,464)
(3,453)
11
$
The following table reflects an itemized breakdown of the changes due to SFAS 158:
SFAS 132
$
(3,453)
N/A
-
(3,453)
Fiscal 2007
Change
$
3,453
(3,464)
11
$
-
SFAS 158
N/A
(3,464)
11
(3,453)
$
(in thousands)
Accrued benefit cost
Liability to reflect Switzerland pension plan's funded status
Accumulated other comprehensive income (pre tax)
Net amount recognized on Consolidated Balance Sheet
$
68
The following table reflects the Switzerland pension plan’s activity for fiscal 2007:
(dollar amounts in thousands)
Change in projected benefit obligation
Projected benefit obligations at 11/3/2006
Service cost (excluding administrative expenses)
Interest cost
Benefits paid
Insurance premiums
Plan participant contributions
Loss on foreign exchange
Projected benefit obligations at the end of the year
Change in plan assets
Fair value of plan assets at 11/3/2006
Actual return on plan assets
Benefits paid
Insurance premiums
Employer contributions
Plan participant contributions
Gain on foreign exchange
Fair value of plan assets at the end of the year
Funded status
Amounts recognized in statement of financial position
Noncurrent assets
Current liabilities
Noncurrent liabilities
Net amount recognized at the end of the year
Amounts recognized in accumulated other comprehensive income
Unrecognized transition obligation (asset)
Prior service cost (credit)
Actuarial net loss
Net amount recognized in accumulated other comprehensive income (pre tax)
Components of net periodic pension cost
Service cost
Interest cost
Expected return on plan assets
Total net periodic pension cost
Weighted average assumptions at the end of the year
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase
Fiscal 2007
$
$
$
9,797
775
258
(64)
(266)
521
810
11,831
6,813
231
(64)
(266)
562
521
570
8,367
$
$
(3,464)
-
$
-
(3,464)
(3,464)
$
-
$
-
$
11
11
$
$
775
258
(243)
790
3.55%
4.10%
1.50%
The discount rate is established based on yields on long-term government bonds corresponding to the expected
duration of the benefit obligation, and the difference between the yields on high quality corporate fixed-income
investments and government fixed-income investments.
Net periodic pension cost for the current year is based on assumptions at the valuation date of the prior year.
The amounts in accumulated other comprehensive income that are expected to be recognized in net periodic pension
expense during fiscal 2008 are immaterial.
69
The accumulated benefit obligation for the pension plan was $8.9 million as of September 29, 2007.
The assets of the Switzerland pension plan are invested with the multi-employer foundation that guarantees minimum
participant benefit, as required under Switzerland regulations.
The following table reflects fiscal 2008 expected contributions to the Switzerland pension plan:
Employer contributions
Employee contributions
Total contributions
(in thousands)
$
642
594
1,236
$
The following table reflects the Switzerland pension plan's estimated future benefit payments for each of the next five fiscal years
and the following five fiscal years in aggregate:
Fiscal year:
2008
2009
2010
2011
2012
2013-2017
Other Plans
(in thousands)
$
76
88
101
142
160
1,100
The Company’s other foreign subsidiaries have retirement plans that are integrated with and supplement the benefits
provided by laws of the various countries. These other plans are not required to report nor do they determine the
actuarial present value of accumulated benefits or net assets available for plan benefits. On a consolidated basis,
pension expense was $2.4 million, $1.9 million and $2.1 million in fiscal 2005, 2006 and 2007 respectively.
NOTE 11: INCOME TAXES
The following table reflects income from continuing operations before income taxes:
2005
Fiscal
2006
2007
$
$
10,690
27,483
38,173
$
$
48,098
38,723
86,821
$
$
36,632
6,606
43,238
(in thousands)
United States operations
Foreign operations
Total
70
The following table reflects the provision for income taxes:
(in thousands)
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Total
2005
Fiscal
2006
2007
$
282
10
8,449
$
1,291
2,192
5,746
$
1,261
3,166
3,074
(3,233)
-
(672)
4,836
$
553
(106)
113
9,789
$
-
(620)
(1,373)
5,508
$
The following table reflects the difference between the provision for income taxes and the amount computed by applying
the statutory federal income tax rate:
(in thousands)
Computed income tax expense based on U.S. statutory rate
Effect of earnings of foreign subsidiaries subject to different tax rates
Benefits from foreign approved enterprise zone
Effect of permanent items
Benefits of net operating loss and tax credit
carryforwards and changes in valuation allowance
Foreign dividends
State income tax expense
Other, net
Total
2005
$
13,360
(2,914)
(1,999)
4,578
(10,835)
617
1,051
978
4,836
$
Fiscal
2006
$
30,387
(2,787)
(7,657)
70
(48,474)
34,461
2,714
1,075
9,789
$
2007
$
15,133
650
769
(275)
(21,095)
4,409
3,524
2,393
5,508
$
Undistributed earnings of certain foreign subsidiaries for which taxes have not been provided approximate $79.4 million
at September 29, 2007. Such undistributed earnings are considered to be indefinitely reinvested in foreign operations.
Undistributed earnings of approximately $111.5 million are not considered to be indefinitely reinvested in foreign
operations. As part of the global restructuring that occurred during fiscal 2006, the Company determined that these
earnings would be repatriated during the domestic net operating loss carryforward period and this taxable income
related to these earnings could be offset with the utilization of the net operating loss carryforwards. Accordingly, as a
result of the restructuring, no valuation allowance has been provided against the deferred tax asset related to these net
operating losses that will offset these earnings. This resulted in a decrease in tax expense as a result of the reduction of
the valuation allowance. As of September 29, 2007, the Company had provided a deferred tax liability of
approximately $20.0 million for withholding taxes associated with future repatriation of earnings for certain
subsidiaries.
71
The following table reflects the net deferred tax balance, composed of the tax effects of cumulative temporary
differences:
(in thousands)
Inventory reserves
Warranty accrual
Other accruals and reserves
Revenue recognition
Valuation allowance
Total short-term deferred tax asset
Intangible assets
Domestic tax credit carryforwards
Net operating loss carryforwards
Minimum pension liability
Unrecognized actuarial net loss
Stock options
Other
Valuation allowance
Total long-term deferred tax asset (1)
Repatriation of foreign earnings,
including foreign withholding taxes
Depreciable assets
Prepaid expenses and other
Total long-term deferred tax liability
Net long-term deferred liability (1)
Fiscal
2006
2007
$
$
$
$
$
$
1,932
285
7,369
533
(6,129)
3,990
239
5,635
82,370
3,424
NA
1,837
1,340
94,845
(64,159)
1,452
354
4,848
113
(3,136)
3,631
156
7,478
58,473
NA
3,259
2,543
3,961
75,870
(46,572)
$
30,686
$
29,298
$
$
50,594
1,574
3,799
55,967
25,281
$
$
47,213
1,505
3,498
52,216
22,918
$
$
(1) Included in other assets on the consolidated balance sheet are deferred tax assets of $184,000 as of
September 30, 2006 and $230,000 as of September 29,2007.
The Company has U.S. federal net operating loss carryforwards, state net operating loss carryforwards, and tax credit
rryforwards of approximately $118.2 million, $243.8 million, and $7.5 million, respectively, that will reduce future
taxable income. These carryforwards can be utilized in the future, prior to expiration of certain carryforwards in 2009
through 2024 with the exception of certain credits that have no expiration date.
Of the total net operating losses as of September 29, 2007, approximately $1.9 million is attributable to stock option
exercises. If the tax benefits associated with our net operating carryforward are recognized in the future, the amounts
attributable to stock option exercises will be recorded as additional paid in capital in shareholders’ equity.
In the fourth quarter of fiscal 2002, as part of the income tax provision for the period, the Company recorded a charge
of $65.3 million for the establishment of a valuation allowance against its deferred tax asset consisting primarily of
U.S. net operating loss carryforwards. The Company determined that the valuation allowance was required based on
its losses, which are given substantially more weight than forecasts of future profitability in the evaluation. In fiscal
2004, 2005, 2006 and 2007, the valuation allowance was reduced to the extent that net operating losses were utilized
against current year federal and state taxable income. During fiscal 2005, $3.9 million of the valuation allowance was
reduced due to the planned repatriation of foreign earnings in fiscal 2006. The Company’s valuation allowance was
reduced by $9.0 and $22.1 million in fiscal 2006 and 2007, respectively, as the result of the utilization of deferred tax
assets, for which a full valuation allowance had previously been provided, to offset current year earnings. As part of
the 2006 international reorganization, the determination made by the Company with regard to future repatriations
during the domestic net operating loss carryforward period, the Company further reduced the valuation allowance by
$29.1 million during fiscal 2006. The Company has determined the valuation allowance against U.S. deferred tax
assets, particularly the federal and state net operating losses, is still necessary as of September 29, 2007 as the
Company does not believe it is more likely than not the remaining deferred tax assets will be realized due to the
restructuring of its international operations in fiscal 2006 and fiscal 2007 and the significant historic volatility of its
72
Equipment segment, which will be the primary income source for the U.S. in the future. The Company will continue to
evaluate the realizability of all of their deferred taxes and adjust the valuation allowance accordingly.
Of the total valuation allowance through September 29, 2007, approximately $3.6 million of subsequently recognized
tax benefits relating to the valuation allowance for deferred tax assets will be applied to reduce goodwill, intangible
assets or additional paid in capital.
The Company also has generated losses in certain foreign jurisdictions totaling approximately $27.5 million. Similar to
the U.S. net operating losses, realization of the benefit associated with certain foreign loss carryforwards is not more
likely than not to be realized and a full valuation allowance has been provided against the deferred tax assets
associated with these carryforwards.
As a result of committing to certain capital investments and employment levels, income from operations in China,
Singapore, Malaysia and Israel are subject to reduced tax rates, and in some cases are wholly exempt from taxes.
In China, the Company expects to benefit from a 100% tax holiday for two years commencing in the first year in
which the Company earns taxable income and then a 50% tax holiday for an additional three years. The Company is
awaiting further legislative guidance concerning the impact of recent legislation on their tax holidays in China. As of
September 29, 2007, additional guidance has not been provided by the taxing authorities and therefore no impact has
been recorded. The Company will continue to evaluate and will record the impact when further guidance is provided.
In connection with certain Singapore operations, the Company expects to benefit from a 100% tax holiday for 10 years
effective February 1, 2000. In Israel, the Company may benefit from a reduced tax rate of 10% through fiscal 2008
provided certain revenue requirements are met. In Malaysia, one of the Company’s subsidiaries is wholly exempt from
taxes through 2014. As a result of these tax holidays, the Company has received tax benefits of approximately $19.5
million for the fiscal periods 2002 through 2007.
NOTE 12: SEGMENT INFORMATION
The Company evaluates performance of its segments and allocates resources to them based on income from operations
before interest, allocations of corporate expenses and income taxes.
Beginning in fiscal 2006, to align its external reporting with management’s internal reporting, the Company no longer
includes “Corporate and Other” as a business segment. Costs previously presented separately for this segment, which
primarily consisted of general corporate expenses, have been allocated to the Company’s two remaining business
segments. The business segments information for fiscal 2005 have been retrospectively adjusted to reflect this change.
The Company operates primarily in two industry segments: equipment and packaging materials. The equipment segment
designs, manufactures and markets capital equipment, and related spare parts for use in the semiconductor assembly
process. The equipment segment also services, maintains, repairs, and upgrades assembly equipment. The packaging
materials segment designs, manufactures, and markets consumable packaging materials for use on the equipment the
Company markets as well as on competitors’ equipment. The packaging materials products have different manufacturing
processes, distribution channels and a less volatile revenue pattern than the Company's capital equipment segment.
73
The following table reflects the Company’s reporting segments:
Fiscal 2007
Net revenue
Cost of sales
Gross profit
Operating expenses
Income from operations
Segment assets
Capital expenditures
Depreciation expense
Fiscal 2006
Net revenue
Cost of sales
Gross profit
Operating expenses
Gain on sale of assets
Income from operations
Segment assets
Capital expenditures
Depreciation expense
Fiscal 2005
Net revenue
Cost of sales
Gross profit
Operating expenses
Income from operations
Segment assets
Capital expenditures
Depreciation expense
Consolidated
700,404
$
519,470
180,934
144,488
36,446
$
$
512,600
5,763
9,477
Consolidated
696,311
$
499,750
196,561
119,119
4,544
81,986
$
$
401,669
9,496
8,237
Consolidated
475,542
$
339,461
136,081
96,330
39,751
$
$
345,292
7,788
11,224
(in thousands)
Packaging
Materials
Segment
Equipment
Segment
$
$
316,718
188,028
128,690
108,257
20,433
383,686
331,442
52,244
36,231
16,013
$
$
$
242,762
3,596
3,524
$
269,838
2,167
5,953
Equipment
Segment
Packaging
Materials
Segment
$
$
319,788
178,473
141,315
85,445
-
55,870
376,523
321,277
55,246
33,674
-
21,572
$
$
$
148,257
1,799
2,670
$
253,412
7,697
5,567
Equipment
Segment
Packaging
Materials
Segment
$
$
201,608
115,558
86,050
65,606
20,444
273,934
223,903
50,031
30,724
19,307
$
$
$
124,368
2,083
6,720
$
220,924
5,705
4,504
74
The Company’s market for its products is worldwide. The following table reflects destination sales to unaffiliated
customers and long-lived assets by country:
(in tho u sa nd s)
F iscal 20 0 7
T aiw an
M alaysia
K o rea
S ingap o re
C hina
H o ng K o ng
M alta
U nited States
Jap an
T hailand
P hilip p ines
G erm any
S w itzerland
Israel
A ll o ther
T o tal
F iscal 20 0 6
T aiw an
M alaysia
C hina
S ingap o re
K o rea
U nited States
H o ng K o ng
Jap an
M alta
P hilip p ines
Israel
A ll o ther
T o tal
F iscal 20 0 5
T aiw an
M alaysia
K o rea
S ingap o re
C hina
P hilip p ines
U nited States
M alta
Jap an
H o ng K o ng
Israel
A ll o ther
T o tal
D estinatio n Sales
1 6 9,7 5 0
$
1 1 7,1 7 3
8 3,3 6 1
6 2,3 7 4
5 7,1 0 4
3 3,2 4 0
3 0,2 2 1
2 7,4 3 6
1 9,1 7 9
1 7,5 4 4
1 4,7 6 5
1 3,9 6 3
8 4 5
2 6 7
5 3,1 8 2
7 0 0,4 0 4
$
D estinatio n
Sales
$
1 7 1,9 7 7
1 2 8,0 7 8
5 8,1 5 9
5 5,2 7 3
5 1,0 6 0
4 9,8 4 0
3 3,6 6 5
3 2,5 3 4
2 9,5 6 3
2 2,9 4 8
3 3 3
6 2,8 8 1
6 9 6,3 1 1
1 2 9,4 6 3
8 1,0 0 7
5 1,6 7 3
3 6,8 2 3
3 1,9 3 3
2 4,1 7 5
2 4,0 0 1
1 9,6 0 5
1 6,7 9 3
1 3,3 5 6
7 2 8
4 5,9 8 5
4 7 5,5 4 2
Lo ng-lived
A ssets (1 )
$
$
Lo ng-lived
A ssets (1 )
$
2 3 5
2 8 8
3 3
5 ,2 4 1
5 ,1 6 2
-
-
3 7,1 4 7
2 9
-
3
9 0
1 6,6 4 0
6 ,7 9 6
-
7 1,6 6 4
3 6 1
4 3 5
6 ,6 9 2
6 ,1 7 5
9 5
3 6,3 9 8
1 6
4 1
-
1 7
7 ,1 0 1
8 4 0
5 8,1 7 1
4 3 1
5 7 7
1 8
6 ,3 0 4
8 ,8 5 6
1 0
3 9,5 7 1
-
8
3 1
5 ,3 9 7
9 0 9
6 2,1 1 2
$
$
D estinatio n
Sales
$
Lo ng-lived
A ssets (1 )
$
$
$
(1 ) G o o dw ill, intangib le assets and p ro p erty, p lant and eq uip m ent, net.
75
NOTE 13: OTHER FINANCIAL DATA
The following table reflects other financial data:
(in thousands)
Rent expense
Selling, general and administrative incentive compensation expense
Warranty and retrofit expense
Maintenance and repairs expense
2005
$
4,443
1,619
1,793
1,522
Fiscal
2006
$
5,438
9,030
3,238
1,456
2007
$
5,269
4,624
2,281
2,100
NOTE 14: EARNINGS PER SHARE
Basic net income (loss) per share (“EPS”) is calculated using the weighted average number of shares of common stock
outstanding during the period. The calculation of diluted net income (loss) per share assumes the exercise of stock
options and the conversion of convertible securities to common shares unless the inclusion of these will have an anti-
dilutive impact on net income (loss) per share. In addition, in computing diluted net income (loss) per share, if
convertible securities are assumed to be converted to common shares, the after-tax amount of interest expense
recognized in the period associated with the convertible securities is added back to net income.
For fiscal 2005, 2006 and 2007 the exercise of dilutive stock options and performance-based restricted stock (fiscal
2007, only) and conversion of the 1.0% and 0.5% Convertible Subordinated Notes were assumed and $1.7 million,
$1.4 million and $1.3 million, respectively, of after-tax interest expense related to its 0.5% and 1.0% Convertible
Subordinated Notes was added to the Company’s net income to determine diluted earnings per share.
The following table reconciles Weighted average shares outstanding – Basic to Weighted average shares outstanding-
Diluted:
(shares in thousands)
Weighted average shares outstanding - Basic
Stock options
Performance-based restricted stock
1.0 % Convertible subordinated notes
0.5 % Convertible subordinated notes
0.875 % Convertible subordinated notes
Total potentially dilutive securities
Weighted average shares outstanding - Diluted
2005
51,619
898
n/a
5,062
10,083
n/a
16,043
67,662
Fiscal
2006
55,089
945
n/a
5,062
7,785
n/a
13,792
68,881
2007
56,221
807
77
5,062
6,107
n/a
12,053
68,274
For fiscal 2006 and 2007, diluted earnings per share excludes approximately 4.8 million and 0.8 million potential
common shares, respectively, related to certain options granted under our stock option plans since the option exercise
price was greater than the average market price of our common stock for the respective periods.
Diluted earnings per share excludes the effect of the 0.875% Convertible Subordinated Notes, issued during fiscal
2007, since the 0.875% Convertible Subordinated Notes were not convertible (see Note 8).
NOTE 15: GUARANTOR OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Guarantor Obligations
The Company has issued standby letters of credit for employee benefit programs and a customs bond, and its wire
manufacturing subsidiaries have issued a guarantee for payment under their gold supply financing arrangement. In
fiscal 2006, the Company renewed its gold supply agreement for a two year term. This gold supply agreement requires
the Company to provide letters of credit or cash to secure its obligations to the supplier. Accordingly, the Company
entered into a credit facility with a bank in an amount up to $20.0 million. The term of the credit facility is two years,
but it is granted on an uncommitted basis and is repayable on demand. In connection with this credit facility the
Company granted the bank a security interest in its assets related to the manufacture and sale of gold wire, including
all gold inventories and all accounts receivable arising from the sale of gold wire and the proceeds thereof. The credit
76
facility contains financial and non-financial covenants. The financial covenants contain restrictions on the Company’s
gold wire manufacturing subsidiaries’ net worth, ratio of total liabilities to Earnings Before Interest and Taxes and
Discontinued Operations, and those subsidiaries’ ability to pay dividends.
The following table reflects guarantees under standby letters of credit as of September 29, 2007:
Nature of guarantee
Security for the Company's gold financing arrangement
Security deposit for payment of employee health benefits
Security deposit for payment of employee worker
compensation benefits
Security deposit for customs bond
Total
Warranty Expense
Term of guarantee
Expires June 2008
Expires June 2008
Expires October 2008
Expires July 2008
(in thousands)
Maximum obligation
under guarantee
$
20,000
480
450
100
21,030
$
The Company’s products are generally shipped with a one-year warranty against manufacturing defects and the
Company does not offer extended warranties in the normal course of its business. The Company establishes reserves
for estimated warranty expense when revenue for the related product is recognized. The reserve for estimated warranty
expense is based upon historical experience and management estimates of future expenses.
The following table reflects product warranties included in accrued expenses as of fiscal 2005, 2006 and 2007:
(in thousands)
Reserve for product warranty at beginning of year
Die bonder reserve for product warranty at date of acquisition
Provision for product warranty
Product warranty costs paid
Reserve for product warranty at end of year
Other Commitments and Contingencies
2005
$
956
-
1,744
(1,847)
853
$
Fiscal
2006
$
853
-
1,903
(2,044)
712
$
2007
$
712
1,597
2,254
(2,588)
1,975
$
The following table identifies contractual obligations under various arrangements which are not reflected on the
Consolidated Balance Sheet as of September 29, 2007:
(in thousands)
Contractual Obligations:
Interest expense related to long term debt
Operating lease obligations (2)
Inventory Purchase obligations (1)
Total Contractual Obligations not reflected
on the Consolidated Balance Sheet
Total
Fiscal
2008
Payments due by period
Fiscal
2010
Fiscal
2009
Fiscal
2011
$
7,325
33,453
67,431
$
1,984
5,901
67,431
$
1,804
4,167
-
$
1,612
3,750
-
$
963
3,390
-
Fiscal 2012
and after
$
$
962
16,245
-
$
108,209
$
75,316
$
5,971
$
5,362
$
4,353
$
17,207
(1) The Company orders inventory components in the normal course of its business. A portion of these orders are non-
cancelable and a portion has varying penalties and charges in the event of cancellation.
(2) The Company has minimum rental commitments under various operating leases (excluding taxes, insurance,
maintenance and repairs, which are also paid by the Company) primarily for manufacturing and office facilities, which
expire periodically through 2018 (not including lease extension options, if applicable).
77
In September 2004, the tax authority in Singapore notified the Company that it believed Goods and Services Tax in the
amount of $3.3 million was owed on the return of gold scrap to the Company’s former gold supplier over the period from
1998 to 2004. The Company did not agree with this assessment and filed an objection. Subsequent to fiscal 2007, the
Company settled this matter with the tax authority in Singapore for approximately $30,000.
In October 2007, the tax authority in Israel notified the Company that it believes withholding and income taxes of
approximately $28.0 million are owed by the Company for the 2002 through 2004 tax years. The Company does not
agree with this assessment and will file an objection with the tax authority in Israel. Discussions between the Company
and the tax authority in Israel regarding the assessment are expected to begin in fiscal 2008. The Company believes it has
adequate tax reserves for this assessment.
Concentrations
The following table reflects significant customer concentrations:
Customer net revenue as a percentage of Net Revenue
Advanced Semiconductor Engineering
ST Microelectronics
2005
13%
11%
Customer accounts receivable as a percentage of Total Accounts Receivable
Advanced Semiconductor Engineering
ST Microelectronics
Siliconware Precision Industries
14%
8%
12%
Fiscal
2006
2007
17%
12%
20%
12%
5%
17%
13%
19%
8%
5%
No other customer accounted for more than 10% of total accounts receivable as of fiscal 2005, 2006 and 2007.
Other
From time to time, the Company may be a plaintiff or defendant in cases arising out of its business. The Company does
not believe resolution of these legal matters will materially or adversely affect its business, financial condition or
operating results.
78
NOTE 16: SELECTED QUARTERLY FINANCIAL DATA (unaudited)
The following table reflects selected quarterly financial data:
(in thousands, except per share amounts)
Net revenue
Gross profit
First
Quarter
Second
Quarter
Fiscal 2007
Third
Quarter
Fourth
Quarter
$
152,308
38,719
$
142,714
31,681
$
168,625
42,793
$
236,757
67,741
Total
$
700,404
180,934
Income from operations
4,239
(2,755)
4,976
29,986
36,446
Income from continuing operations before income taxes
Provision for income taxes
Net income (loss)
5,060
887
4,173
$
(1,850)
364
(2,214)
$
6,091
571
5,520
$
33,937
3,686
30,251
$
43,238
5,508
37,730
$
Basic shares outstanding
Diluted shares outstanding
Net income (loss) per share (1):
Basic
Diluted
(in thousands, except per share amounts)
Net revenue
Gross profit
57,301
69,456
57,580
57,580
56,456
68,951
53,546
64,702
56,221
65,926
$
$
0.07
0.06
$
$
(0.04)
(0.04)
$
$
0.10
0.08
$
$
0.56
0.47
$
$
0.67
0.57
First
Quarter
Second
Quarter
Fiscal 2006
Third
Quarter
Fourth
Quarter (2)
$
204,632
65,463
$
160,329
44,940
$
169,935
43,604
$
161,415
42,554
Total
$
696,311
196,561
Income from operations
36,213
14,788
17,363
13,622
81,986
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations
Net income (loss)
Income per share from continuing operations, net of tax: (1)
Basic
Diluted
Loss per share from discontinued operations (1):
Basic
Diluted
Net income (loss) per share (1):
Basic
Diluted
35,967
5,349
30,618
(5,317)
25,301
18,781
1,667
17,114
(17,843)
(729)
17,784
1,438
16,346
(1,581)
14,765
14,289
1,335
12,954
(121)
12,833
86,821
9,789
77,032
(24,862)
52,170
$
$
0.59
0.45
$
$
0.31
0.25
$
$
0.29
0.24
$
$
0.22
0.19
$
$
1.40
1.14
$
$
(0.10)
(0.07)
$
$
(0.32)
(0.26)
$
$
(0.03)
(0.02)
$
$
(0.00)
(0.00)
$
$
(0.45)
(0.36)
$
$
0.49
0.38
$
$
(0.01)
(0.01)
$
$
0.26
0.22
$
$
0.22
0.19
$
$
0.95
0.78
(1) Earnings per share for the year may not equal the sum of quarterly earnings per share due to changes in weighted average share calculations.
(2) Includes the following cumulative adjustment to correct immaterial errors that originated in the consolidated financial statements of prior years:
79
Increase to Gross Profit
Increase to Income from operations
Increase to Income from continuing operations before income taxes
Increase to Income from continuing operations
Increase in Loss from discontinued operations
Increase to Net income
Increase to Income per share from continuing operations, net of tax:
Basic
Diluted
Increase to Net income per share, net of tax for fiscal 2006:
Basic
Diluted
(in thousands, except per
share amounts)
$
$
$
$
$
$
3,506
4,301
4,301
4,281
528
3,753
$
$
0.08
0.06
$
$
0.07
0.05
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of September 29, 2007. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of September 29, 2007 our disclosure controls and
procedures were effective in providing reasonable assurance the information required to be disclosed by us in reports
filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including
the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
Management’s Report on Internal Control Over Financial Reporting
The management of Kulicke and Soffa Industries, Inc. (the “Company”) is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange
Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial
reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, provide reasonable assurance that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and directors of the Company; and provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
80
Management evaluated the Company’s internal control over financial reporting as of September 29, 2007. In making
this assessment, management used the framework established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management’s assessment included
an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness
of our internal control over financial reporting. As permitted by SEC rules and regulations, our management has
excluded Alphasem from its assessment of internal control over financial reporting as of September 29, 2007 because
it was acquired in fiscal 2007. Total assets and total revenues of Alphasem, our wholly-owned subsidiary, represented
9.4% and 5.1%, respectively, of the related Consolidated Financial Statement amounts as of and for the year ended
September 29, 2007. Refer to Note 3 of our Consolidated Financial Statements included in Part II, Item 8 of this
Annual Report on Form 10-K for more information about the purchase of Alphasem. Management reviewed the results
of its assessment with the Audit Committee of the Company’s Board of Directors. Based on that assessment and based
on the criteria in the COSO framework, management has concluded that, as of September 29, 2007, the Company’s
internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of September 29, 2007 has been
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report,
which appears herein.
Change in Internal Control Over Financial Reporting
In order to remediate the material weakness described in Management’s Annual Report on Internal Control Over
Financial Reporting contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006, we
made changes that materially affected our internal control over financial reporting during fiscal 2007. The material
weakness related to ineffective controls over the processes associated with the reconciliation and analysis of certain
account balances as of September 30, 2006. In particular, we implemented the following measures to remediate the
material weakness:
•
We added resources in our corporate accounting department.
•
•
•
•
We improved our monthly accounting close by increasing the review of balance sheet account reconciliations.
We strengthened corporate level processes to improve oversight of balance sheet accounts.
We developed additional system-generated reports to identify potential reconciling items on a timely basis.
We increased training of key personnel at all locations within the Company.
There was no other change in our internal control over financial reporting during fiscal 2007 that have materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. OTHER INFORMATION
None
81
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by Item 401 of Regulation S-K with respect to the directors will appear under the heading
"ELECTION OF DIRECTORS" in the Company's Proxy Statement for the 2008 Annual Meeting, which information is
incorporated herein by reference. The information required by Item 401 of Regulation S-K with respect to executive
officers appears at the end of Part I, Item 1 of this report under the heading "Executive Officers of the Company." The
other information required by Item 401 of Regulation S-K will appear under the heading “CORPORATE
GOVERNANCE” in the Company’s Proxy Statement for the 2008 Annual Meeting, which information is incorporated
herein by reference.
The information required by Item 405 of Regulation S-K will appear under the heading “CORPORATE GOVERNANCE
– Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for the 2008 Annual
Meeting, which information is incorporated herein by reference.
The information required by Item 406 of Regulation S-K will appear under the heading “CORPORATE GOVERNANCE
- Code of Ethics” in the Company’s Proxy Statement for the 2008 Annual Meeting, which information is incorporated
herein by reference.
The information required by Item 407(c)(3) of Regulation will appear under the headings “CORPORATE
the
in
GOVERNANCE—Nominating and Governance Committee” and “SHAREHOLDER PROPOSALS”
Company’s Proxy Statement for the 2008 Annual Meeting, which information is incorporated herein by reference.
The information required by Items 407(d)(4) and (d)(5) of Regulation S-K will appear under the heading
“CORPORATE GOVERNANCE—Audit Committee” in the Company’s Proxy Statement for the 2008 Annual
Meeting, which information is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K will appear under the heading “COMPENSATION OF
EXECUTIVE OFFICERS,” in the Company's Proxy Statement for the 2008 Annual Meeting, which information is
incorporated herein by reference.
The information required by Item 407(e)(4) of Regulation S-K will appear under the heading “CORPORATE
GOVERNANCE— Management Development and Compensation Committee Interlocks and Insider Participation” in
the Company’s Proxy Statement for the 2008 Annual Meeting, which information is incorporated herein by reference.
The information required by Item 407(e)(5) of Regulation S-K will appear under the heading “REPORT OF THE
MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE” in the Company’s Proxy Statement for
the 2008 Annual Meeting, which information is incorporated herein by reference.
82
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required hereunder concerning security ownership of certain beneficial owners and management will
appear under the heading “Security Ownership of Certain beneficial Owners” in the Company’s Proxy Statement for the
2008 Annual Meeting, which information is incorporated herein by reference. The information required hereunder
concerning security ownership of management will appear under the heading "ELECTION OF DIRECTORS" in the
Company's Proxy Statement for the 2008 Annual Meeting, which information is incorporated herein by reference. The
information required by this item relating to securities authorized for issuance under equity compensation plans is
included under the heading “EQUITY COMPENSATION PLANS” in the Company’s Proxy Statement for the 2008
Annual Meeting, which is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by Item 404 of Regulation S-K will appear under the heading “CORPORATE GOVERNANCE
– Certain Relationships and Related Transactions” in the Company’s Proxy Statement for the 2008 Annual Meeting
which information is incorporated herein by reference.
The information required by Section 407(a) of Regulation S-K will appear under the heading “CORPORATE
GOVERNANCE – Board Matters” in the Company’s Proxy Statement for the 2008 Annual Meeting, which information
is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required hereunder will appear under the heading "AUDIT AND RELATED FEES” in the Company's
Proxy Statement for the 2008 Annual Meeting, which information is incorporated herein by reference.
83
Part IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) Financial Statements - Kulicke and Soffa Industries, Inc.:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2006 and September 29, 2007
Consolidated Statements of Operations for fiscal years 2005, 2006 and 2007
Consolidated Statements of Cash Flows for fiscal 2005, 2006 and 2007
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for fiscal 2005, 2006 and 2007
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Page
43
44
45
46
47
48
87
All other schedules are omitted because they are not applicable or the required information is shown in the
financial statements or notes thereto.
(3) Exhibits:
EXHIBIT
NUMBER
ITEM
3(i)
The Company’s Form of Amended and Restated Articles of Incorporation dated December 5,
2007.
3(ii)
4(i)
4(ii)
4(iii)
4(iv)
The Company’s Form of Amended and Restated By-Laws dated December 5, 2007.
Specimen Common Share Certificate of Kulicke and Soffa Industries, Inc., filed as Exhibit 4 to
the Company’s Form 8-A12G/A dated September 11, 1995, SEC file number 000-00121, is
incorporated herein by reference.
Indenture dated as of November 26, 2003 between the Company and J.P. Morgan Trust Company,
National Association, as Trustee, filed as Exhibit 4.1 to the Company’s Form 8-K dated December
5, 2003, is incorporated herein by reference.
Form of Note (included in Exhibit 4(ii)).
Indenture dated as of June 30, 2004 between the Company and J.P. Morgan Trust Company,
National Association, as Trustee, filed as Exhibit 4.1 to the Company’s quarterly report on Form
10-Q for the quarterly period ended June 30, 2004, is incorporated herein by reference.
4(v)
Form of Note (included in Exhibit 4(iv)).
4(vi)
4(viii)
10(i)
Indenture dated as of June 6, 2007 between the Company and Bank of New York, as Trustee, filed
as Exhibit 4.1 to the Company’s form 8-K dated June 6, 2007, is incorporated by reference.
Registration Rights Agreement dated as of June 6, 2007, between the Company and Bank of
America Securities, LLC as Initial Purchaser, filed as Exhibit 10.1 to the Company’s Form 8-K
dated June 6, 2007, is incorprated by reference.
The Company’s 1988 Employee Incentive Stock Option and Non-Qualified Stock Option Plan (as
amended and restated effective March 21, 2003), filed as Exhibit 10(i) to the Company’s Annual
Report on Form 10-K for the year ended September 30, 2003 is incorporated herein by reference.*
84
10(ii)
10(iii)
10(iv)
10(v)
10(vi)
10(vii)
10(viii)
10(ix)
10(x)
10(xi)
10(xii)
The Company’s 1988 Non-Qualified Stock Option Plan for Non-Officer Directors (as amended
and restated effective February 9, 1999), filed as Exhibit 10(vi) to the Company’s Annual Report
on Form 10-K for the year ended September 30, 1999, is incorporated by reference.*
The Company’s 1994 Employee Incentive Stock Option and Non-Qualified Stock Option Plan (as
amended and restated effective March 21, 2003), filed as Exhibit 10(iii) to the Company’s Annual
Report on Form 10-K for the year ended September 30, 2003 is incorporated herein by reference.*
2004 Israeli Addendum to the Company’s 1994 Employee Incentive Stock Option and Non-
Qualified Stock Option Plan (as amended and restated effective March 21, 2003), filed as Exhibit
10(iv) to the Company’s Post-Effective Amendment No.4 on Form S-1 to the Registration
Statement on Form S-3 filed December 14, 2004, is incorporated herein by reference.*
The Company’s 1997 Non-Qualified Stock Option Plan for Non-Employee Directors (as amended
and restated effective March 21, 2003), filed as Exhibit 10(vi) to the Company’s Annual Report
on Form 10-K for the year ended September 30, 2003 is incorporated herein by reference.*
The Company’s 1998 Employee Incentive Stock Option and Non-Qualified Stock Option Plan (as
amended and restated effective March 21, 2003), filed as Exhibit 10(ix) to the Company’s Annual
Report on Form 10-K for the year ended September 30, 2003 is incorporated herein by reference.*
2004 Israeli Addendum to the Company’s 1998 Employee Incentive Stock Option and Non-
Qualified Stock Option Plan (as amended and restated effective March 21, 2003), filed as Exhibit
10(vii) to the Company’s Post-Effective Amendment No.4 on Form S-1 to the Registration
Statement on Form S-3 filed December 14, 2004, is incorporated herein by reference.*
The Company’s 1999 Nonqualified Employee Stock Option Plan (as amended and restated
effective March 21, 2003), filed as Exhibit 10(xv) to the Company’s Annual Report on Form 10-K
for the year ended September 30, 2003 is incorporated herein by reference.*
2004 Israeli Addendum to the Company’s 1999 Non-Qualified Stock Option Plan (as amended
and restated effective March 21, 2003), filed as Exhibit 10(ix) to the Company’s Post-Effective
Amendment No.4 on Form S-1 to the Registration Statement on Form S-3 filed December 14,
2004, is incorporated herein by reference.*
Form of Termination of Employment Agreement signed by Mr. Kulicke (Section 2(a) - 30
months), and Messrs. Carson, Salmons, Belani, Griffing, Chylak, Torton, Anderson, Lutz, Mak,
and Rheault (Section 2(a) - 18 months), filed as Exhibit 10(a) to the Company’s Quarterly Report
on Form 10-Q for the quarterly period ended December 31, 2000, is incorporated herein by
reference.*
The Company’s 2001 Employee Incentive Stock Option and Non-Qualified Stock Option Plan (as
amended and restated effective March 21, 2003), filed as Exhibit 10(xix) to the Company’s
Annual Report on Form 10-K for the year ended September 30, 2003 is incorporated herein by
reference.*
2004 Israeli Addendum to the Company’s 2001 Employee Incentive Stock Option and Non-
Qualified Stock Option Plan (as amended and restated effective March 21, 2003), filed as Exhibit
10(xii) to the Company’s Post-Effective Amendment No.4 on Form S-1 to the Registration
Statement on Form S-3 filed December 14, 2004, is incorporated herein by reference.*
10(xiii)(1)
Sale and Buyback of Fine Metal Agreement dated June 12, 2006 between Kulicke & Soffa (SEA)
PTE LTD, Kulicke and Soffa Global Holding Corporation and AGR Matthey, filed as Exhibit
10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 1,
2006 is incorporated herein by reference. (1)
10(xiv)
The Company’s 2006 Equity Plan, filed as Appendix A to the Company’s proxy statement on
Schedule 14A for the annual meeting of shareholders on February 14, 2006, is incorporated herein
by reference. *
10(xv)
Form of Stock Option Award Letter regarding the 2006 Equity Plan, filed as Exhibit 99.1 to the
10(xvi)
Company’s report on Form 8-K dated October 3, 2006, is incorporated herein by reference. *
Form of Performance Share Award Agreement regarding the 2006 Equity Plan, filed as Exhibit
99.2 to the Company’s report on Form 8-K dated October 3, 2006, is incorporated herein by
reference. *
85
10(xvii)
10(xviii)
10(xix)
10(xx)
10(xxi)
10(xxii)
10(xxiii)
10(xxiv)
10(xxv)
21
23
31.1
31.2
32.1
32.2
Acquisition Agreement among the Company, K & S Interconnect, Inc. and Tyler Acquisition
Corp. dated January 25, 2006, filed as Exhibit 10.1 to the Company’s report on Form 8-K dated
January 25, 2006, is incorporated herein by reference.
Asset Purchase Agreement among Kulicke and Soffa Industries, Inc., K & S Interconnect Inc.,
Kulicke and Soffa (Suzhou), Ltd., Kulicke and Soffa (Japan) Ltd., Kulicke and Soffa (SEA) Pte.,
Kulicke and Soffa Test Taiwan Co., Ltd., SV Probe Pte. Ltd. and SV Probe, Inc. dated January 25,
2006, filed as Exhibit 10.2 to the Company’s report on Form 8-K dated January 25, 2006, is
incorporated herein by reference.
Master Sale and Purchase Agreement between Dover Technologies International, Inc. and the
Company dated as of October 11, 2006, filed as Exhibit 2.1 to the Company’s report on Form 8-K
dated November 3, 2006, is incorporated herein by reference.
Facility Letter Agreement dated June 7, 2006 between Kulicke & Soffa (SEA) PTE LTD, Kulicke
And Soffa Global Holding Corporation and Citibank, N.A., Singapore Branch, filed as Exhibit
10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 1,
2006, is incorporated herein by reference.
Agreement to Sell and Purchase Real Estate, dated August 25, 2004, as amended on September
15, 2004, between the Company and Good Mac Realty Partners, L.P. , filed as Exhibit 10(xiv) to
the Company’s Registration on Form S-1 filed September 30, 2004, is incorporated herein by
reference.
Agreement of Lease, by and between the Company and 1005 Virginia Associates, L.P., dated June
30, 2005, filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2005, is incorporated herein by reference.
Officer Incentive Compensation Plan, dated August 2, 2005, filed as Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, is
incorporated herein by reference. *
Severance Agreement and General Release, dated March 31, 2006 between the Company and
Oded Lender, filed as Exhibit 10.1 to the Company’s report of Form 8-K dated March 31, 2006, is
incorporated herein by reference. *
2007 Equity Plan for Non-employee Directors, filed as Appendix A to the Company’s proxy
statement on Schedule 14A for the annual meeting of shareholders on February 13, 2007, is
incorporated herein by reference.*
Subsidiaries of the Company.
Consent of PricewaterhouseCoopers LLP (Independent Registered Public Accounting Firm)
Certification of C. Scott Kulicke, Chief Executive Officer of Kulicke and Soffa Industries, Inc.,
pursuant to Rule 13a-14(a) or Rule 15d-14(a).
Certification of Maurice E. Carson, Chief Financial Officer of Kulicke and Soffa Industries, Inc.,
pursuant to Rule 13a-14(a) or Rule 15d-14(a).
Certification of C. Scott Kulicke, Chief Executive Officer of Kulicke and Soffa Industries, Inc.,
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Certification of Maurice E. Carson, Chief Financial Officer of Kulicke and Soffa Industries, Inc.,
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.1
Agreement for Commitment to Make Plan Sufficient, filed as Exhibit 99.1 to the Company’s
report on Form 8-K dated May 7, 2007, is incorporated herein by reference.
*
(1)
Indicates a management contract or compensatory plan or arrangement.
Portions of this exhibit have been omitted based on a request for confidential treatment submitted
to the U.S. Securities and Exchange Commission. The omitted portions have been filed separately
with the Commission.
86
KULICKE AND SOFFA INDUSTRIES, INC.
Schedule II-Valuation and Qualifying Accounts
Balance
at beginning
of period
Charged to
costs and
expenses
Other
additions
(describe)
Deductions
(describe)
Balance
at end
of period
(in thousands)
Fiscal 2005
Allowance for doubtful accounts
$
3,022
$
(589)
$
-
$
347
(1)
$
2,086
Inventory reserve
Valuation allowance for deferred taxes
Fiscal 2006
Allowance for doubtful accounts
Inventory reserve
9,890
93,440
2,086
9,388
2,699
15,018
(3)
-
-
(656)
1,034
Valuation allowance for deferred taxes
108,458
(38,170)
(3)
Fiscal 2007
Allowance for doubtful accounts
Inventory reserve
3,068
7,586
477
2,262
1,642
(4)
-
-
602
-
3,201
(2)
9,388
-
4
2,836
-
(1)
(2)
108,458
3,068
7,586
70,288
2,434
1,420
(1)
(2)
1,713
8,428
Valuation allowance for deferred taxes
$
70,288
$
(20,584)
(3)
$
3,600
(5)
$
-
$
53,304
(1) Represents write offs of specific accounts receivable.
(2) Disposal of excess and obsolete inventory.
(3) Reflects the decrease in the valuation allowance primarily associated with the Company’s U.S. net
operating losses and other deferred tax assets.
(4) Reflects reserve against the Company’s former Test business accounts receivable that were not sold.
(5) Increase in valuation allowance related to the acquisition of Alphasem.
87
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
KULICKE AND SOFFA INDUSTRIES, INC.
By: /s/ C. SCOTT KULICKE
C. Scott Kulicke
Chairman of the Board and
Chief Executive Officer
Dated: December 10, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date______
/s/ C. SCOTT KULICKE
C. Scott Kulicke
(Principal Executive Officer)
/s/ MAURICE E. CARSON
Maurice E. Carson
(Principal Financial and Accounting
Officer)
/s/ BRIAN R. BACHMAN
Brian R. Bachman
Chairman of the Board
of Directors and Chief
Executive Officer
December 10, 2007
Senior Vice President and
Chief Financial Officer
December 10, 2007
Director
December 10, 2007
/s/ JOHN A. O’STEEN
John A. O'Steen
Director
/s/ GARRETT E. PIERCE
Garrett E. Pierce
/s/ MACDONELL ROEHM, JR.
MacDonell Roehm, Jr.
/s/ BARRY WAITE
Barry Waite
/s/ C. WILLIAM ZADEL
C. William Zadel
Director
Director
Director
Director
December 10, 2007
December 10, 2007
December 10, 2007
December 10, 2007
December 10, 2007
88
Stock Performance Graph
The graph set forth below compares, for fiscal years 2003 through 2007, the yearly change in the cumulative
total returns to holders of common shares of the Company with the cumulative total return of a peer group selected
by the Company and of the NASDAQ Stock Market-US Index. The peer group is focused on companies that
manufacture equipment and materials similar to the equipment and materials manufactured by the Company and is
composed, in part, by reference to peer group lists that the Company believes are commonly used by institutional
investors and financial research analysts when evaluating Company performance. The Company believes that the
peer group provides a useful reference point for investors when evaluating Company performance across the
semiconductor assembly equipment industry business cycle. The peer group is composed of Asyst Technologies
Inc., ASM Pacific Technology Limited, BE Semiconductor Industries N.V., Brooks Automation, Inc., Cohu, Inc.,
Credence Systems Corporation, Cymer, Inc., KLA-Tencor Corporation, Lam Research Corporation, LTX
Corporation, Novellus Systems, Inc., Shinkawa Ltd., Teradyne, Inc., Ultratech, Inc., Varian Semiconductor
Equipment Associates, Inc., and Veeco Instruments, Inc. The graph assumes that the value of the investment in the
relevant stock or index was $100 at September 30, 2002 and that all dividends were reinvested. Total returns are
calculated based on a fiscal year ending September 30. For purposes of the peer group index, the peer group
companies have been weighted based upon their relative market capitalization. The closing sale price of the
Company’s common shares as of September 29, 2007 was $8.48.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Kulicke & Soffa Industries, Inc., The NASDAQ Composite Index
And A Peer Group
$400
$350
$300
$250
$200
$150
$100
$50
$0
9/02
9/03
9/04
9/05
9/06
9/07
Kulicke & Soffa Industries, Inc.
NASDAQ Composite
Peer Group
* $100 invested on 9/30/02 in stock or index-including reinvestment of dividends.
Fiscal year ending September 30.
COMPANY INFORMATION
(December 2007)
BOARD OF DIRECTORS
C. Scott Kulicke
Chairman of the Board
Kulicke & Soffa Industries, Inc.
Brian R. Bachman
Private Investor
Former CEO and Vice Chairman
Axcelis Technologies, Inc.
John A. O’Steen
Retired Business Executive
Former Executive Vice President
Cornerstone Brands, Inc.
Garrett E. Pierce
Vice Chairman and CFO
Orbital Sciences Corporation
MacDonell Roehm, Jr.
Chairman and CEO
Crooked Creek Capital LLC
Barry Waite
Retired Business Executive
Former President and CEO
Chartered Semiconductor
C. William Zadel
Retired Business Executive
Former Chairman and CEO
Mykrolis Corporation
EXECUTIVE OFFICERS
C. Scott Kulicke
Chairman of the Board and
Chief Executive Officer
Maurice E. Carson
Senior Vice President and CFO
Jack G. Belani
Senior Vice President
Charles Salmons
Senior Vice President
Bruce Griffing
Vice President
Christian Rheault
Senior Vice President
CORP. VICE PRESIDENTS
David J. Anderson
Michael Lutz
CORPORATE
HEADQUARTERS
Kulicke & Soffa Industries, Inc.
1005 Virginia Drive
Fort Washington, PA 19034
EQUIPMENT
MANUFACTURING
FACILITIES
Fort Washington, PA
Berg, Switzerland
Singapore
PACKAGING MATERIALS
MANUFACTURING
FACILITIES
Yokneam Elite, Israel
Suzhou, China
Singapore
Thalwil-Zurich, Switzerland
K&S SALES OFFICES,
SALES REPRESENTATIVES,
DISTRIBUTORS, SERVICE
LOCATIONS
USA
Arizona
California
Massachusetts
Minnesota
Pennsylvania
Texas
Europe & Africa
Czech Republic Pakistan
France
Germany
Hungary
Israel
Italy
Kingdom
Netherlands
Poland
Russia
Switzerland
Turkey
United
Asia
China
Hong Kong
India
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Vietnam
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers, LLP
Philadelphia, PA
BANK
Bank of America
Chicago, IL
REGISTRAR AND TRANSFER
AGENT
Common Stock
American Stock Transfer & Trust
59 Maiden Lane
New York NY 10007
800-937-5449
STOCK TRADING
Traded on NASDAQ
NASDAQ Symbol – KLIC
ADDITIONAL INFORMATION
An electronic copy of the 2007 Annual
Report, the 2008 Proxy Statement and
other filings are available online at
http://www.kns.com/investors
Copies of the Company’s recent news
releases and investor packages may be
obtained by contacting:
Michael Sheaffer
Director of Investor Relations
Kulicke & Soffa Industries, Inc.
Phone: 215-784-6411
Fax: 215-784-6167
Or request information online at:
http://www.kns.com/investors
1005 Virginia Drive, Fort Washington, PA 19034, USA
215-784-6000
www.kns.com