Q3 2014 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 28, 2014
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                  to                    .
 
Commission File No. 0-121
 
KULICKE AND SOFFA INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
PENNSYLVANIA
23-1498399
(State or other jurisdiction of incorporation)
(IRS Employer
 
Identification No.)
 
23A Serangoon North, Avenue 5, #01-01 K&S Corporate Headquarters, Singapore 554369
(Address of principal executive offices and Zip Code)
 
(215) 784-7518
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý
Accelerated filer [ ] 
Non-accelerated filer [ ] 
Smaller reporting company [ ] 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
 
As of July 25, 2014, there were 76,663,182 shares of the Registrant's Common Stock, no par value, outstanding.


Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
 
FORM 10 – Q
 
June 28, 2014
 Index
 
 
 
Page Number
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
Item 1.
FINANCIAL STATEMENTS (Unaudited)
 
 
 
 
 
Consolidated Balance Sheets as of June 28, 2014 and September 28, 2013
 
 
 
 
Consolidated Statements of Operations for the three and nine months ended June 28, 2014 and June 29, 2013
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and nine months ended June 28, 2014 and June 29, 2013
 
 
 
 
Consolidated Statements of Cash Flows for the nine months ended June 28, 2014 and June 29, 2013
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
Item 4.
CONTROLS AND PROCEDURES
 
 
 
PART II - OTHER INFORMATION
 
 
 
Item 1A.
RISK FACTORS
 
 
 
Item 6.
EXHIBITS
 
 
 
 
SIGNATURES




Table of Contents

PART I. - FINANCIAL INFORMATION
Item 1. – FINANCIAL STATEMENTS
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
 
 
As of
 
 
June 28, 2014
 
September 28, 2013
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
597,457

 
$
521,788

Short-term investments
 
2,600

 
3,252

Accounts and notes receivable, net of allowance for doubtful accounts of $239 and $504 respectively
 
154,410

 
162,714

Inventories, net
 
53,922

 
38,135

Prepaid expenses and other current assets
 
19,153

 
24,012

Deferred income taxes
 
4,063

 
4,487

Total current assets
 
831,605

 
754,388

 
 
 
 


Property, plant and equipment, net
 
52,231

 
47,541

Goodwill
 
41,546

 
41,546

Intangible assets
 
7,221

 
11,209

Other assets
 
7,260

 
8,310

TOTAL ASSETS
 
$
939,863

 
$
862,994

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
66,222

 
$
37,030

Accrued expenses and other current liabilities
 
41,406

 
38,868

Income taxes payable
 
4,076

 
1,504

Total current liabilities
 
111,704

 
77,402

 
 
 
 
 
Financing obligation
 
19,618

 
19,396

Deferred income taxes
 
40,115

 
40,709

Other liabilities
 
8,957

 
8,822

TOTAL LIABILITIES
 
$
180,394

 
$
146,329

 
 
 
 
 
Commitments and contingent liabilities (Note 12)
 


 


 
 
 
 
 
SHAREHOLDERS' EQUITY:
 
 

 
 

Preferred stock, without par value:
 
 

 
 

Authorized 5,000 shares; issued - none
 
$

 
$

Common stock, no par value:
 
 

 
 

Authorized 200,000 shares; issued 81,590 and 80,237 respectively; outstanding 76,636 and 75,283 shares, respectively
 
476,547

 
467,525

Treasury stock, at cost, 4,954 shares
 
(46,356
)
 
(46,356
)
Accumulated income
 
325,607

 
291,878

Accumulated other comprehensive income
 
3,671

 
3,618

TOTAL SHAREHOLDERS' EQUITY
 
$
759,469

 
$
716,665

 
 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
939,863

 
$
862,994

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


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Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Unaudited
 
 
 
Three months ended
 
Nine months ended
 
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Net revenue
 
$
180,517

 
$
141,181

 
$
373,836

 
$
361,330

Cost of sales
 
95,360

 
75,267

 
192,642

 
195,071

Gross profit
 
85,157

 
65,914

 
181,194

 
166,259

Selling, general and administrative
 
30,093

 
31,264

 
81,430

 
88,754

Research and development
 
23,480

 
15,783

 
60,277

 
46,243

Operating expenses
 
53,573

 
47,047

 
141,707

 
134,997

Income from operations
 
31,584

 
18,867

 
39,487

 
31,262

Interest income
 
256

 
267

 
878

 
629

Interest expense
 
(316
)
 

 
(732
)
 
(1
)
Income from operations before income taxes
 
31,524

 
19,134

 
39,633

 
31,890

Provision for income taxes
 
4,908

 
247

 
5,904

 
2,063

Net income
 
$
26,616

 
$
18,887

 
$
33,729

 
$
29,827

 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.35

 
$
0.25

 
$
0.44

 
$
0.40

Diluted
 
$
0.34

 
$
0.25

 
$
0.44

 
$
0.39

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
76,596

 
75,231

 
76,308

 
75,083

Diluted
 
77,605

 
76,473

 
77,086

 
76,204

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














 



2

Table of Contents

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

 
Three months ended
 
Nine months ended
 
June 28, 2014

 
June 29, 2013

 
June 28, 2014

 
June 29, 2013

Net income
$
26,616

 
$
18,887

 
$
33,729

 
$
29,827

Other comprehensive income / (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
304

 
186

 
(10
)
 
784

Unrecognized actuarial gain / (loss), Switzerland pension plan, net of tax
3

 
41

 
(9
)
 
4

 
307

 
227

 
(19
)
 
788

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Unrealized gain on derivative instruments, net of tax
95

 

 
95

 

Reclassification adjustment for gain on derivative instruments recognized, net of tax
(23
)
 

 
(23
)
 

Net increase from derivatives designated as hedging instruments, net of tax
72

 

 
72

 

 
 
 
 
 
 
 
 
Total other comprehensive income
379

 
227

 
53

 
788

 
 
 
 
 
 
 
 
Comprehensive income
$
26,995

 
$
19,114

 
$
33,782

 
$
30,615

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













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Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
 
 
Nine months ended
 
 
June 28, 2014

 
June 29, 2013

CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income
 
$
33,729

 
$
29,827

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

 
 

Depreciation and amortization
 
9,995

 
14,302

Equity-based compensation and employee benefits
 
8,817

 
8,088

Reversal of excess tax benefits from stock-based compensation arrangements
 
825

 

Adjustment for doubtful accounts
 
(265
)
 
(111
)
Adjustment for inventory valuation
 
2,109

 
(205
)
Deferred taxes
 
(552
)
 
190

Loss (Gain) on disposal of property, plant and equipment
 
46

 
(147
)
Changes in operating assets and liabilities:
 
 

 
 

Accounts and notes receivable
 
8,599

 
42,728

Inventory
 
(17,893
)
 
10,869

Prepaid expenses and other current assets
 
4,115

 
40

Accounts payable, accrued expenses and other current liabilities
 
30,293

 
(31,296
)
Income taxes payable
 
2,566

 
(5,454
)
Other, net
 
1,805

 
(651
)
Net cash provided by operating activities
 
84,189

 
68,180

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Purchases of property, plant and equipment
 
(9,294
)
 
(5,957
)
Proceeds from sales of property, plant and equipment
 

 
5,310

Purchase of short-term investments
 
(9,173
)
 

Maturity of short-term investments
 
9,795

 

Net cash used in investing activities
 
(8,672
)
 
(647
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Proceeds from exercise of common stock options
 
1,030

 
868

Reversal of excess tax benefits from stock-based compensation arrangements
 
(825
)
 

Net cash provided by financing activities
 
205

 
868

Effect of exchange rate changes on cash and cash equivalents
 
(53
)
 
(152
)
Changes in cash and cash equivalents
 
75,669

 
68,249

Cash and cash equivalents at beginning of period
 
521,788

 
440,244

Cash and cash equivalents at end of period
 
$
597,457

 
$
508,493

 
 
 
 
 
CASH PAID FOR:
 
 

 
 

Interest
 
$
580

 
$

Income taxes
 
$
4,270

 
$
8,060


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


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



NOTE 1: BASIS OF PRESENTATION
These consolidated financial statements include the accounts of Kulicke and Soffa Industries, Inc. and its subsidiaries (the “Company”), with appropriate elimination of intercompany balances and transactions.
The interim consolidated financial statements are unaudited and, in management's opinion, include all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of results for these interim periods. The interim consolidated financial statements do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended September 28, 2013, filed with the Securities and Exchange Commission, which includes Consolidated Balance Sheets as of September 28, 2013 and September 29, 2012, and the related Consolidated Statements of Operations, Statements of Other Comprehensive Income, Changes in Shareholders' Equity and Cash Flows for each of the years in the three-year period ended September 28, 2013. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full year.
Fiscal Year    
Each of the Company's first three fiscal quarters end on the Saturday that is 13 weeks after the end of the immediately preceding fiscal quarter. The fourth quarter of each fiscal year ends on the Saturday closest to September 30th. Fiscal 2014 quarters end on December 28, 2013, March 29, 2014, June 28, 2014 and September 27, 2014. Fiscal 2013 quarters ended on December 29, 2012, March 30, 2013, June 29, 2013 and September 28, 2013. In fiscal years consisting of 53 weeks, the fourth quarter will consist of 14 weeks.
Nature of Business
The Company designs, manufactures and sells capital equipment and expendable tools as well as services, maintains, repairs and upgrades equipment, all used to assemble semiconductor devices. The Company's operating results depend upon the capital and operating expenditures of semiconductor manufacturers and outsourced semiconductor assembly and test providers (“OSATs”) worldwide which, in turn, depend on the current and anticipated market demand for semiconductors and products utilizing semiconductors. The semiconductor industry is highly volatile and experiences downturns and slowdowns which have a severe negative effect on the semiconductor industry's demand for semiconductor capital equipment, including assembly equipment manufactured and sold by the Company and, to a lesser extent, expendable tools, including those sold by the Company. These downturns and slowdowns have in the past adversely affected the Company's operating results. The Company believes such volatility will continue to characterize the industry and the Company's operations in the future.
Use of Estimates
The preparation of consolidated financial statements requires management to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, net revenue and expenses during the reporting periods, and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. On an ongoing basis, management evaluates estimates, including but not limited to, those related to accounts receivable, reserves for excess and obsolete inventory, carrying value and lives of fixed assets, goodwill and intangible assets, valuation allowances for deferred tax assets and deferred tax liabilities, repatriation of un-remitted foreign subsidiary earnings, equity-based compensation expense, restructuring, and warranties. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable. As a result, management makes judgments regarding the carrying values of its assets and liabilities that are not readily apparent from other sources. Authoritative pronouncements, historical experience and assumptions are used as the basis for making estimates, and on an ongoing basis, management evaluates these estimates. Actual results may differ from these estimates under different assumptions or conditions.
Vulnerability to Certain Concentrations
Financial instruments which may subject the Company to concentrations of credit risk as of June 28, 2014 and September 28, 2013 consisted primarily of short-term investments and trade receivables. The Company manages credit risk associated with investments by investing its excess cash in highly rated debt instruments of the U.S. Government and its agencies, financial institutions, and corporations. The Company has established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity. These guidelines are periodically reviewed and modified as appropriate. The Company does not have any exposure to sub-prime financial instruments or auction rate securities.


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


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


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


Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Cash equivalents are measured at fair value based on level one measurement, or quoted market prices, as defined by ASC No. 820, Fair Value Measurements and Disclosures. As of June 28, 2014 and September 28, 2013, fair value approximated the cost basis for cash equivalents.
Investments
Investments, other than cash equivalents, are classified as “trading,” “available-for-sale” or “held-to-maturity,” in accordance with ASC No. 320, Investments-Debt & Equity Securities, and depending upon the nature of the investment, its ultimate maturity date in the case of debt securities, and management's intentions with respect to holding the securities. Investments classified as “trading” are reported at fair market value, with unrealized gains or losses included in earnings. Investments classified as “available-for-sale” are reported at fair market value, with net unrealized gains or losses reflected as a separate component of shareholders' equity (accumulated other comprehensive income (loss)). The fair market value of trading and available-for-sale securities is determined using quoted market prices at the balance sheet date. Investments classified as held-to-maturity are reported at amortized cost. Realized gains and losses are determined on the basis of specific identification of the securities sold.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from its customers' failure to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company is also subject to concentrations of customers and sales to a few geographic locations, which could also impact the collectability of certain receivables. If global economic conditions deteriorate or political conditions were to change in some of the countries where the Company does business, it could have a significant impact on the results of operations and the Company's ability to realize the full value of its accounts receivable.
Inventories
Inventories are stated at the lower of cost (on a first-in first-out basis) or market value. The Company generally provides reserves for obsolete inventory and for inventory considered to be in excess of demand. Demand is generally defined as 18 months forecasted future consumption for equipment, 24 months consumption for all spare parts, and 12 months forecasted future consumption for expendable tools. Forecasted consumption is based upon internal projections, historical sales volumes, customer order activity and a review of consumable inventory levels at customers' facilities. The Company communicates forecasts of its future consumption to its suppliers and adjusts commitments to those suppliers accordingly. If required, the Company reserves the difference between the carrying value of its inventory and the lower of cost or market value, based upon assumptions about future consumption, and market conditions. If actual market conditions are less favorable than projections, additional inventory reserves may be required.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. The cost of additions and those improvements which increase the capacity or lengthen the useful lives of assets are capitalized, while repair and maintenance costs are expensed as incurred. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives as follows: buildings 25 years; machinery and equipment 3 to 10 years; and leasehold improvements are based on the shorter of the life of lease or life of asset. Purchased computer software costs related to business and financial systems are amortized over a five-year period on a straight-line basis.
Valuation of Long-Lived Assets
In accordance with ASC No. 360, Property, Plant & Equipment ("ASC 360"), the Company's property, plant and equipment is tested for impairment based on undiscounted cash flows when triggering events occur, and if impaired, written-down to fair value based on either discounted cash flows or appraised values. ASC 360 also provides a single accounting model for long-lived assets to be disposed of by sale and establishes additional criteria that would have to be met to classify an asset as held for sale. The carrying amount of an asset or asset group is not recoverable to the extent it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. Estimates of future cash flows used to test the recoverability of a long-lived asset or asset group must incorporate the entity's own assumptions about its use of the asset or asset group and must factor in all available evidence.


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


ASC 360 requires that long-lived assets be tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Such events include significant under-performance relative to 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. During the three and nine months ended June 28, 2014, no triggering events occurred.
Accounting for Impairment of Goodwill
The Company operates two reportable segments: Equipment and Expendable Tools. Goodwill was recorded in 2009 for the acquisition of Orthodyne Electronics Corporation ("Orthodyne"), which added wedge bonder products (also known as "reporting unit") to the Equipment business.
Accounting Standard Update 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”), provides companies with the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, after assessing the qualitative factors, a company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then performing the two-step impairment test is unnecessary. However, if a company concludes otherwise, then it is required to perform the first step of the two-step goodwill impairment test. If the carrying value of a reporting unit exceeds its fair value, then a company is required to perform the second step of the two-step goodwill impairment test. 
As part of the annual evaluation, the Company performs an impairment test of its goodwill in the fourth quarter of each fiscal year to coincide with the completion of its annual forecasting and refreshing of its business outlook process. On an ongoing basis, the Company monitors if a “triggering” event has occurred that may have the effect of reducing the fair value of a reporting unit below its respective carrying value. Adverse changes in expected operating results and/or unfavorable changes in other economic factors used to estimate fair values could result in a non-cash impairment charge in the future. During the three and nine months ended June 28, 2014, no triggering events occurred.  
Impairment assessments inherently involve judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact the assumptions as to prices, costs, growth rates or other factors that may result in changes in the estimates of future cash flows. Although the Company believes the assumptions that it has used in testing for impairment are reasonable, significant changes in any one of the assumptions could produce a significantly different result. Indicators of potential impairment may lead the Company to perform interim goodwill impairment assessments, including significant and unforeseen customer losses, a significant adverse change in legal factors or in the business climate, a significant adverse action or assessment by a regulator, a significant stock price decline or unanticipated competition.
For further information on goodwill and other intangible assets, see Note 3 below.
Revenue Recognition
In accordance with ASC No. 605, Revenue Recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, the collectability is reasonably assured, and equipment installation obligations have been completed and customer acceptance, when applicable, has been received or otherwise released from installation or customer acceptance obligations. If terms of the sale provide for a customer acceptance period, revenue is recognized upon the expiration of the acceptance period or customer acceptance, whichever occurs first. The Company’s standard terms are ex works (the Company’s factory), with title transferring to its customer at the Company’s loading dock or upon embarkation. The Company has a small percentage of sales with other terms, and revenue is recognized in accordance with the terms of the related customer purchase order. 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 paid by the Company are included in cost of sales.
Research and Development
The Company charges research and development costs associated with the development of new products to expense when incurred. In certain circumstances, pre-production machines which the Company intends to sell are carried as inventory until sold.


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


Income Taxes
In accordance with ASC No. 740, Income Taxes, deferred income taxes are determined using the liability method. The Company records a valuation allowance to reduce its deferred tax assets to the amount it expects is more likely than not to be realized. While the Company has considered future taxable income and its ongoing tax planning strategies in assessing the need for the valuation allowance, if it were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax asset would decrease income in the period such determination was made.
In accordance with ASC No. 740 Topic 10, Income Taxes, General (“ASC 740.10”), the Company accounts for uncertain tax positions taken or expected to be taken in its income tax return. Under ASC 740.10, the Company utilizes a two-step approach for evaluating uncertain tax positions. Step one, or recognition, requires a company to determine if the weight of available evidence indicates a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, or measurement, is based on the largest amount of benefit, which is more likely than not to be realized on settlement with the taxing authority.
Equity-Based Compensation
The Company accounts for equity-based compensation under the provisions of ASC No. 718, Compensation - Stock Compensation (“ASC 718”). ASC 718 requires the recognition of the fair value of the equity-based compensation in net income. Compensation expense associated with market-based restricted stock is determined using a Monte-Carlo valuation model, and compensation expense associated with time-based and performance-based restricted stock is determined based on the number of shares granted and the fair value on the date of grant. The fair value of the Company's stock option awards are estimated using a Black-Scholes option valuation model. In addition, the calculation of equity-based compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. The fair value of equity-based awards is amortized over the vesting period of the award and the Company elected to use the straight-line method for awards granted after the adoption of ASC 718.
Earnings per Share
Earnings per share (“EPS”) are calculated in accordance with ASC No. 260, Earnings per Share. Basic EPS include only the weighted average number of common shares outstanding during the period. Diluted EPS include the weighted average number of common shares and the dilutive effect of stock options, restricted stock and share unit awards and convertible subordinated notes outstanding during the period, when such instruments are dilutive.
In accordance with ASC No. 260.10.55, Earnings per Share - Implementation & Guidance, the Company treats all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends as participating in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted EPS must be applied.
Prior Period Adjustments
During the three months ended December 28, 2013, the Company identified a prior period adjustment of $0.8 million relating to the provision of input tax receivables that resulted in increased selling, general and administrative expense and a reduction of input tax receivable that should have been recorded during the three months ended September 28, 2013. This error was corrected during the quarter ended December 28, 2013 and management has deemed that the adjustment was not material to the quarter ended September 28, 2013, the fiscal year ended September 28, 2013, or to the expected full year results of the current year ending September 27, 2014.
During the three months ended June 28, 2014, the Company identified a prior period adjustment of $1.6 million relating to the pricing discounts given to certain distributors that resulted in the decrease of the selling, general and administrative expense and the revenue that should have been recorded during the six months ended March 29, 2014. This error was corrected during the quarter ended June 28, 2014 and management has assessed that the adjustment was not material to the six months ended March 29, 2014, or to the expected full year results of the current year ending September 27, 2014.


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


Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition. The new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The Company is currently assessing the impact of this new guidance.
NOTE 2: BALANCE SHEET COMPONENTS
The following tables reflect the components of significant balance sheet accounts as of June 28, 2014 and September 28, 2013:
 
 
As of
(in thousands)
 
June 28, 2014
 
September 28, 2013
Short term investments, available-for-sale:
 
 
 
 
Deposits maturing within one year (1)
 
$
2,600

 
$
3,252

 
 
 
 
 
Inventories, net:
 
 

 
 

Raw materials and supplies
 
$
27,438

 
$
19,703

Work in process
 
24,695

 
12,219

Finished goods
 
15,547

 
20,333

 
 
67,680

 
52,255

Inventory reserves
 
(13,758
)
 
(14,120
)
 
 
$
53,922

 
$
38,135

Property, plant and equipment, net:
 
 

 
 

Buildings and building improvements (2)
 
$
31,132

 
$
3,060

Leasehold improvements
 
14,009

 
15,763

Data processing equipment and software
 
27,333

 
24,549

Machinery, equipment, furniture and fixtures
 
44,331

 
48,998

Construction in progress (2)
 

 
19,396

 
 
116,805

 
111,766

Accumulated depreciation
 
(64,574
)
 
(64,225
)
 
 
$
52,231

 
$
47,541

Accrued expenses and other current liabilities:
 
 

 
 

Wages and benefits
 
$
19,101

 
$
19,779

Accrued customer obligations (3)
 
8,549

 
8,270

Commissions and professional fees
 
2,318

 
2,640

Deferred rent
 
1,896

 
1,097

Severance
 
1,290

 
1,468

Other
 
8,252

 
5,614

 
 
$
41,406

 
$
38,868


(1)
All short-term investments were classified as available-for-sale and were measured at fair value based on level one measurement, or quoted market prices, as defined by ASC 820. As of June 28, 2014 and September 28, 2013, fair value approximated the cost basis for short-term investments. The Company did not recognize any realized gains or losses on the sale of investments during the three and nine months ended June 28, 2014 and June 29, 2013.
(2)
Pursuant to ASC No. 840, Leases, the Company was considered to be the owner of the building during the construction phase for the Agreement to Develop and Lease (the “ADL”) facility being developed by Mapletree Industrial Trust (the “Landlord”) in Singapore—see Notes 7 and 12 below. The building was completed on December 1, 2013 and the construction costs incurred


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


in relation to the relevant proportion of the Company's lease were recognized on the Consolidated Balance Sheet as of June 28, 2014.
(3)
Represents customer advance payments, customer credit program, accrued warranty expense and accrued retrofit costs.

NOTE 3: GOODWILL AND INTANGIBLE ASSETS
Goodwill
Intangible assets classified as goodwill are not amortized. The Company performs an annual impairment test of its goodwill during the fourth quarter of each fiscal year, which coincides with the completion of its annual forecasting and refreshing of business outlook process. The Company performed its annual impairment test in the fourth quarter of fiscal 2013 and concluded that no impairment charge was required. During the nine months ended June 28, 2014, the Company reviewed the qualitative factors to ascertain if a "triggering" event may have taken place that may have the effect of reducing the fair value of the reporting unit below its carrying value and concluded that no triggering event had occurred.
In 2008, the Company acquired Orthodyne and added wedge bonder products to the business.
Intangible Assets
Intangible assets with determinable lives are amortized over their estimated useful lives. The Company's intangible assets consist primarily of wedge bonder developed technology and customer relationships.

The following table reflects net intangible assets as of June 28, 2014 and September 28, 2013
 
 
As of
 
Average estimated
(dollar amounts in thousands)
 
June 28, 2014
 
September 28, 2013
 
useful lives (in years)
Wedge bonder developed technology
 
$
33,200

 
$
33,200

 
7.0
Accumulated amortization
 
(27,273
)
 
(23,715
)
 
 
Net wedge bonder developed technology
 
$
5,927

 
$
9,485

 
 
 
 
 
 
 
 
 
Wedge bonder customer relationships
 
$
19,300

 
$
19,300

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

 
$

 
 
 
 
 
 
 
 
 
Wedge bonder trade name
 
$
4,600

 
$
4,600

 
8.0
Accumulated amortization
 
(3,306
)
 
(2,876
)
 
 
Net wedge bonder trade name
 
$
1,294

 
$
1,724

 
 
 
 
 
 
 
 
 
Wedge bonder other intangible assets
 
$
2,500

 
$
2,500

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

 
$

 
 
Net intangible assets
 
$
7,221

 
$
11,209

 
 

The following table reflects estimated annual amortization expense related to intangible assets as of June 28, 2014:
 
 
As of
(in thousands)
June 28, 2014
Remaining fiscal 2014
$
1,330

Fiscal 2015
5,318

Fiscal 2016
573

Total amortization expense
$
7,221

 




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




NOTE 4: CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. In general, these investments are free of trading restrictions. We carry these investments at fair value, based on quoted market prices or other readily available market information.
Cash and cash equivalents consisted of the following as of June 28, 2014:
(dollar amounts in thousands)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
137,854

 
$

 
$

 
$
137,854

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
260,885

 

 

 
260,885

Time deposits
198,718

 

 

 
198,718

Total cash and cash equivalents
$
597,457

 
$

 
$

 
$
597,457

Short-term investments:
 
 
 
 
 
 
 
Time deposits
2,600

 

 

 
2,600

Total short-term investments
$
2,600

 
$

 
$

 
$
2,600

Total cash, cash equivalents and short-term investments
$
600,057

 
$

 
$

 
$
600,057

Cash and cash equivalents consisted of the following as of September 28, 2013:
(dollar amounts in thousands)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
113,295

 
$

 
$

 
$
113,295

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
226,272

 

 

 
226,272

Time deposits
182,221

 

 

 
182,221

Total cash and cash equivalents
$
521,788

 
$

 
$

 
$
521,788

Short-term investments
 
 
 
 
 
 
 
Time deposits
3,252

 

 

 
3,252

Total short-term investments
$
3,252

 
$

 
$

 
$
3,252

Total cash, cash equivalents and short-term investments
$
525,040

 
$

 
$

 
$
525,040


NOTE 5: FAIR VALUE MEASURMENTS
Accounting standards establish three levels of inputs that may be used to measure fair value: quoted prices in active markets for identical assets or liabilities (referred to as Level 1), inputs other than Level 1 that are observable for the asset or liability either directly or indirectly (referred to as Level 2) and unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities (referred to as Level 3).
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis 
We measure certain financial assets and liabilities at fair value on a recurring basis. There were no transfers between fair value measurement levels during the three months and nine months ended June 28, 2014.
Fair Value Measurements on a Nonrecurring Basis
Our non-financial assets such as intangible assets and property, plant and equipment are carried at cost unless impairment is deemed to have occurred.


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


Fair Value of Financial Instruments Amounts reported as cash and equivalents, short-term investments, accounts receivables, prepaid expenses and other current assets, accounts payable and accrued expenses approximate fair value.
The fair value of our financial assets and liabilities at June 28, 2014 were determined using the following inputs:
(dollar amounts in thousands)
Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash
$
137,854

 
$
137,854

 
$

 
$

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
260,885

 
260,885

 

 

Time deposits
198,718

 
198,718

 

 

Short-term investments:
 
 
 
 
 
 
 
Time deposits
2,600

 
2,600

 

 

Total assets
$
600,057

 
$
600,057

 
$

 
$

The fair value of our financial assets and liabilities at September 28, 2013 were determined using the following inputs:
(dollar amounts in thousands)
Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash
$
113,295

 
$
113,295

 
$

 
$

Cash equivalents
 
 
 
 
 
 
 
Money market funds
226,272

 
226,272

 

 

Time deposits
182,221

 
182,221

 

 

Short-term investments
 
 
 
 
 
 
 
Time deposits
3,252

 
3,252

 

 

Total assets
$
525,040

 
$
525,040

 
$

 
$


NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS
The Company’s international operations are exposed to changes in foreign exchange rates due to transactions denominated in currencies other than U.S. dollars. Most of the Company’s revenue and cost of materials are transacted in U.S. dollars. However, a significant amount of the Company’s operating expenses are denominated in local currencies, primarily in Singapore.
The foreign currency exposure of our operating expenses denominated in local currencies are generally hedged with foreign exchange forward contracts. The Company’s foreign exchange risk management programs include using foreign exchange forward contracts with cash flow hedge accounting designation to hedge exposures to the variability in the U.S.-dollar equivalent of forecasted non-U.S.-dollar-denominated operating expenses. These instruments generally mature within 6 months. For these derivatives, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss), and we reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings and in the same line item on the consolidated statements of income as the impact of the hedged transaction.


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


The fair value of derivative instruments on our Consolidated Balance Sheets as of June 28, 2014 and September 28, 2013 was as follows:
 
As of
(in thousands)
June 28, 2014
 
September 28, 2013
 
Notional Amount
 
Fair Value Asset Derivatives(1)
 
Fair Value Liability Derivatives(2)
 
Notional Amount
 
Fair Value Asset Derivatives(1)
 
Fair Value Liability Derivatives(2)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts (3)
$
7,863

 
$
72

 
$

 
$

 
$

 
$

Total derivatives
$
7,863

 
$
72

 
$

 
$

 
$

 
$

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

The effect of derivative instruments designated as cash flow hedges in our Consolidated Statements of Income for three months and nine months ended June 28, 2014 and June 29, 2013 was as follows:
(in thousands)
 
Three months ended
 
Nine months ended
 
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Foreign exchange forward contract in cash flow hedging relationships:
 
 
 
 
 
 
 
 
Net gain recognized in OCI, net of tax(1)
 
$
95

 
$

 
$
95

 
$

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

 
$

 
$
23

 
$

Net gain recognized in income(3)
 
$

 
$

 
$

 
$

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

NOTE 7: DEBT AND OTHER OBLIGATIONS
Agreement to Develop and Lease and Lease Agreement
On May 7, 2012, Kulicke & Soffa Pte Ltd. (“Pte” or the "Tenant"), the Company's wholly owned subsidiary, entered into the ADL with DBS Trustee Limited as trustee of Mapletree Industrial Trust (the “Landlord”).  Pursuant to the ADL, the Landlord agreed to develop a building at 23A Serangoon North Avenue 5, #01-01 K&S Corporate Headquarters, Singapore 554369 (the “Building”).
The lease has a ten year non-cancellable term (the "Initial Term") and contains options to renew for two further 10-year terms. The annual rent and service charge for the Initial Term range from approximately $4 million to approximately $5 million Singapore dollars.  The Tenant has a right of first refusal for all space that becomes available in the Building and the Landlord has agreed to make available a certain amount of additional space for rental by the Tenant at the Tenant’s option which may be exercised at certain points during the second half of the Initial Term. Subject to the Tenant renting a minimum amount of space for a certain period, the Tenant has partial surrender rights. In addition, the Tenant has termination rights after renting the Initial Premises for a certain period of time.
The Building was completed on December 1, 2013 and Pte signed a Lease Agreement with the Landlord to lease from the Landlord approximately 198,000 square feet (the “Initial Premises”), representing approximately 70% of the Building. In accordance with ASC No. 840, Leases ("ASC 840"), the Company was considered to be the owner of the Building during the construction phase due to its involvement in the asset construction. Following the completion of construction, we were required to perform a sale-leaseback analysis pursuant to ASC 840-40 to determine if we could remove the Landlord’s asset and associated financing obligation from the consolidated balance sheet. Our lease contained collateral, considered a prohibited form of continuing involvement under


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


ASC 840-40 and therefore involvement that precluded us from derecognizing the asset and associated financing obligation. As such, we reclassified the asset from construction in progress to Property, Plant and Equipment and began to depreciate the building over its estimated useful life of twenty-five years. We concluded that the term of the financing obligation is 10 years. This is equal to the non-cancellable term of our lease agreement with the Landlord. At the inception of the lease, the asset and financing obligation recorded on the balance sheet was $20.0 million, which was based on using an interest rate of 6.3% over the Initial Term.  The financing obligation will be settled through a combination of periodic cash rental payments and the return of the leased property at the expiration of the lease. We do not report rent expense for the property which is deemed owned for accounting purposes. Rather, rental payments required under the lease are considered debt service and applied to the deemed landlord financing obligation and interest expense. The Building and financing obligation are being amortized in a manner that will not generate a gain or loss upon lease termination.
Bank Guarantee
On May 7, 2012, Pte obtained a bank guarantee from DBS Bank Ltd., which was furnished to the Landlord and expired on May 9, 2013, at which time Pte replaced the bank guarantee with a cash deposit of an equivalent amount. The cash deposit was refunded on December 6, 2013.
Credit facility
On November 22, 2013, the Company obtained a $5.0 million credit facility with Citibank in connection with the issuance of a bank guarantee of $3.4 million Singapore dollars to the Landlord in connection with the Lease Agreement. The bank guarantee is effective from December 1, 2013 to November 30, 2014.

NOTE 8: SHAREHOLDERS’ EQUITY AND EMPLOYEE BENEFIT PLANS
Common Stock and 401(k) Retirement Income Plan
The Company has a 401(k) retirement income plan (the “Plan”) for its employees. Historically, the Company's matching contributions to the Plan were made in the form of issued and contributed shares of Company common stock; however, beginning January 2, 2011, matching contributions to the Plan were made in cash instead of stock. The Plan allows for employee contributions and matching Company contributions up to 4% or 6% of the employee's contributed amount based upon years of service.
The following table reflects the Company’s matching contributions to the Plan during the three and nine months ended June 28, 2014 and June 29, 2013:
 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 28, 2014
 
June 29, 2013

 
June 28, 2014
 
June 29, 2013
Cash
 
$
304

 
$
323

 
$
913

 
$
1,082

 
Accumulated Other Comprehensive Income
The following table reflects accumulated other comprehensive income reflected on the Consolidated Balance Sheets as of June 28, 2014 and September 28, 2013
 
 
As of
(in thousands)
 
June 28, 2014
 
September 28, 2013
Gain from foreign currency translation adjustments
 
$
4,172

 
$
4,182

Unrecognized actuarial gain, Switzerland pension plan, net of tax
 
(346
)
 
(227
)
Switzerland pension plan curtailment
 
(227
)
 
(337
)
Unrealized gain on hedging
 
72

 

Accumulated other comprehensive income
 
$
3,671

 
$
3,618

Equity-Based Compensation
As of June 28, 2014, the Company had seven equity-based employee compensation plans (the “Employee Plans”) and three director compensation plans (the “Director Plans”) (collectively, the “Plans”). Under these Plans, market-based share awards (collectively, “market-based restricted stock”), time-based share awards (collectively, “time-based restricted stock”), performance-based share awards (collectively, “performance-based restricted stock”), stock options, or common stock have been granted at


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


100% of the market price of the Company's common stock on the date of grant. As of June 28, 2014, the Company’s one active plan, the 2009 Equity Plan, had 3.7 million shares of common stock available for grant to its employees and directors.
Market-based restricted stock entitles the employee to receive common shares of the Company on the award vesting date, if market performance objectives which measure relative total shareholder return (“TSR”) are attained. Relative TSR is calculated based upon the 90-calendar day average price of the Company's stock as compared to specific peer companies that comprise the Philadelphia Semiconductor Index. TSR is measured for the Company and each peer company over a performance period, which is generally three years. Vesting percentages range from 0% to 200% of awards granted. The provisions of the market-based restricted stock are reflected in the grant date fair value of the award; therefore, compensation expense is recognized regardless of whether or not the market condition is ultimately satisfied. Compensation expense is reversed if the award is forfeited prior to the vesting date.
In general, stock options and time-based restricted stock awarded to employees vest annually over a three-year period provided the employee remains employed. The Company follows the non-substantive vesting method for stock options and recognizes compensation expense immediately for awards granted to retirement eligible employees, or over the period from the grant date to the date retirement eligibility is achieved.
In general, performance-based restricted stock (“PSU”) entitles the employee to receive common shares of the Company on the three-year anniversary of the grant date (if employed by the Company) if return on invested capital and revenue growth targets set by the Management Development and Compensation Committee (“MDCC”) of the Board of Directors on the date of grant are met. If return on invested capital and revenue growth targets are not met, performance-based restricted stock does not vest. Certain PSUs vest based on achievement of strategic goals over a certain time period or periods set by the MDCC. If the strategic goals are not achieved, the PSUs do not vest.
Equity-based compensation expense recognized in the Consolidated Statements of Operations for the three and nine months ended June 28, 2014 and June 29, 2013 was based upon awards ultimately expected to vest. In accordance with ASC No. 718, Stock Based Compensation, forfeitures have been estimated at the time of grant and were based upon historical experience. The Company reviews the forfeiture rates periodically and makes adjustments as necessary.
The following table reflects restricted stock and common stock granted during the three and nine months ended June 28, 2014 and June 29, 2013:
 
 
Three months ended
 
Nine months ended
(shares in thousands)
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Market-based restricted stock
 
11

 

 
335

 
343

Time-based restricted stock
 
27

 
42

 
634

 
581

Performance-based restricted stock
 

 

 

 
57

Common stock
 
16

 
19

 
48

 
56

Equity-based compensation in shares
 
54

 
61

 
1,017

 
1,037

The following table reflects total equity-based compensation expense, which includes restricted stock, stock options and common stock, included in the Consolidated Statements of Operations during the three and nine months ended June 28, 2014 and June 29, 2013
 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Cost of sales
 
$
82

 
$
53

 
$
269

 
$
275

Selling, general and administrative
 
2,182

 
2,125

 
6,924

 
6,375

Research and development
 
471

 
418

 
1,624

 
1,438

Total equity-based compensation expense
 
$
2,735

 
$
2,596

 
$
8,817

 
$
8,088






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



The following table reflects equity-based compensation expense, by type of award, for the three and nine months ended June 28, 2014 and June 29, 2013:  
 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Market-based restricted stock 
 
$
1,237

 
$
1,042

 
$
3,879

 
$
3,175

Time-based restricted stock
 
1,250

 
1,303

 
4,225

 
4,171

Performance-based restricted stock 
 
32

 
33

 
98

 
75

Stock options
 
6

 
8

 
15

 
37

Common stock
 
210

 
210

 
600

 
630

Total equity-based compensation expense
 
$
2,735

 
$
2,596

 
$
8,817

 
$
8,088


NOTE 9: EARNINGS PER SHARE
Basic income per share is calculated using the weighted average number of shares of common stock outstanding during the period. Stock options and restricted stock are included in the calculation of diluted earnings per share, except when their effect would be anti-dilutive.
Diluted income per share is calculated using the weighted average number of shares of common stock outstanding during the period and, if there is net income during the period, the dilutive impact of common stock equivalents outstanding during the period.
The following tables reflect a reconciliation of the shares used in the basic and diluted net income per share computation for the three and nine months ended June 28, 2014 and June 29, 2013
 
 
Three months ended
(in thousands, except per share)
 
June 28, 2014
 
June 29, 2013
 
 
Basic
 
Diluted
 
Basic
 
Diluted
NUMERATOR:
 
 

 
 

 
 

 
 

Net income
 
$
26,616

 
$
26,616

 
$
18,887

 
$
18,887

DENOMINATOR:
 
 

 
 

 
 

 
 

Weighted average shares outstanding - Basic
 
76,596

 
76,596

 
75,231

 
75,231

Stock options
 
 

 
117

 
 

 
108

Time-based restricted stock
 
 

 
442

 
 

 
535

Market-based restricted stock
 
 

 
450

 
 

 
599

Weighted average shares outstanding - Diluted
 
 

 
77,605

 
 

 
76,473

EPS:
 
 

 
 

 
 

 
 

Net income per share - Basic
 
$
0.35

 
$
0.35

 
$
0.25

 
$
0.25

Effect of dilutive shares
 
 

 
(0.01
)
 
 

 
$

Net income per share - Diluted
 
 

 
$
0.34

 
 

 
$
0.25

 



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


 
 
Nine months ended
(in thousands, except per share)
 
June 28, 2014
 
June 29, 2013
 
 
Basic
 
Diluted
 
Basic
 
Diluted
NUMERATOR:
 
 

 
 

 
 

 
 

Net income
 
$
33,729

 
$
33,729

 
$
29,827

 
$
29,827

DENOMINATOR:
 
 

 
 

 
 

 
 

Weighted average shares outstanding - Basic
 
76,308

 
76,308

 
75,083

 
75,083

Stock options
 
 
 
114

 
 

 
111

Time-based restricted stock
 
 
 
345

 
 

 
499

Market-based restricted stock
 
 
 
319

 
 

 
511

Weighted average shares outstanding - Diluted
 
 

 
77,086

 
 

 
76,204

EPS:
 
 

 
 

 
 

 
 

Net income per share - Basic
 
$
0.44

 
$
0.44

 
$
0.40

 
$
0.40

Effect of dilutive shares
 
 

 

 
 

 
(0.01
)
Net income per share - Diluted
 
 

 
$
0.44

 
 

 
$
0.39

  
NOTE 10: INCOME TAXES
The following table reflects the provision for income taxes and the effective tax rate for the nine months ended June 28, 2014 and June 29, 2013
 
Nine months ended
(dollar amounts in thousands)
June 28, 2014
 
June 29, 2013
Income from operations before income taxes
$
39,633

 
$
31,890

Provision for income taxes
5,904

 
2,063

Net income
$
33,729

 
$
29,827

 
 
 
 
Effective tax rate
14.9
%
 
6.5
%
 
For the nine months ended June 28, 2014, the effective income tax rate differed from the federal statutory rate primarily due to tax from foreign operations at a lower effective tax rate than the U.S. statutory rate and the impact of tax holidays, offset by an increase for deferred taxes on un-remitted earnings, discrete foreign tax liabilities, other U.S. current and deferred taxes and additional domestic and foreign expenses or benefits related to returns filed in the current period.
For the nine months ended June 29, 2013, the effective income tax rate differed from the federal statutory rate primarily due to tax from foreign operations at a lower effective tax rate than the U.S. statutory rate, the release of a prior year reserve and the impact of tax holidays, offset by an increase for deferred taxes on un-remitted earnings, other U.S. current and deferred taxes and additional domestic and foreign expenses or benefits related to returns filed in the current period.
The effective tax rate for the period ended June 28, 2014 of 14.9% increased from the effective rate for the fiscal period ended September 28, 2013 of 6.5% primarily due to the increased earnings in countries with higher statutory rates, additional discrete foreign tax liabilities and the release of a reserve in the prior period.
The Company's future effective tax rate would be affected if earnings were lower than anticipated in countries where it has lower statutory rates and higher than anticipated in countries where it has higher statutory rates, by changes in the valuation of its deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. The Company regularly assesses the effects resulting from these factors to determine the adequacy of its provision for income taxes.



18

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


NOTE 11: SEGMENT INFORMATION
The Company operates two reportable segments: Equipment and Expendable Tools. The Equipment segment manufactures and sells a line of ball bonders and heavy wire wedge bonders that are sold to semiconductor device manufacturers, their outsourced semiconductor assembly and test subcontractors, other electronics manufacturers and automotive electronics suppliers. The Company also services, maintains, repairs and upgrades its equipment. The Expendable Tools segment manufactures and sells a variety of expendable tools for a broad range of semiconductor packaging applications.
The following table reflects operating information by segment for the three and nine months ended June 28, 2014 and June 29, 2013
 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Net revenue:
 
 

 
 

 
 

 
 

       Equipment
 
$
165,013

 
$
125,103

 
$
325,770

 
$
316,088

       Expendable Tools
 
15,504

 
16,078

 
48,066

 
45,242

              Net revenue
 
180,517

 
141,181

 
373,836

 
361,330

Cost of sales:
 
 

 
 

 
 

 
 

       Equipment
 
88,749

 
67,632

 
173,933

 
175,204

       Expendable Tools
 
6,611

 
7,635

 
18,709

 
19,867

              Cost of sales
 
95,360

 
75,267

 
192,642

 
195,071

Gross profit:
 
 

 
 

 
 

 
 

        Equipment
 
76,264

 
57,471

 
151,837

 
140,884

        Expendable Tools
 
8,893

 
8,443

 
29,357

 
25,375

              Gross profit
 
85,157

 
65,914

 
181,194

 
166,259

Operating expenses:
 
 

 
 

 
 

 
 

        Equipment
 
48,460

 
40,997

 
125,620

 
118,237

        Expendable Tools
 
5,113

 
6,050

 
16,087

 
16,760

              Operating expenses
 
53,573

 
47,047

 
141,707

 
134,997

Income from operations:
 
 

 
 

 
 

 
 

        Equipment
 
27,804

 
16,474

 
26,217

 
22,647

        Expendable Tools
 
3,780

 
2,393

 
13,270

 
8,615

              Income from operations
 
$
31,584

 
$
18,867

 
$
39,487

 
$
31,262

 
The following table reflects assets by segment as of June 28, 2014 and September 28, 2013:
 
 
 
As of
(in thousands)
 
June 28, 2014
 
September 28, 2013
Segment assets:
 
 

 
 

Equipment
 
$
831,881

 
$
764,793

Expendable Tools
 
107,982

 
98,201

Total assets
 
$
939,863

 
$
862,994

 


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


The following tables reflect capital expenditures for the nine months ended June 28, 2014 and June 29, 2013, and depreciation expense for the three and nine months ended June 28, 2014 and June 29, 2013:
 
 
 
Nine months ended
(in thousands)
 
June 28, 2014
 
June 29, 2013
Capital expenditures:
 
 

 
 

Equipment
 
$
7,231

 
$
4,425

Expendable Tools
 
2,365

 
1,532

Capital expenditures
 
$
9,596

 
$
5,957

 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Depreciation expense
 
 

 
 

 
 

 
 

Equipment
 
$
1,518

 
$
1,898

 
$
4,130

 
$
5,599

Expendable Tools
 
662

 
606

 
1,877

 
1,820

Depreciation expense
 
$
2,180

 
$
2,504

 
$
6,007

 
$
7,419

 
NOTE 12: COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Agreement to Develop and Lease
On May 7, 2012, Pte entered into the ADL and a Lease Agreement with DBS Trustee Limited as trustee of the Landlord. Pursuant to the ADL, the Landlord agreed to develop a building at 23A Serangoon North Avenue 5, #01-01 K&S Corporate Headquarters, Singapore 554369 and Pte agreed to lease from the Landlord approximately 198,000 square feet (the “Initial Premises”) representing approximately 70% of the Building. The Building was completed on December 1, 2013.
Warranty Expense
The Company's equipment is generally shipped with a one-year warranty against manufacturing defects. The Company establishes reserves for estimated warranty expense when revenue for the related equipment is recognized. The reserve for estimated warranty expense is based upon historical experience and management's estimate of future warranty costs.
The following table reflects the reserve for product warranty activity for the three and nine months ended June 28, 2014 and June 29, 2013
 
 
Three months ended
 
Nine months ended
(in thousands)
 
June 28, 2014

 
June 29, 2013

 
June 28, 2014
 
June 29, 2013
Reserve for product warranty, beginning of period
 
$
885

 
$
1,163

 
$
1,194

 
$
2,412

Provision for product warranty
 
784

 
379

 
1,284

 
443

Product warranty costs paid
 
(375
)
 
(468
)
 
(1,184
)
 
(1,781
)
Reserve for product warranty, end of period
 
$
1,294

 
$
1,074

 
$
1,294

 
$
1,074


Other Commitments and Contingencies
The following table reflects obligations not reflected on the Consolidated Balance Sheet as of June 28, 2014:
 
 
 
 

 
Payments due by fiscal year
(in thousands)
 
Total
 
2014
 
2015
 
2016
 
2017
 
thereafter
Inventory purchase obligation (1)
 
$
133,542

 
$
133,542

 
$

 
$

 
$

 
$

Operating lease obligations (2)
 
29,716

 
1,143

 
3,154

 
3,177

 
2,974

 
19,268

Total
 
$
163,258

 
$
134,685

 
$
3,154

 
$
3,177

 
$
2,974

 
$
19,268


(1)
The Company orders inventory components in the normal course of its business. A portion of these orders are non-cancelable and a portion may have varying penalties and charges in the event of cancellation.


20

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


(2)
The Company has minimum rental commitments under various leases (excluding taxes, insurance, maintenance and repairs, which are also paid by the Company) primarily for various facility and equipment leases, which expire periodically through 2018 (not including lease extension options, if applicable).
Pursuant to ASC No. 840, Leases, for lessee's involvement in asset construction, the Company was considered the owner of the Building during the construction phase of the ADL. This financing obligation is not reflected in the table above. The Company has recorded a financing obligation of $19.6 million on the balance sheet as of June 28, 2014.
Concentrations
There is no significant customer that represents 10% or more of our net revenue for the nine months ended June 28, 2014 and June 29, 2013.
The following table reflects significant customer concentrations as a percentage of total accounts receivable as of June 28, 2014 and June 29, 2013:
 
 
As of
 
 
June 28, 2014
 
June 29, 2013
Haoseng Industrial Co., Ltd
 
15.3
%
 
15.0
%
STATS ChipPAC Ltd
 
*

 
19.0
%
Siliconware Precision Industries Co. Limited
 
*

 
13.0
%
* Represents less than 10% of total accounts receivable 


21

Table of Contents

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

Forward-Looking Statements
In addition to historical information, this filing contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the safe harbor provisions created by statute. Such forward-looking statements include, but are not limited to, our future revenue, sustained, increasing, continuing or strengthening demand for our products, the continuing transition from gold to copper wire bonding, replacement demand, our research and development efforts, our ability to identify and realize new growth opportunities, our ability to control costs and our operational flexibility as a result of (among other factors):
projected growth rates in the overall semiconductor industry, the semiconductor assembly equipment market, and the market for semiconductor packaging materials; and
projected demand for ball, wedge and die bonder equipment and for expendable tools.
Generally, words such as “may,” “will,” “should,” “could,” “anticipate,” “expect,” “intend,” “estimate,” “plan,” “continue,” “goal” and “believe,” or the negative of or other variations on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this filing. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.
Forward-looking statements are based on current expectations and involve risks and uncertainties. Our future results could differ significantly from those expressed or implied by our forward-looking statements. These risks and uncertainties include, without limitation, those described below and under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 28, 2013 (the “Annual Report”) and our other reports and registration statements filed from time to time with the Securities and Exchange Commission. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in this report, as well as our audited financial statements included in the Annual Report.
We operate in a rapidly changing and competitive environment. New risks emerge from time to time and it is not possible for us to predict all risks that may affect us. Future events and actual results, performance and achievements could differ materially from those set forth in, contemplated by or underlying the forward-looking statements, which speak only as of the date on which they were made. Except as required by law, we assume no obligation to update or revise any forward-looking statement to reflect actual results or changes in, or additions to, the factors affecting such forward-looking statements. Given those risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictions of actual results.
OVERVIEW
Kulicke and Soffa Industries, Inc. (the "Company" or "K&S") designs, manufactures and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits (“ICs”), high and low powered discrete devices, light-emitting diodes (“LEDs”), and power modules. We also service, maintain, repair and upgrade our equipment. Our customers primarily consist of semiconductor device manufacturers, outsourced semiconductor assembly and test providers (“OSATs”), other electronics manufacturers and automotive electronics suppliers.
We operate two main business segments, Equipment and Expendable Tools. Our goal is to be the technology leader and the most competitive supplier in terms of cost and performance in each of our major product lines. Accordingly, we invest in research and engineering projects intended to enhance our position at the leading edge of semiconductor assembly technology. We also remain focused on our cost structure, through consolidating our manufacturing facilities. Cost reduction efforts remain an important part of our normal ongoing operations, and are expected to generate savings without compromising overall product quality and service levels.
Business Environment
The semiconductor business environment is highly volatile, driven by internal dynamics, both cyclical and seasonal, in addition to macroeconomic forces. Over the long term, semiconductor consumption has historically grown and is forecast to continue to grow. This growth is driven, in part, by regular advances in device performance and by price declines that result from improvements in manufacturing technology. In order to exploit these trends, semiconductor manufacturers, both integrated device manufacturers (“IDMs”) and OSATs, periodically invest aggressively in latest generation capital equipment. This buying pattern often leads to periods of excess supply and reduced capital spending - the so called semiconductor cycle. Within this broad semiconductor cycle there are also, generally weaker, seasonal effects that are specifically tied to annual, end-consumer purchasing patterns. Typically, semiconductor manufacturers prepare for heightened demand by adding or replacing equipment capacity by the end of the September


22

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quarter. Occasionally, this results in subsequent reductions in the December quarter. This annual seasonality can occasionally be overshadowed by effects of the broader semiconductor cycle. Macroeconomic factors also affect the industry, primarily through their effect on business and consumer demand for electronic devices, as well as other products that have significant electronic content such as automobiles, white goods, and telecommunication equipment.
Our Equipment segment is primarily affected by the industry's internal cyclical and seasonal dynamics in addition to broader macroeconomic factors that positively or negatively affect our financial performance. The sales mix of IDM and OSAT customers in any period also impacts financial performance, as changes in this mix can affect our products' average selling prices and gross margins due to differences in volume purchases and machine configurations required by each customer type.
Our Expendable Tools segment is less volatile than our Equipment segment. Expendable Tools sales are more directly tied to semiconductor unit consumption rather than capacity requirements and production capability improvements. 
We continue to position our business to leverage our research and development leadership and innovation and to focus our efforts on mitigating volatility, improving profitability and ensuring longer-term growth. We remain focused on operational excellence, expanding our product offerings and managing our business efficiently throughout the business cycles. Our visibility into future demand is generally limited, forecasting is difficult, and we may experience typical industry seasonality.
To limit potential adverse cyclical, seasonal and macroeconomic effects on our financial position, we have de-leveraged and strengthened our balance sheet. As of June 28, 2014, our total cash, cash equivalents and short-term investments were $600.1 million, a $75.0 million increase from the prior fiscal year end. We believe this strong cash position will allow us to continue to invest in organic product development and non-organic opportunities.
Technology Leadership
We compete largely by offering our customers among the most advanced equipment and expendable tools available for the wire and wedge bonding processes. Our equipment is typically the most productive and has the highest levels of process capability, and as a result, has a lower cost of ownership compared to other equipment in its market. Our expendable tools are designed to optimize the performance of the equipment in which they are used. We believe our technology leadership contributes to the strong market positions of our various wire bonder and expendable tools products. To maintain our competitive advantage, we invest in product development activities designed to produce a stream of improvements to existing products and to deliver next-generation products. These investments often focus as much on improvements in the semiconductor assembly process as on specific pieces of assembly equipment or expendable tools. In order to generate these improvements, we often work in close collaboration with customers, end users, and other industry members. In addition to producing technical advances, these collaborative development efforts strengthen customer relationships and enhance our reputation as a technology leader and solutions provider.
In addition to gold, silver alloy wire and aluminum wire, our leadership in the industry's use of copper wire for the bonding process is an example of the benefits of our collaborative efforts. By working with customers, material suppliers, and other equipment suppliers, we have developed a series of robust, high-yielding production processes, which have made copper wire widely accepted and significantly reduced the cost of assembling an integrated circuit. Based on our industry leading copper bonding processes and the continued high price of gold, we believe the demand for copper configured wire bonders is likely to remain solid.
Our leadership has allowed us to maintain a competitive position in the latest generations of gold and copper ball bonders, which enable our customers to handle the leading technologies in terms of bond pad pitch, silicon with the latest node and complex wire bonding requirement. We continue to see demand for our large bondable area (“LA”) configured machines. This LA option is now available on all of our Power Series (PS) models and allows our customers to gain added efficiencies and to reduce the cost of packaging.
We also leverage the technology leadership of our equipment by optimizing our bonder platforms, and we deliver variants of our products to serve emerging high-growth markets. For example, we have developed extensions of our main ball bonding platforms to address opportunities in LED assembly, in particular for general lighting. We expect the next wave of growth in the LED market to be high brightness LED for general lighting. We also believe there is an opportunity for growth in wire bonding sales at wafer level using our ATPremier Plus. 
Furthermore, we gain synergies by leveraging technologies between our unique platforms. Our leading technology for wedge bonder equipment uses aluminum ribbon or heavy wire as opposed to fine gold and fine copper wire used in ball bonders.  In 2013, we launched a new line of high performance wedge bonder products, PowerFusionPS. The advanced interconnect capabilities of PowerFusionPS improve the processing of high-density power packages, due to an expanded bondable area, wider leadframe capability, superior indexing accuracy and teach mode. We have also initiated the design and development of our next generation hybrid wedge bonder which is due to be released in 2015. In both cases, we are making a concerted effort to develop commonality of subsystems and design practices, in order to improve performance and design efficiencies. We believe this will benefit us in


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maintaining our leadership position in the wedge bonding market and increase synergies between the various engineering product groups. Furthermore, we continually research adjacent market segments where our technologies could be used. Many of these initiatives are in the early stages of development and may become business opportunities in the future.
Another example of our developing equipment for high-growth niche markets is our AT Premier Plus. This machine utilizes a modified wire bonding process to mechanically place bumps on devices in a wafer format, for variants of the flip chip assembly process. Typical applications include complementary metal-oxide semiconductor (“CMOS”) image sensors, surface acoustical wave (“SAW”) filters and high brightness LEDs. These applications are commonly used in most, if not all, smartphones available today in the market. We also have expanded the use of AT Premier Plus for wafer level wire bonding for micro-electro-mechanical systems (“MEMS”) and other sensors.
Our technology leadership and bonding process know-how enable us to develop highly function-specific equipment with best-in-class throughput and accuracy. This forms the foundation for our advanced packaging equipment development. We have established a dedicated team to develop advanced packaging bonders for the emerging three-dimensional integrated circuit (“3D IC”) market, and in November 2013, we shipped the first TCB (Thermal Compression Bonder) C2S (Chip-to-Substrate) alpha machine to a strategic customer. We have recently shipped the first C2S beta machine to one of our customers. 3D ICs save space, reduce footprint, form factor and enable stacking of separate chips in a single package, thus expanding overall IC functionality. It also improves performance while reducing power consumption. Mobile devices such as smartphones and tablets are the main drivers of this market.
We bring the same technology focus to our expendable tools business, driving tool design and manufacturing technology to optimize the performance and process capability of the equipment in which our tools are used. For all our equipment products, expendable tools are an integral part of their process capability. We believe our unique ability to simultaneously develop both equipment and tools is a core strength supporting our products' technological differentiation.
Products and Services
We supply a range of bonding equipment and expendable tools. The following tables reflect net revenue by business segment for the three and nine months ended June 28, 2014 and June 29, 2013, respectively:
 
 
Three months ended
 
 
June 28, 2014
 
June 29, 2013
(dollar amounts in thousands)
 
Net revenues
 
% of total net revenue
 
Net revenues
 
% of total net revenue
Equipment
 
$
165,013

 
91.4
%
 
$
125,103

 
88.6
%
Expendable Tools
 
15,504

 
8.6
%
 
16,078

 
11.4
%
 
 
$
180,517

 
100.0
%
 
$
141,181

 
100.0
%
 
 
 
Nine months ended
 
 
June 28, 2014
 
June 29, 2013
(dollar amounts in thousands)
 
Net revenues
 
% of total net revenue
 
Net revenues
 
% of total net revenue
Equipment
 
$
325,770

 
87.1
%
 
$
316,088

 
87.5
%
Expendable Tools
 
48,066

 
12.9
%
 
45,242

 
12.5
%
 
 
$
373,836

 
100.0
%
 
$
361,330

 
100.0
%
 
Equipment Segment
We manufacture and sell a line of ball bonders, heavy wire wedge bonders and wafer level bonders that are sold to semiconductor device manufacturers, OSATs, other electronics manufacturers and automotive electronics suppliers. Ball bonders are used to connect very fine wires, typically made of gold or copper, between the bond pads of the semiconductor device, or die, and the leads on its package. Heavy wire wedge bonders use either aluminum wire or ribbon to perform the same function in packages that cannot use gold or copper wire because of either high electrical current requirements or other package reliability issues. Wafer level bonders mechanically apply bumps to die, typically while still in the wafer format, for some variants of the flip chip assembly process. We believe our equipment offers competitive advantages by providing customers with high productivity/throughput, superior package quality/process control, and as a result, a lower cost of ownership.



24

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Our principal Equipment segment products include:
Business Unit
 
Product Name (1)
 
Typical Served Market
 
 
 
 
 
Ball bonders
 
IConnPS
 
Advanced and ultra fine pitch applications
 
 
 
 
 
 
 
IConnPS Plus
 
Advanced and ultra fine pitch applications
 
 
 
 
 
 
 
IConnPS LA
 
Large area substrate and matrix applications
 
 
 
 
 
 
 
IConnPS Plus LA
 
Large area substrate and matrix applications
 
 
 
 
 
 
 
IConnPS ProCu
 
High-end copper wire applications demanding advanced process capability and high producti