UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended DECEMBER 31, 1998
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 (IRS Employer
of incorporation) Identification No.)
2101 BLAIR MILL ROAD, WILLOW GROVE, PENNSYLVANIA 19090
(Address of principal executive offices) (Zip code)
(215) 784-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether 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 ___
As of February 2, 1999, there were 23,404,894 shares of the Registrant's Common
Stock, Without Par Value outstanding.
KULICKE AND SOFFA INDUSTRIES, INC.
FORM 10 - Q DECEMBER 31, 1998
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
December 31, 1998 and September 30, 1998 3
Consolidated Statements of Operations -
Three Months Ended December 31, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Three Months Ended December 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 9 - 18
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 18
PART II. OTHER INFORMATION:
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
Item 6. EXHIBITS AND REPORTS ON FORM 8 - K. 19
Signatures. 19
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
December 31, September 30,
1998 1998
----------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 50,980 $ 76,478
Short-term investments 42,447 30,422
Accounts and notes receivable, net 58,180 66,137
Inventories, net 48,458 47,573
Prepaid expenses and other current assets 5,319 5,303
Refundable income taxes 2,770 5,270
Deferred income taxes 7,404 2,608
--------- ---------
TOTAL CURRENT ASSETS 215,558 233,791
Property, plant and equipment, net 47,124 48,269
Intangible assets, primarily goodwill, net 38,201 38,765
Investments in and loans to joint ventures 21,319 19,920
Other assets 1,880 1,839
--------- ---------
TOTAL ASSETS $ 324,082 $ 342,584
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Debt due within one year $ 52 $ 192
Accounts payable to suppliers and others 19,843 24,223
Accrued expenses 18,623 23,549
Estimated income taxes payable 1,350 3,646
--------- ---------
TOTAL CURRENT LIABILITIES 39,868 51,610
Other liabilities 4,670 3,064
--------- ---------
TOTAL LIABILITIES 44,538 54,674
--------- ---------
Commitments and contingencies -- --
SHAREHOLDERS' EQUITY:
Common stock, without par value 158,537 157,986
Retained earnings 125,101 133,964
Accumulated other comprehensive loss (4,094) (4,040)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 279,544 287,910
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 324,082 $ 342,584
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three months ended
December 31,
-----------------------------
1998 1997
--------- ---------
Net sales $ 61,175 $ 123,111
Cost of goods sold 44,999 77,766
--------- ---------
Gross profit 16,176 45,345
Selling, general and
administrative 17,247 22,447
Research and development, net 8,814 12,268
Resizing costs 397 --
--------- ---------
Income (loss) from operations (10,282) 10,630
Interest income 1,157 1,394
Interest expense (37) (47)
Equity in loss of joint venture (3,501) (2,229)
--------- ---------
Income (loss) before income taxes (12,633) 9,748
Income tax provision (benefit) (3,800) 2,924
--------- ---------
Net income (loss) $ (8,863) $ 6,824
========= =========
Net income (loss) per share:
Basic $ (0.38) $ 0.29
========= =========
Diluted $ (0.38) $ 0.29
========= =========
Weighted average shares
outstanding:
Basic 23,373 23,247
Diluted 23,373 23,719
The accompanying notes are an integral part of these consolidated financial
statements.
4
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three months ended
December 31,
---------------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ (8,863) $ 6,824
Adjustments to reconcile net income(loss) to
net cash used by operating activities:
Depreciation and amortization 3,370 2,966
Equity in loss of joint venture 3,501 2,229
Deferred taxes on income (4,796) (501)
Collection of refundable income taxes 2,500 --
Changes in other components of working
capital (4,098) (17,531)
Other, net 1,509 589
--------- ---------
Net cash used by operating activities (6,877) (5,424)
--------- ---------
INVESTING ACTIVITIES:
Purchases of investments classified as
available for sale (21,316) (28,214)
Maturities of investments classified as
available for sale 9,145 2,602
Purchases of property, plant and equipment (1,513) (3,141)
Investments in and loans to joint ventures (4,900) (4,000)
--------- ---------
Net cash used by investing activities (18,584) (32,753)
--------- ---------
FINANCING ACTIVITIES:
Payments on capital leases (140) (368)
Proceeds from exercise of stock options 103 1,155
--------- ---------
Net cash provided by (used in)
financing activities (37) 787
--------- ---------
Changes in cash and cash equivalents (25,498) (37,390)
Cash and cash equivalents at beginning
of period 76,478 107,605
--------- ---------
Cash and cash equivalents at end of period $ 50,980 $ 70,215
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
(unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The consolidated financial statement information included herein is unaudited,
but in the opinion of management, contains all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial position as of December 31, 1998 and September 30, 1998, and the
results of its operations and its cash flows for the three months ended December
31, 1998 and 1997. These financial statements should be read in conjunction with
the audited financial statements included in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1998.
NOTE 2 - INVENTORIES:
Inventories consist of the following:
December 31, September 30,
1998 1998
------------ -------------
Raw materials and supplies $ 28,030 $ 28,062
Work in process 10,580 11,381
Finished goods 24,786 23,788
-------- --------
63,396 63,231
Inventory reserves (14,938) (15,658)
-------- --------
$ 48,458 $ 47,573
======== ========
NOTE 3 - EARNINGS PER SHARE:
Net income(loss) per share for the three months ended December 31, 1998 and
December 31, 1997 has been calculated per the requirements of Statement of
Financial Accounting Standards ("SFAS") 128. Under SFAS 128, basic earnings per
share includes only the weighted average number of common shares outstanding
during the period and excludes the effect of stock options from the calculation.
In addition, diluted earnings per share includes the weighted average number of
common shares and the dilutive effect of stock options outstanding during the
period.
For the three months ended December 31, 1998, the Company reported a net loss.
For this period, the effect of stock options has been excluded from the
sharebase used to compute diluted loss per share as the effect would be
antidilutive.
6
NOTE 4 - OPERATING RESULTS BY BUSINESS SEGMENT:
Operating results by business segment for the three months ended December 31,
1998 and 1997 were as follows:
Packaging Corporate and
Three months ended Equipment Materials Reconciling
December 31, 1998: Segment Segment Items Total
--------- --------- ----------- ---------
Net sales $ 33,623 $ 27,552 $ 61,175
Cost of goods sold 24 185 20,814 44,999
--------- --------- ---------
Gross profit 9,438 6,738 16,176
Operating costs 19,079 5,583 $ 1,399 26,061
Resizing costs 397 397
--------- --------- --------- ---------
Income (loss)
from operations $ (10,038) $ 1,155 $ (1,399) (10,282)
========= ========= ========= =========
Segment assets
at December 31, 1998 $ 120,041 $ 79,121 $ 124,920 $ 324,082
========= ========= ========= =========
Packaging Corporate and
Three months ended Equipment Materials Reconciling
December 31, 1997: Segment Segment Items Total
--------- --------- --------- ---------
Net sales $ 93,938 $ 29,173 $ 123,111
Cost of goods sold 55,547 22,219 77,766
--------- --------- ---------
Gross profit 38,391 6,954 45,345
Operating costs 26,148 6,298 $ 2,269 34,715
--------- --------- --------- ---------
Income (loss) from
operations $ 12,243 $ 656 $ (2,269) $ 10,630
========= ========= ========= =========
Segment assets
at December 31, 1997 $ 163,109 $ 88,572 $ 119,715 $ 371,396
========= ========= ========= =========
Intersegment sales are immaterial.
7
Note 5 - COMPREHENSIVE LOSS:
As of October 1, 1998, the Company adopted SFAS 130, "Reporting Comprehensive
Income" which establishes rules for the reporting and presentation of
comprehensive income and its components. SFAS 130 requires accumulated
translation adjustments, net unrealized gains/losses on investments and minimum
pension liability adjustments to be included in other comprehensive
income(loss). For the three months ended December 31, 1998 and 1997, the
components of total comprehensive income are as follows:
Three Months Ended
December 31,
1998 1997
------- -------
Net income(loss) $(8,863) $ 6,824
------- -------
Foreign currency translation adjustment 1,191 (1,008)
Minimum pension liability, net of taxes (1,137) --
Unrealized gain(loss) on investments,
net of taxes (108) --
------- -------
Other comprehensive loss (54) (1,008)
------- -------
Comprehensive income(loss) $(8,917) $ 5,816
======= =======
Prior year amounts have been restated to conform with the current year
presentation.
Note 6 - SUBSEQUENT EVENTS:
In the second quarter of fiscal 1999, the Company purchased, for $8 million,
enabling technology and fixed assets used in the design, development,
manufacture, marketing and sale of laminate substrates. The Company has no
commitments to, but expects to invest additional cash to fully develop this
technology and bring new laminate substrate products to market.
In the second quarter of fiscal 1999, the Company announced plans to move its
automatic ball bonder manufacturing and certain related functions from its
Willow Grove, Pennsylvania facility to Asia. The move is part of the Company's
ongoing effort to reduce manufacturing cost and improve customer support. The
Company expects to spend between $15 and $17 million on tooling and equipment,
training, starting-up costs and severance to prepare the new facility for
production and reduce the production related work-force in the Willow Grove
facility. The new facility is expected to be operational in fiscal 2000.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Certain statements contained in this discussion are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Act of 1934, as amended (the "Exchange Act"), and are subject
to the Safe Harbor provisions created by the statute. Such forward-looking
statements include, but are not limited to, statements that relate to the
Company's future revenue, product development, demand, competitiveness, gross
margins, operating expenses and management's plans and objectives for current
and future operations of the Company. Such statements are based on current
expectations and are subject to risk and uncertainties, including those
discussed below and under the heading "Risk Factors" within this section and in
the Company's reports and registration statements filed from time to time with
the Securities and Exchange Commission. This discussion should be read in
conjunction with the Condensed Financial Statements and Notes presented thereto
on pages 6 to 8 of this Form 10-Q for a full understanding of the Company's
financial position and results of operations for the three months ended December
31, 1998.
INTRODUCTION
The Company's operating results primarily depend upon the capital expenditures
of semiconductor manufacturers and subcontract assemblers worldwide which, in
turn, depend on the current and anticipated market demand for semiconductors and
products using semiconductors. The semiconductor industry historically has been
highly volatile and has experienced periodic downturns and slowdowns which have
had a severe negative effect on the semiconductor industry's demand for 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.
These downturns and slowdowns have also adversely affected the Company's
operating results, in particular, during fiscal 1998 and the first quarter of
fiscal 1999. The Company does not consider its business to be seasonal in
nature.
The semiconductor industry experienced a downturn in fiscal 1998, which has
continued into the first quarter of fiscal 1999. The Company expects the lower
level of industry-wide assembly equipment purchases to continue, at least
through the second quarter of fiscal 1999, which is expected to result in the
Company reporting net losses in the first 2 quarters of its fiscal 1999.
RESULTS OF OPERATIONS - Three Months Ended December 31, 1998 compared to the
three months ended December 31,1997.
As indicated above, the demand for semiconductor assembly equipment, principally
the Company's automatic gold ball bonders, declined steadily throughout fiscal
1998 and the three months ended December 31, 1998. Net bookings for the three
months ended December 31, 1998 totaled $51.0 million, compared to $136.0 million
for the three months ended December 31, 1997. The backlog
9
of customer orders totaled $44.0 million at December 31, 1998 compared to $131.0
million at December 31, 1997. Since the timing of deliveries may vary and orders
generally are subject to delay or cancellation, the Company's backlog as of any
date may not be indicative of sales for any succeeding period.
Net sales for the three-month period ended December 31, 1998 totaled $61.2
million compared to $123.1 million for the same period in the prior year. The
lower sales level in the first quarter of fiscal 1999 compared to the comparable
quarter in the prior year was due to the industry-wide slowdown in demand for
semiconductor assembly equipment, primarily the Company's wire bonders. Net
sales in the three months ended December 31, 1998 to all major geographic
regions were down sharply from the comparable period in the prior year.
Equipment segment sales totaled $33.6 million for the three months ended
December 31, 1998, compared to $93.9 million in the comparable quarter of the
prior year. For the three month period ended December 31, 1998, unit sales of
automatic ball bonders were approximately 75% lower than the comparable period
last year. The lower unit sales of ball bonders were partially offset by higher
sales of upgrade kits and accessories.
Packaging materials sales totaled $27.6 million for the three months ended
December 31, 1998 compared to $29.2 million in the comparable quarter of the
prior year. The lower sales in fiscal 1999 were primarily due to lower volume of
aluminum wire shipments and lower average gold prices partially offset by higher
volume of gold wire shipments.
Gross profit as a percentage of net sales was 26.4% in the three months ended
December 31, 1998 compared to 36.8% during the comparable quarter in the prior
year due to lower gross profit margin in the equipment segment partially offset
by higher gross profit margin in the packaging materials segment. Equipment
segment gross profit margin decreased to 28.1% in the three months ended
December 31, 1998 from 40.9% for the same period in the prior year. This
decrease resulted primarily from lower average selling prices for the Company's
ball bonders due to pricing competition and the absorption of manufacturing
overhead costs by fewer units sold. Gross profit margins on packaging materials
products increased to 24.5% in the three months ended December 31, 1998 from
23.8% in the same period last year due to a shift in sales mix to higher margin
expendable tools products.
Selling, general and administrative ("SG&A") expenses declined to $17.2 million
in the three months ended December 31, 1998 compared to $22.4 million in the
comparable quarter of the prior year. The lower SG&A expenses in fiscal 1999 was
due primarily to the Company's reduction in work-force that took place in the
fourth quarter of fiscal 1998 in response to the industry-wide slowdown in
orders for semiconductor assembly equipment.
10
Net research and development ("R&D") costs totaled $8.8 million for the three
months ended December 31, 1998 compared to $12.3 million during the comparable
quarter of the prior year. The decrease in fiscal 1999 R&D spending generally
reflected the Company's resizing efforts of reducing its work-force and
discontinuance of products in response to the industry-wide slowdown in orders
for semiconductor assembly equipment.
The Company recorded resizing costs of $0.4 million in the three months ended
December 31, 1998 for severance in connection with the reduction in work-force
that began in the fourth quarter of fiscal 1998.
For the three months ended December 31, 1998, the Company recorded a $10.3
million loss from operations compared to income from operation of $10.6 million
in the comparable quarter of the prior year. The fiscal 1999 loss resulted
primarily from the decline in equipment segment unit sales and gross profit due
to the industry-wide slowdown in orders for semiconductor assembly equipment
partially offset by lower SG&A and R&D expense.
Net interest income totaled $1.2 million for the three months ended December 31,
1998 compared to $1.4 million for the same period last year. The lower interest
income was due to lower invested balances and the elimination of interest income
recognized on loans to Flip Chip Technologies, LLC ("FCT") partially offset by
higher rates resulting from shifting tax-free investments to taxable
investments.
In the three months ended December 31, 1998, the Company recognized 100%, or
$3.5 million, of the loss incurred on its 51% equity interest in FCT compared to
recognizing only 51% of the loss, or $2.2 million, during the same period last
year. The Company recorded 100% of the loss at FCT due to uncertainties
surrounding FCT's ability to obtain additional financing from Delco (the
Company's joint venture partner) and FCT's ability to generate short-term
positive cash flow. See the discussion of FCT under the "Risk Factors" section
of this Item 2 for further information regarding FCT.
The Company's effective tax rate is presently expected to approximate 30%, the
same as was expected in the first quarter of fiscal 1998.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued. SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value.
11
This standard is effective for the Company's financial statements for all
quarters in the fiscal year commencing October 1, 1999. Management has not
completed its review of SFAS 133 and has not determined the impact adoption will
have on the Company's financial statements.
LIQUIDITY AND CAPITAL RESOURCES:
As of December 31, 1998, the Company had $93.4 million in cash and investments
compared to $106.9 million at September 30, 1998, additionally, the Company has
a total of $60.0 million available under a bank revolving credit facility, which
expires in March 2003. At December 31, 1998, the Company was in compliance with
the covenants of the credit facility and had no borrowings outstanding under the
facility. The revolving credit facility provides for borrowings denominated in
either U.S. dollars or foreign currencies. Borrowings in U.S. dollars bear
interest either at a Base Rate (defined as the greater of the prime rate minus
1/4% or the federal funds rate plus 1/2%) or, at a LIBOR Rate (defined as LIBOR
plus .4% to .8% depending on the Company's leverage ratio). Foreign currency
borrowings bear interest at a LIBOR Rate, as defined above, applicable to the
foreign currency.
Cash used by operating activities totaled $6.9 million during the three months
ended December 31, 1998 compared to $5.4 million during the comparable period in
the prior year. The use of cash for operating activities in the first quarter of
fiscal 1999 was primarily the result of the net loss recorded by the Company in
the quarter.
At December 31, 1998, working capital was $175.7 million compared to $182.2
million at September 30, 1998. The lower working capital was due primarily to a
reduction in accounts receivable reflecting the reduced sales in the quarter
ended December 31, 1998 compared to the quarter ended September 30, 1998 and
lower cash and short-term investments partially offset by lower trade accounts
payable and accrued expenses also reflecting the lower sales and, therefore,
production volume in the first quarter of fiscal 1999.
During the three months ended December 31, 1998, the Company invested
approximately $1.5 million in property and equipment compared to $3.1 million in
the comparable quarter of the prior year. The Company presently expects fiscal
1999 capital spending to approximate $15.0 million. The principal capital
projects planned for fiscal 1999 include the purchase of tooling and equipment
necessary to commence equipping a new manufacturing facility in Asia for the
production of the Company's automatic ball bonders, additional increases in
manufacturing capacity for the packaging and materials business segment and
additional investments in the Enterprise Resource Planning System ("ERPS").
Pursuant to the terms of the FCT joint venture agreement, the Company made
capital contributions of $16.8 million through December 31, 1998. In addition,
the Company has entered into four separate loan agreements totaling $30.0
million with FCT. As of December 31, 1998, $24.0 million had been loaned to FCT
under these loan agreements. During the first
12
quarter of fiscal 1999, the Company gave notice to FCT of its desire to convert
the loans, together with accrued interest, into equity units. See the "Risk
Factors" section of this Item 2 for a further discussion of FCT.
The Company entered into a joint venture agreement, in September 1998, to
develop, manufacture and market advanced polymer materials for semiconductor and
microelectronic packaging end users. The Company has committed to invest $6.0
million in this joint venture.
In the second quarter of Fiscal 1999, the Company purchased, for $8.0 million,
enabling technology and fixed assets used in the design, development,
manufacture, marketing and sale of laminate substrates. The Company has no
commitments to, but expects to invest additional cash to fully develop this
technology and bring new laminate substrate products to market. Such additional
investment may be significant.
The Company believes that anticipated cash flows from operations, its working
capital and amounts available under its revolving credit facilities will be
sufficient to meet the Company's liquidity and capital requirements for at least
the next 12 months. However, the Company may seek, as required, equity or debt
financing to provide capital for corporate purposes 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 the Company's products, semiconductor and semiconductor capital equipment
industry conditions and competitive factors and the nature and size of strategic
business opportunities which the Company may elect to pursue.
RISK FACTORS:
Semiconductor Industry Volatility
The Company's operating results primarily depend upon the capital expenditures
of semiconductor manufacturers and subcontract assemblers worldwide which, in
turn, depend on the current and anticipated market demand for semiconductors and
products using semiconductors. The semiconductor industry historically has been
highly volatile and has experienced periodic downturns and slowdowns which have
had a severe negative effect on the semiconductor industry's demand for 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.
These downturns and slowdowns have also adversely affected the Company's
operating results and the Company believes that such volatility will continue to
characterize the industry and to impact the Company's operations in the future.
Product Concentration
A significant portion of the Company's revenue is derived from sales of a
relatively small number of machines, most with selling prices ranging
13
from $60,000 to over $400,000. A delay in the shipment of a limited quantity of
machines, either due to manufacturing delays or to rescheduling or cancellations
of customer orders, could have a material adverse effect on the results of the
operations for any particular fiscal year or quarter.
Rapid Technology Change
The semiconductor and semiconductor equipment industries are subject to rapid
technological change and frequent new product introductions and enhancements.
The Company believes that its continued success will depend upon the extent to
which it is able to continuously develop and manufacture or otherwise acquire
new products and product enhancements and to introduce them into the market in
response to demands for higher performance assembly equipment.
New Product Introduction
The Company's inability to successfully qualify new products, or its inability
to manufacture and ship these products in volume and on a timely basis, could
adversely affect the Company's competitive position.
Furthermore, to the extent the Company fails to accurately forecast demand in
volume and configuration for both its current and next-generation wire bonders
and generally to manage product transitions successfully, it could experience
reduced orders, delays in product shipments and increased risk of inventory
obsolescence. There can be no assurance that the Company will successfully
introduce and manufacture new products, that new products introduced by the
Company will be accepted in the marketplace or that the Company will manage its
product transitions successfully. The Company's failure to do any of the
foregoing could materially adversely affect the Company's business, financial
condition and operating results.
Dependence on Key Customers
Sales to a relatively small number of customers have accounted for a significant
percentage of the Company's net sales. Sales to these and other customers might
be affected by a number of factors including the transition from conventional
assembly techniques to alternative methods of semiconductor assembly for future
generation products. The timing of such a transition and the impact on the
Company, if any, can not be determined at this time. In the event a current
customer would transition to an alternative method, the Company's failure to
acquire replacement customers for its equipment business could have a material
adverse affect on the Company's financial condition and operating results.
Dependence on Key Suppliers
The Company relies on subcontractors to produce to the Company's specifications
many of the materials, components or subassemblies used in its products. Certain
of the Company's products, however, require
14
components or assemblies of an exceptionally high degree of reliability,
accuracy and performance. Currently there are a number of such items for which
there are only a single or limited number of suppliers which have been accepted
by the Company as qualified suppliers. The Company generally does not maintain
long-term contracts with its subcontractors and suppliers. While the Company
does not believe that its business is substantially dependent on any contract or
arrangement with any of its subcontractors or suppliers, the Company's reliance
on subcontractors and single source suppliers involves a number of significant
risks, including the loss of control over the manufacturing process, the
potential absence of adequate capacity and the reduced control over delivery
schedules, manufacturing yields, quality and costs. Further, certain of the
Company's subcontractors and suppliers are relatively small operations and have
limited financial and manufacturing resources. In the event that any significant
subcontractor or single source supplier were to become unable or unwilling to
continue to manufacture or sell subassemblies, components or parts to the
Company in required volumes and of acceptable quality levels and prices, the
Company would have to identify and qualify acceptable replacements. The process
of qualifying subcontractors and suppliers could be lengthy, and no assurance
can be given that any additional sources would be available to the Company on a
timely basis.
Sales to Foreign Customers
Most of the Company's foreign sales are denominated in US dollars, and the
Company believes that fluctuations in the value of the US dollar relative to
certain foreign currencies may make the Company's products more expensive in
relation to products offered by certain of the Company's foreign competitors. In
addition, a majority of the Company's sales are to customers with operations in
the Asia/Pacific region which has been adversely affected by economic turmoil.
There can be no assurance that selling prices of future orders or that the
economic problems that persist in the Asia/Pacific region will not have a
material adverse effect on the Company's business and operating results.
Dependence on Key Personnel
The future success of the Company is dependent upon its ability to hire and
retain qualified management, marketing and technical employees. Competition in
the recruiting of personnel in the semiconductor and semiconductor equipment
industry is intense, particularly with respect to certain engineering
disciplines. The inability for the Company to continue to attract and retain the
necessary technical and managerial personnel could have a material adverse
effect on the Company's business and operating results.
Intellectual Property
From time to time, third parties assert that the Company is, or may be,
infringing or misappropriating their intellectual property rights. In such
cases, the Company will defend against claims or negotiate licenses where
considered appropriate. In addition, certain of the
15
Company's customers have received notices of infringement from the Lemelson
Medical, Education and Research Foundation Limited Partnership (the "Lemelson
Foundation"), alleging that equipment supplied by the Company, and processes
performed by such equipment, infringe on patents held by the Lemelson
Foundation. This activity increased substantially in 1998, since in June of that
year the Lemelson Foundation settled its suit against the Ford Motor Company,
and entered into License Agreements with Ford, GM and Chrysler. Since then a
number of the Company's customers, including Intel, have been sued by the
Lemelson Foundation. Certain customers have requested that the Company defend
and indemnify them against the claims of the Lemelson Foundation or to
contribute to any settlement the customer reaches with the Lemelson Foundation.
To date, however, no customer who has settled with the Lemelson Foundation has,
after settlement, sought contribution from the Company. The Company has received
opinions from its outside patent counsel with respect to certain of the Lemelson
Foundation patents. The Company is not aware that any equipment marketed by the
Company, or process performed by such equipment infringe on the Lemelson
Foundation patents in question and does not believe that the Lemelson Foundation
matter or any other pending intellectual property claim will have a material
adverse effect on its business, financial condition or operating results.
However, the ultimate outcome of any infringement or misappropriation claim
affecting the Company is uncertain and there can be no assurances that the
resolution of these matters will not have a material adverse effect on the
Company's business, financial condition and operating results.
Volatility of Common Stock Price
The market price for the Company's common stock has been volatile and it could
continue to be subject to significant fluctuations in response to market or
industry conditions generally, or specific variations in quarterly operating
results, shortfalls in revenue or earnings from levels expected by securities
analysts and other factors, such as announcements of reductions in force,
departure of key employees, introduction of new products by the Company or by
the Company's competitors, disruptions with key customers or the occurrence of
political, economic or environmental events globally or in key sales regions. In
addition, the stock market has in recent years experienced significant price
fluctuations. These fluctuations often have been unrelated to the operating
performance of specific companies whose stocks are traded. Recent fluctuations
affecting the Company's common stock have been tied in part to the Asian
financial crisis and the price of semiconductors. Broad market fluctuations, as
well as economic conditions generally in the semiconductor industry, may
adversely affect the market price of the Company's common stock.
Investment in Flip Chip Technologies, LLC
In February 1996, the Company entered into a joint venture agreement with Delco
Electronics Corporation ("Delco") providing for the formation and management of
Flip Chip Technologies, L.L.C. ("FCT"). FCT was formed to provide wafer bumping
services on a contract basis and to license related technologies. The Company
owns a 51% equity interest in
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FCT but participates equally with Delco in the management of FCT through an
Executive Committee. The Company accounts for its investment in FCT using the
equity method, and prior to fiscal 1999 recognized its proportionate share of
the operating results of the joint venture on the basis of its ownership
interest. Beginning in fiscal 1999, the Company is recognizing 100% of the
operating results for the reasons described below. Through December 31, 1998,
the Company had contributed $16.8 million of capital and had loaned $24.0
million to FCT pursuant to four revolving loan agreements totaling $30 million.
The loans to FCT bear interest at the prime rate plus 1 1/2% (9.50% at December
31, 1998) and are secured by FCT's accounts receivable, inventory and machinery
and equipment. The loans are due on various dates through November 19, 2000 with
interest payable generally upon maturity. The loans are convertible, at the
Company's option, into additional equity units of FCT. Under these agreements
Delco also has certain rights to purchase additional equity units of FCT. On
November 4, 1998, the Company notified Delco of its desire to convert the
outstanding loans into additional equity units of FCT, subject to an appraisal
of FCT and the value of an equity unit. Until the appraisal is completed and the
conversion valuation is determined the Company cannot be certain as to if or
when the conversion of the outstanding loans to FCT equity units will take
place. However, due to uncertainties surrounding FCT's ability to obtain
additional financing from Delco and FCT's ability to generate short-term
positive cash flow, the Company, beginning in fiscal 1999, will recognize 100%
of the operating results of FCT in its financial statements and it will not
record interest income from its loans to FCT.
As a result of delays in the customers' evaluations of FCT's manufacturing
process and the generally soft business environment in the semiconductor
industry, FCT has not generated substantial operating revenues to date. The
Company is currently working with FCT management to balance FCT's planned
expense and spending levels with available financial resources but expects FCT
to report a loss from operations in fiscal 1999. The joint venture is subject to
numerous risks common to business arrangements of this nature. There can be no
assurance that FCT will ever become profitable, that the Company will make
additional capital contributions and loans to FCT, or that the anticipated
benefits of FCT will ever be realized. If FCT does not become profitable and
cash flow positive, the Company's business, financial condition and operating
results could be materially adversely affected.
Year 2000
The Year 2000 compliance issue (in which systems do not properly recognize date
sensitive information when the year changes to 2000) creates risk for the
Company: if internal data management, accounting and/or manufacturing or
operating software and systems do not adequately or accurately process or manage
day or date information beyond the year 1999, there could be an adverse impact
on the Company's operations. To address the issue, the Company created an
internal task force to assess its state of readiness for possible Year 2000
issues and take the necessary actions to ensure Year 2000
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compliance. The task force has and continues to evaluate internal business
systems, software and other components which affect the performance of Company's
products, and the Company's vulnerability to possible Year 2000 exposures due to
suppliers' and other third parties' lack of preparedness for the year 2000. To
evaluate certain equipment sold by the Company and certain equipment, tools and
software used by the Company, the Company employs Year 2000 Readiness Test
scenarios established by SEMATECH, an industry group comprised of U.S.
semiconductor manufacturers. Based on this assessment, the Company does not
believe operation of such equipment will be affected by the transition to the
year 2000. The Company expects that its review, corrective measures and
contingency planning (where necessary) will be complete by September 1999.
In connection with its review and corrective measures, the Company has replaced
its business and accounting systems of its equipment manufacturing sites in the
US and Israel with a new ERPS which is Year 2000 compliant. The Company expects
the total cost of hardware, software, consulting costs, training and internal
expenses to implement the new ERPS to be approximately $9 million, the majority
of which had been spent by December 31, 1998.
In addition, the Company has been in contact with its suppliers and other third
parties to determine the extent to which they may be vulnerable to Year 2000
issues. As this assessment progresses, matters may come to the Company's
attention which could give rise to the need for remedial measures which have not
yet been identified. As a contingency, the Company may replace the suppliers and
third party vendors who can not demonstrate to the Company that their products
or services will be Year 2000 compliant. The Company cannot currently predict
the potential effect of third parties' Year 2000 issues on its business.
The Company believes that its Year 2000 compliance project will be completed in
advance of the Year 2000 date transition and that Year 2000 issues will not have
a material adverse effect on the Company's financial condition or overall trends
in the results of operations. However, there can be no assurance that unexpected
delays or problems, including the failure to ensure Year 2000 compliance by
systems or products supplied to the Company by a third party, will not have an
adverse effect on the Company, its financial performance, or the competitiveness
or customer acceptance of its products.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At December 31, 1998, the Company had a non-trading investment portfolio of
fixed income securities, excluding those classified as cash and cash
equivalents, of $42.4 million. These securities, like all fixed income
instruments, are subject to interest rate risk and will fall in value if market
interest rates increase. If market interest rates were to increase immediately
and uniformly by 100 basis points from levels as of December 31, 1998, the
decline in the fair market value of the portfolio would not have a material
adverse effect on the Company's business, financial condition or operating
results.
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PART II. OTHER INFORMATION.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the first three months of fiscal 1999, the Company contributed 24,461
shares of unregistered common stock, valued at its fair market value, as its
matching contribution to its Section 401(k) Employee Incentive Savings Plan.
Registration of such shares was not required because the transaction did not
constitute a "sale" under Section 2(3) of the Securities Act of 1933, or,
alternatively, the transaction was exempt pursuant to the private offering
provisions of that Act and the rules thereunder.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule for the Quarterly Period
Ended December 31, 1998
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter to which
this Report relates.
SIGNATURES
Pursuant to the requirements 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.
KULICKE AND SOFFA INDUSTRIES, INC.
Date: February 12, 1999 By: /s/ Clifford G. Sprague
-------------------------------
Clifford G. Sprague
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
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