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 MARCH 31, 1999
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 April 30, 1999, there were 23,464,535 shares of the Registrant's Common
Stock, Without Par Value outstanding.
KULICKE AND SOFFA INDUSTRIES, INC.
FORM 10 - Q MARCH 31, 1999
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
March 31, 1999 and September 30, 1998 3
Consolidated Statements of Operations -
Three and Six Months Ended March 31, 1999
and 1998 4
Consolidated Statements of Cash Flows -
Six Months Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6 - 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10 - 20
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 20
PART II. OTHER INFORMATION:
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
Item 6. EXHIBITS AND REPORTS ON FORM 8 - K. 21 - 22
Signatures. 22
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31,
1999 September 30,
(unaudited) 1998
----------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,336 $ 76,478
Short-term investments 37,575 30,422
Accounts and notes receivable, net 63,488 66,137
Inventories, net 50,595 47,573
Deferred income taxes 16,022 2,608
Prepaid expenses and other current assets 5,193 5,303
Refundable income taxes 2,770 5,270
--------- ---------
TOTAL CURRENT ASSETS 208,979 233,791
Property, plant and equipment, net 45,403 48,269
Intangible assets, primarily goodwill, net 41,185 38,765
Investments in and loans to joint ventures 24,641 19,920
Other assets 1,760 1,839
--------- ---------
TOTAL ASSETS $ 321,968 $ 342,584
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Debt due within one year $ 5 $ 192
Accounts payable to suppliers and others 25,958 24,223
Accrued expenses 23,319 23,549
Income taxes payable 2,795 3,646
--------- ---------
TOTAL CURRENT LIABILITIES 52,077 51,610
Other liabilities 4,687 3,064
--------- ---------
TOTAL LIABILITIES 56,764 54,674
--------- ---------
Commitments and contingencies -- --
SHAREHOLDERS' EQUITY:
Common stock, without par value 159,423 157,986
Retained earnings 110,325 133,964
Accumulated other comprehensive loss (4,544) (4,040)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 265,204 287,910
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 321,968 $ 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 Six months ended
March 31 March 31
---------------------------- ----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net sales $73,561 $120,060 $134,736 $243,171
Cost of goods sold 52,536 74,073 97,535 151,839
--------- --------- --------- ---------
Gross profit 21,025 45,987 37,201 91,332
--------- ---------
Selling, general and
administrative 19,829 20,315 37,076 42,762
Research and development, net 8,827 12,685 17,641 24,953
Resizing and relocation costs 5,521 -- 5,918 --
Purchased in-process research
and development 3,935 -- 3,935 --
--------- --------- --------- ---------
Income (loss) from operations (17,087) 12,987 (27,369) 23,617
Interest income 810 1,266 1,967 2,660
Interest expense (60) (47) (97) (94)
Equity in loss of joint ventures (4,772) (2,312) (8,273) (4,541)
--------- --------- --------- ---------
Income (loss) before income taxes (21,109) 11,894 (33,772) 21,642
Income tax provision (benefit) (6,333) 2,703 (10,133) 5,627
--------- --------- --------- ---------
Net income (loss) $(14,776) $9,191 $(23,639) $16,015
========= ========= ========= =========
Net income (loss) per share:
Basic ($0.63) $0.39 ($1.01) $0.69
========= ========= ========= =========
Diluted ($0.63) $0.39 ($1.01) $0.68
========= ========= ========= =========
Weighted average shares outstanding:
Basic 23,421 23,288 23,397 23,268
Diluted 23,421 23,676 23,397 23,692
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)
Six months ended
March 31,
------------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ (23,639) $ 16,015
Adjustments to reconcile net income(loss) to
net cash used in operating activities:
Depreciation and amortization 6,991 6,271
Equity in loss of joint ventures 8,273 4,541
Deferred taxes on income (13,414) (4)
Purchased in-process R&D 3,935 --
Changes in other components of working
capital, net 1,161 (35,199)
Collection of refundable income taxes 2,500 --
Other, net 1,649 (120)
--------- ---------
Net cash used in operating activities (12,544) (8,496)
--------- ---------
INVESTING ACTIVITIES:
Purchases of investments classified as
available for sale (29,375) (48,083)
Maturities of investments classified as
available for sale 22,098 6,268
Purchases of property, plant and equipment (2,307) (6,863)
Purchase of XLAM technology (8,000) --
Investments in and loans to joint ventures (12,994) (7,000)
--------- ---------
Net cash used in investing activities (30,578) (55,678)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 167 214
Payments on capital leases (187) (606)
--------- ---------
Net cash used in financing activities (20) (392)
--------- ---------
Changes in cash and cash equivalents (43,142) (64,566)
Cash and cash equivalents at beginning
of period 76,478 107,605
--------- ---------
Cash and cash equivalents at end of period $ 33,336 $ 43,039
========= =========
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 March 31, 1999 and September 30, 1998, and the results
of its operations for the three and six month periods ended March 31, 1999 and
its cash flows for the six month periods ended March 31, 1999 and 1998. 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:
March 31, September 30,
1999 1998
-------- --------
Raw materials and supplies $ 35,845 $ 28,062
Work in process 10,164 11,381
Finished goods 19,350 23,788
-------- --------
65,359 63,231
Inventory reserves (14,764) (15,658)
-------- --------
$ 50,595 $ 47,573
======== ========
NOTE 3 - EARNINGS PER SHARE:
Net income(loss) per share for the three and six month periods ended March 31,
1999 and March 31, 1998 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.
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 and six month periods ended March 31, 1999, the Company reported
net losses. For these periods, 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 and six month periods ended
March 31, 1999 and 1998 were as follows:
Packaging Corporate,
Three months ended Equipment Materials Other and
March 31, 1999: Segment Segment Eliminations Total
------- ------- ------------ -----
Net sales $ 44,769 $ 28,792 $ 73,561
Cost of goods sold 32,044 20,492 52,536
-------- -------- --------
Gross profit 12,725 8,300 21,025
Operating costs 20,702 5,929 $ 2,025 28,656
Resizing and relocation
costs 5,521 5,521
Purchased in-process
research and development 3,935 3,935
-------- -------- -------- --------
Income (loss)
from operations $(13,498) $ 2,371 $ (5,960) $(17,087)
======== ======== ======== ========
Packaging Corporate,
Six months ended Equipment Materials Other and
March 31, 1999: Segment Segment Eliminations Total
------- ------- ------------ -----
Net sales $ 78,392 $ 56,344 $134,736
Cost of goods sold 56,229 41,306 97,535
-------- -------- -------- --------
Gross profit 22,163 15,038 37,201
Operating costs 39,781 11,512 $ 3,424 54,717
Resizing and relocation
costs 5,918 5,918
Purchased in-process
research and development 3,935 3,935
-------- -------- -------- --------
Income (loss) from
operations $(23,536) $ 3,526 $ (7,359) $(27,369)
======== ======== ======== ========
Segment assets
at March 31, 1999 $128,962 $ 78,659 $114,347 $321,968
======== ======== ======== ========
Packaging Corporate
Three months ended Equipment Materials and
March 31, 1998: Segment Segment Eliminations Total
------- ------- ------------ -----
Net Sales $ 92,920 $ 27,140 $120,060
Cost of Goods Sold 53,789 20,284 74,073
-------- -------- --------
Gross Profit 39,131 6,856 45,987
Operating Costs 25,220 5,624 $ 2,156 33,000
-------- -------- -------- --------
Income(loss) from
operations $ 13,911 $ 1,232 $ (2,156) $ 12,987
======== ======== ======== ========
7
Packaging Corporate,
Six months ended Equipment Materials Other and
March 31, 1998 Segment Segment Eliminations Total
------- ------- ------------ -----
Net Sales $186,858 $ 56,313 $243,171
Cost of Goods Sold 109,336 42,503 151,839
-------- -------- -------- --------
Gross Profit 77,522 13,810 91,332
Operating Costs 51,368 11,922 $ 4,425 67,715
-------- -------- -------- --------
Income(loss) from
operations $ 26,154 $ 1,888 $ (4,425) $ 23,617
======== ======== ======== ========
Note 5 - RESIZING AND RELOCATION COSTS
During the quarter ended March 31, 1999, the Company announced plans to relocate
the manufacturing operation of its automatic ball bonders to Asia. As a result,
the Company recorded severance and payroll related costs of $4.4 million for the
elimination of approximately 230 positions, primarily in the Willow Grove
facility, and asset write-off and removal costs of approximately $1.6 million.
During the quarter ended December 31, 1998, the Company recorded resizing
charges of $397 representing severance costs associated with the reduction in
workforce that began in fiscal 1998.
The components of the change in resizing and relocation liabilities for the six
months ended March 31, 1999 are as follows:
Asset
write-off
Severance and removal Other Total
--------- ----------- ----- -----
Balance at
September 30, 1998 $ 3,088 $ 628 $ 3,716
Provision 4,352 $ 1,566 5,918
Spending/other (2,838) (147) (2,985)
-------- -------- -------- --------
Balance at
March 31, 1999 $ 4,602 $ 1,566 $ 481 $ 6,649
======== ======== ======== ========
Note 6 - IN-PROCESS RESEARCH AND DEVELOPMENT
In January 1999, the Company purchased enabling technology and fixed assets used
in the design, development, manufacture, marketing and sale of laminate
substitutes (the "XLAM technology") for $8 million. The Company has allocated
the majority of the purchase price to intangible assets, including in-process
research and development. The portion of the purchase price allocated to
in-process research and development was charged to expense in the three months
ended March 31, 1999. The other purchased intangibles include core technology
and assembled workforce. These intangibles are being amortized over their
8
estimated useful lives of 1 - 5 years.
The Company has allocated the purchase price to the following asset accounts:
In-process research and development $ 3,935
Core technology 3,447
Property, plant and equipment 513
Assembled workforce 105
-------
Total $ 8,000
=======
The Company obtained an independent valuation of the purchased in-process
research and development. The income valuation approach was used to determine
the fair value of the in-process research and development. The Company estimated
that the purchased technology was 60% complete and the technology would be
marketable in fiscal 2000 and would generate positive cash flow beginning in
fiscal 2001. The Company estimates that it will spend approximately $15 million
for operational and capital expenditures in the remainder of fiscal 1999 to
further develop the XLAM technology and estimates additional funding
requirements will be necessary in future years. These estimates are subject to
change, given uncertainties of the development process, and no assurance can be
given that deviations from these estimates will not occur.
Note 7 - FLIP CHIP TECHNOLOGIES LLC
Summarized financial information of Flip Chip Technologies, LLC ("FCT"), the
Company's 51% owned joint venture with Delco Electronics Corporation, at March
31, 1999 and September 30, 1998 and for the three and six months ended March 31,
1999 and 1998, follows:
March 31,
1999 September 30,
(unaudited) 1998
-------- -------------
Current assets $ 7,667 $ 2,505
Property, plant and equipment, net 21,505 22,318
Total assets 29,788 25,594
Current liabilities 4,656 8,535
Notes payable, net of current portion 33,487 15,478
Member's equity(deficit) (8,355) 824
Three months ended Six months ended
March 31 March 31
--------------------- ------------------------
1999 1998 1999 1998
------- ------- ------- -------
Net sales $ 2,892 $ 956 $ 5,756 $ 1,391
Net loss (1) (4,569) (4,535) (8,070) (8,906)
(1) The three and six months ended March 31, 1999 include $900 of one-time
resizing and appraisal costs.
9
Note 8 - COMPREHENSIVE LOSS:
For the three and six months ended March 31, 1999 and 1998, the components of
total comprehensive income (loss) are as follows:
Three months ended Six months ended
March 31 March 31
-------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net income(loss) $(14,776) $ 9,191 $(23,639) $ 16,015
-------- -------- -------- --------
Foreign currency translation
adjustment (464) (107) 727 (1,115)
Minimum pension liability,
net of taxes -- -- (1,137) --
Unrealized gain(loss)
on investments,net of taxes 14 -- (94) --
-------- -------- -------- --------
Other comprehensive loss (450) (107) (504) (1,115)
-------- -------- -------- --------
Comprehensive income(loss) $(15,226) $ 9,084 $(24,143) $ 14,900
======== ======== ======== ========
Prior year amounts have been restated to conform with the current year
presentation.
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 10 of this Form 10-Q for a full understanding of the Company's
financial position and results of operations for the three and six month periods
ended March 31, 1999.
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
10
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 half of fiscal 1999. However, the
Company has experienced a rebound in orders during the three months ended March
31, 1999 and believes this is the beginning of an upturn in the semiconductor
cycle. The Company does not consider its business to be seasonal in nature.
RESULTS OF OPERATIONS - Three and six month periods ended March 31, 1999
compared to the three and six month periods ended March 31, 1998.
As indicated above, the semiconductor industry experienced a downturn in fiscal
1998 and the first half of fiscal 1999. However, the Company experienced a
rebound in orders during the three months ended March 31, 1999 with net bookings
of $98 million, compared to $51 million for the three months ended December 31,
1998 and $93 million in the three months ended March 31, 1998. The backlog of
customer orders totaled $68 million at March 31, 1999 compared to $44 million at
December 31, 1998 and $104 million at March 31, 1998. 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 months ended March 31, 1999 totaled $74 million compared
to $120 million for the same period in the prior year. Net sales for the six
months ended March 31, 1999 were $135 million compared to $243 million in the
same period of the prior year. The lower sales level in the first two quarters
of fiscal 1999 compared to the comparable period 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 and six
months ended March 31, 1999 to all major geographic regions were down from the
comparable period in the prior year.
Equipment segment sales totaled $45 million for the three months ended March 31,
1999, compared to $93 million in the comparable quarter of the prior year.
Equipment segment sales for the six months ended March 31, 1999 were $78 million
compared to $187 million in the comparable period of the prior year. For the
three and six month periods ended March 31, 1999, unit sales of machines were
lower than the comparable period last year by 41% and 55%, respectively. The
lower sales volume reflected the industry wide downtown in orders for
semiconductor assembly equipment.
Packaging materials sales totaled $29 million for the three months ended March
31, 1999 compared to $27 million in the comparable quarter of the prior year.
For the six months ended March 31, 1999 and March 31, 1998, packaging materials
sales totaled $56 million. The increased net sales for the three months ended
March 31, 1999 primarily reflected a higher volume of gold wire shipments. For
the six month period ended March 31, 1999 gold wire shipments were also higher
than
11
the prior year but were offset by lower volume of aluminum wire shipments.
Gross profit as a percentage of net sales was 28.6% in the three months ended
March 31, 1999 compared to 38.3% during the comparable quarter in the prior
year. For the six month period ended March 31, 1999, gross profit as a
percentage of net sales was 27.6% compared to 37.6% in the prior year. The lower
gross margin in both the three month and six month periods ended March 31, 1999
was 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 28.4% in the three months ended March
31, 1999 from 42.1% for the same period in the prior year. For the six month
period ended March 31, 1999 equipment segment gross profit as a percentage of
net sales decreased to 28.3% from 41.5% in the prior year. The decrease in both
the three and six month periods ended March 31, 1999 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 28.8% in
the three months ended March 31, 1999 from 25.3% in the same period last year.
For the six month period ended March 31, 1999 the gross profit margin for
packaging materials products increased to 26.7% from 24.5% in the prior year.
The increase in both the three and six month periods ended March 31, 1999 was
due primarily to the introduction in fiscal 1999 of higher margin fine pitch
products by the expendable tools operation.
Selling, general and administrative ("SG&A") expenses totaled $20 million in
both the three months ended March 31, 1999 and the three months ended March 31,
1998. For the six month period ended March 31, 1999 SG&A expenses were $37
million compared to $43 million for the comparable period in the prior year. In
the three month period ended March 31, 1999, lower payroll related expenses were
offset by a higher reserve for outstanding receivables resulting in the same
total SG&A expense as the prior year. For the six month period ended March 31,
1999 the lower SG&A expenses in fiscal 1999 were 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.
Net research and development ("R&D") costs totaled $9 million for the three
months ended March 31, 1999 compared to $13 million during the comparable
quarter of the prior year. R&D costs for the six month period ended March 31,
1999 were $18 million compared to $25 million in the prior year. The decrease in
R&D spending in the first two quarters of fiscal 1999 compared to the prior year
generally reflected the Company's resizing efforts of reducing its work-force
and discontinuing certain products in response to the industry-wide slowdown in
orders for semiconductor assembly equipment that began in fiscal 1998.
The Company recorded resizing and relocation costs of approximately $5.5 million
in the three months ended March 31, 1999, reflecting provisions for severance
and asset write-off and removal costs
12
resulting from the planned move of its automatic ball bonder manufacturing
operation to Asia. The Company expects to spend an additional $10 to $12 million
on tooling and equipment, training and start-up costs within the next 12 months
to prepare the new facility for production. The new facility is expected to be
operational in fiscal 2000. In addition to the costs associated with the move of
the automatic ball bonder production operation, during the six month period
ended March 31, 1999 the Company also recorded resizing costs of $397,000 for
severance in connection with the reduction in work-force that took place in the
three months ended December 31, 1998.
In January 1999, the Company purchased enabling technology and fixed assets used
in the design, development, manufacture, marketing and sale of laminate
substitutes (the "XLAM technology") for $8 million. The Company recorded a
charge of approximately $4 million for in-process research and development
representing the appraised value of products still in the development stage that
have not reached technological feasibility.
For the three month period ended March 31, 1999, the Company recorded a $17
million loss from operations compared to income from operation of $13 million in
the comparable quarter of the prior year. For the six-month period ended March
31, 1999, the Company recorded a loss from operations of $27 million compared to
income from operations of $24 million in the comparable period of the prior
year. Excluding the non recurring costs associated with the move of the ball
bonder manufacturing operation and the charge for in-process research and
development, the loss from operations in the three and six month periods ended
March 31, 1999 was $8 million and $18 million, respectively. The loss from
operations in both the three and six month periods ended March 31, 1999 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.
In the three and six months ended March 31, 1999, the Company recognized 100%,
or approximately $5 million and $8 million, respectively, of the loss incurred
on its 51% equity interest in Flip Chip Technologies, LLC ("FCT") compared to
recognizing only 51% of the loss, or $2 million and $5 million, respectively,
during the same periods in the prior year. Included in the loss for the three
months ended March 31, 1999 was a one-time charge of approximately $1 million
for severance costs associated with a resizing of the FCT operations and an
appraisal fee. 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 for fiscal 1999 is presently expected to
approximate 30%, compared to 26% for fiscal 1998. The increase in the effective
tax rate in fiscal 1999 is due to a larger portion of the expected loss
occurring in United Stated based operations, which have a higher effective tax
rate than the Company's foreign entities.
13
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. 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 March 31, 1999, the Company had $71 million in cash and short term
investments compared to $107 million at September 30, 1998, additionally, the
Company has a total of $60 million available under a bank revolving credit
facility, which expires in March 2003. At March 31, 1999, 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 in operating activities totaled $13 million during the six months
ended March 31, 1999 compared to $8 million during the comparable period in the
prior year. The use of cash for operating activities in the first six months of
fiscal 1999 was primarily the result of the loss recorded by the Company in that
period.
At March 31, 1999, working capital was $157 million compared to $182 million at
September 30, 1998. The lower working capital was due primarily to a reduction
in cash and investments reflecting the loss recorded in the six month period
ended March 31, 1999 along with the funding of joint ventures and the purchase
of the XLAM technology.
During the six months ended March 31, 1999, the Company invested approximately
$2 million in property and equipment compared to $7 million in the comparable
period of the prior year. The Company presently expects total fiscal 1999
capital spending to approximate $23 million. The principal capital projects
planned for the remainder of fiscal 1999 include approximately $4 million for
the purchase of tooling and equipment necessary to commence equipping the new
manufacturing facility in Asia, $9 million for equipment and leasehold
improvements necessary to outfit a research and manufacturing facility to
develop the XLAM technology, $4 million for improvements to the manufacturing
capacity for the packaging and materials business and $2 million for increases
in manufacturing capacity at Flip Chip Technologies.
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Pursuant to the terms of the Flip Chip Technologies joint venture agreement, the
Company made capital contributions of approximately $17 million through March
31, 1999. In addition, the Company has entered into four separate loan
agreements totaling $30 million with FCT. As of March 31, 1999, all $30 million
had been loaned to FCT under these loan agreements. During the first six months
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. Through March 31, 1999 the Company has
invested $2 million in this joint venture and has committed to invest a total of
$6 million.
As stated previously, the Company purchased the XLAM technology for $8 million.
The Company has no commitments to, but expects to invest approximately $15
million during the remainder of fiscal 1999 for operational and capital
expenditures.
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.
15
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 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.
To the extent the Company fails to accurately forecast demand in volume and
configuration for both its current and next-generation wire bonders
(specifically the Company's Model 8028 wire bonders) and generally to manage
product transitions successfully, it could experience reduced orders, delays in
product shipments and increased risk of inventory obsolescence.
Furthermore, the acquisition of the XLAM technology and the investment in FCT (
see Investment in Flip Chip Technologies, LLC under this Risk Factors section)
and advance polymer materials joint ventures expose the Company to risk to the
extent that there can be no assurance that the Company will successfully
complete the development and manufacture of these new products, that these new
products will be accepted in the marketplace or that the Company will manage
these new products 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
16
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 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
17
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 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. 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
FCT. FCT was formed to provide wafer bumping services on a contract basis and to
license related
18
technologies. The Company owns a 51% equity interest in 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 March 31, 1999, the Company had contributed $17 million
of capital and had loaned $30 million to FCT pursuant to four revolving loan
agreements.
The loans to FCT bear interest at the prime rate plus 1 1/2% (9.25% at March 31,
1999) 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 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, in fiscal
1999 the Company began recognizing 100% of the operating results of FCT in its
financial statements. The Company is not recognizing 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
19
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 Enterprise Resource Planning System ("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 March 31,
1999.
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 March 31, 1999, the Company had a non-trading investment portfolio of fixed
income securities, excluding those classified as cash and cash equivalents, of
$38 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 March 31, 1999, 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.
20
PART II. OTHER INFORMATION.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of Shareholders of the Company was held on February 9,
1999.
At this meeting, Messrs. James W. Bagley and C. Scott Kulicke were reelected to
the Board of Directors of the Company for terms expiring at the 2003 Annual
Meeting. In such election, 22,282,518 votes and 22,165,410 votes were cast for
Mr. Kulicke and Mr. Bagley, respectively. Under Pennsylvania law, vote cannot be
cast against a candidate. Proxies filed by the holders of 188,467 shares and
71,359 shares at the 1999 Annual Meeting withheld authority to vote for Mr.
Bagley and Mr. Kulicke, respectively.
Also at the 1999 Annual Meeting, 14,804,753 shares were voted in favor of the
proposal to amend the Company's Articles of Incorporation providing that
Subchapter E - Control Transactions of the Pennsylvania Business Corporation Law
shall not be applicable to the Company, and 240,785 shares voted against this
proposal. Proxies filed by the holders of 124,815 shares instructed the proxy
holders to abstain from voting on this proposal.
Also at the meeting, 10,965,808 shares were voted in favor of the proposal to
approve the 1998 Employee Stock Option Plan, and 4,073,062 shares were voted
against such proposal. Proxies filed by the holders of 131,385 shares at the
1999 Annual Meeting instructed proxy holders to abstain from voting on such
proposal.
Lastly, 22,275,426 shares were voted in favor of the reappointment of
PricewaterhouseCoopers LLP as independent accountants of the Company to serve
until the 2000 Annual Meeting, and 47,429 shares were voted against such
proposal. Proxies filed by the holders of 31,022 shares at the 1999 Annual
Meeting instructed the proxy holders to abstain from voting on such proposal.
"Broker non votes" received at the 1999 Annual Meeting totaled 7,475,340 shares.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 3(i) - Form of Amendment of Articles of Incorporation
effective March 12, 1999.
Exhibit 10(a) - The Company's 1998 Employee Incentive Stock Option and
Non-Qualified Stock Option Plan filed as Appendix A to the Company's
definitive proxy statement relating to the February 9, 1999 Annual
Meeting of Shareholders, is incorporated herein by reference. *
Exhibit 27 - Financial Data Schedule
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(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter to which this Report
relates.
* Compensatory contract
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: May 13, 1999 By: /s/ Clifford G. Sprague
----------------------------------
Clifford G. Sprague
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
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