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 JUNE 30, 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 July 31, 1999, there were 23,469,549 shares of the Registrant's Common
Stock, Without Par Value outstanding.
KULICKE AND SOFFA INDUSTRIES, INC.
FORM 10 - Q JUNE 30, 1999
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
June 30, 1999 and September 30, 1998 3
Consolidated Statements of Operations -
Three and Nine Months Ended June 30, 1999
and 1998 4
Consolidated Statements of Cash Flows -
Nine Months Ended June 30, 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 11 - 20
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 20
PART II. OTHER INFORMATION:
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. 21
Signatures. 21
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, September 30,
1999 1998
(unaudited)
ASSETS -------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 56,913 $ 76,478
Short-term investments 2,186 30,422
Accounts and notes receivable, net 98,258 66,137
Inventories, net 50,489 47,573
Deferred income taxes 16,628 2,608
Prepaid expenses and other current assets 7,704 5,303
Refundable income taxes 2,831 5,270
--------- ---------
TOTAL CURRENT ASSETS 235,009 233,791
Property, plant and equipment, net 64,087 48,269
Intangible assets, primarily goodwill, net 45,468 38,765
Investments in and loans to joint ventures 2,668 19,920
Other assets 2,299 1,839
--------- ---------
TOTAL ASSETS $ 349,531 $ 342,584
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Debt due within one year $ -- $ 192
Accounts payable to suppliers and others 44,131 24,223
Accrued expenses 26,695 23,549
Income taxes payable 2,746 3,646
--------- ---------
TOTAL CURRENT LIABILITIES 73,572 51,610
Other liabilities 5,658 3,064
--------- ---------
TOTAL LIABILITIES 79,230 54,674
--------- ---------
Commitments and contingencies -- --
Minority interest 5,778 --
SHAREHOLDERS' EQUITY:
Common stock, without par value 159,555 157,986
Retained earnings 109,666 133,964
Accumulated other comprehensive loss (4,698) (4,040)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 264,523 287,910
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 349,531 $ 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 Nine months ended
June 30 June 30
--------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- --------
Net sales $ 110,806 $ 91,693 $ 245,542 $ 334,864
Cost of goods sold 80,432 61,508 177,967 213,347
--------- --------- --------- ---------
Gross profit 30,374 30,185 67,575 121,517
--------- --------- --------- ---------
Selling, general and
administrative 21,743 21,252 58,819 64,014
Research and development, net 9,407 12,135 27,048 37,088
Resizing and relocation costs -- -- 5,918 --
Purchased in-process research
and development -- -- 3,935 --
--------- --------- --------- ---------
Income (loss) from operations (776) (3,202) (28,145) 20,415
Interest income 926 1,428 2,893 4,088
Interest expense (44) (136) (141) (230)
Equity in loss of joint ventures (1,330) (2,312) (9,603) (6,853)
--------- --------- ------- ---------
Income (loss) before income taxes (1,224) (4,222) (34,996) 17,420
Income tax provision (benefit) (283) (1,098) (10,416) 4,529
--------- --------- ------- ---------
Income (loss) before minority
interest (941) (3,214) (25,580) 12,891
Minority interest (282) -- (282) --
--------- --------- --------- ---------
Net income (loss) $ (659) $ (3,124) $ (24,298) $ 12,891
========= ========= ========= =========
Net income (loss) per share:
Basic $ (0.03) $ (0.13) $ (1.04) $ 0.55
========= ========= ========= =========
Diluted $ (0.03) $ (0.13) $ (1.04) $ 0.54
========= ========= ========= =========
Weighted average shares outstanding:
Basic 23,464 23,324 23,413 23,287
Diluted 23,464 23,324 23,413 23,678
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)
Nine months ended
June 30,
------------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ (24,298) $ 12,891
Adjustments to reconcile net income(loss) to
net cash provided by(used in) operating
activities:
Depreciation and amortization 10,769 9,613
Equity in loss of joint ventures 9,603 6,853
Minority interest (282) --
Deferred taxes on income (14,020) (925)
Purchased in-process R&D 3,935 --
Changes in other components of working
capital, net (15,448) (16,928)
Change in refundable income taxes 2,439 --
Other, net 1,498 (12)
--------- ---------
Net cash provided by(used in) operating
activities (25,804) 11,492
--------- ---------
INVESTING ACTIVITIES:
Purchases of investments classified as
available for sale (29,375) (86,337)
Maturities of investments classified as
available for sale 57,454 51,054
Purchases of property, plant and equipment (3,583) (12,382)
Purchase of XLAM technology (8,000) --
Investments in and loans to joint ventures (10,243) (10,000)
--------- ---------
Net cash provided by(used in) investing
activities 6,253 (57,665)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 178 377
Payments on capital leases (192) (757)
--------- ---------
Net cash used in financing activities (14) (380)
--------- ---------
Changes in cash and cash equivalents (19,565) (46,553)
Cash and cash equivalents at beginning
of period 76,478 107,605
--------- ---------
Cash and cash equivalents at end of period $ 56,913 $ 61,052
========= =========
Certain non-cash investing activities related to the conversion of investments
in joint venture are described more fully in Note 7.
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 June 30, 1999 and September 30, 1998, and the results
of its operations for the three and nine month periods ended June 30, 1999 and
1998 and its cash flows for the nine month periods ended June 30, 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:
June 30, September 30,
1999 1998
-------- -------------
Raw materials and supplies $ 34,097 $ 28,062
Work in process 19,175 11,381
Finished goods 12,847 23,788
-------- --------
66,119 63,231
Inventory reserves (15,630) (15,658)
-------- --------
$ 50,489 $ 47,573
======== ========
NOTE 3 - EARNINGS PER SHARE:
Net income(loss) per share for the three and nine month periods ended June 30,
1999 and 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 month periods ended June 30, 1999 and 1998 and the nine month
period ended June 30, 1999, the Company reported net losses. For these periods,
the effect of stock options has been excluded from the share base 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 nine month periods ended
June 30, 1999 and 1998 were as follows:
Advanced
Packaging Packaging Corporate,
Three months ended Equipment Materials Technology Other and
June 30, 1999: Segment Segment Segment(1) Elim. Total
--------- --------- --------- --------- ---------
Net sales $ 78,652 $ 31,191 $ 963 $ 110,806
Cost of goods sold 56,635 22,309 1,488 80,432
--------- --------- --------- --------- ---------
Gross profit 22,017 8,882 (525) 30,374
Operating costs 21,093 5,933 1,746 $ 2,378 31,150
--------- --------- --------- --------- ---------
Income (loss)
from operations $ 924 $ 2,949 $ (2,271) $ (2,378) $ (776)
========= ========= ========= ========= =========
Advanced
Packaging Packaging Corporate,
Nine months ended Equipment Materials Technology Other and
June 30, 1999: Segment Segment Segment(1) Elim. Total
--------- --------- --------- --------- ---------
Net sales $ 157,044 $ 87,535 $ 963 $ 245,542
Cost of goods sold 112,864 63,615 1,488 177,967
--------- --------- --------- --------- ---------
Gross profit 44,180 23,920 (525) 67,575
Operating costs 60,874 17,445 1,746 $ 5,802 85,867
Resizing/relocation costs 5,918 5,918
Puchased in-process R&D 3,935 3,935
--------- --------- --------- --------- ---------
Income (loss)
from operations $ (22,612) $ 6,475 $ (2,271) $ (9,737) $ (28,145)
========= ========= ========= ========= =========
Segment assets
at June 30, 1999 $ 154,328 $ 81,842 $ 34,803 $ 78,558 $ 349,531
========= ========= ========= ========= =========
(1) Comprised of Flip Chip Technologies,LLC ("FCT") and the Company's XLAM
operation. Effective May 31, 1999, the Company increased its ownership
interest in FCT (see Note 7) and began consolidating FCT's results with
the operating results of the Company. Accordingly, the Loss from
Operations includes FCT's results for the month of June 1999. Prior to
June 1999 no separate segment existed and therefore no comparative data
is available.
7
Packaging Corporate,
Three months ended Equipment Materials Other and
June 30, 1998: Segment Segment Elim. Total
-------- -------- -------- --------
Net sales $ 64,822 $ 26,871 $ 91,693
Cost of goods sold 41,235 20,273 61,508
-------- -------- -------- --------
Gross profit 23,587 6,598 30,185
Operating costs 25,765 5,811 $ 1,811 33,387
-------- -------- -------- --------
Income (loss)
from operations $ (2,178) $ 787 $ (1,811) $ (3,202)
======== ======== ======== ========
Packaging Corporate,
Nine months ended Equipment Materials Other and
June 30, 1998: Segment Segment Elim. Total
--------- --------- --------- ---------
Net sales $ 251,680 $ 83,184 $ 334,864
Cost of goods sold 150,571 62,776 213,347
--------- --------- --------- ---------
Gross profit 101,109 20,408 121,517
Operating costs 77,133 17,733 $ 6,236 101,102
--------- --------- --------- ---------
Income (loss)
from operations $ 23,976 $ 2,675 $ (6,236) $ 20,415
========= ========= ========= =========
Segment assets
at June 30, 1998 $ 157,407 $ 83,355 $ 121,599 $ 362,361
========= ========= ========= =========
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 nine
months ended June 30, 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 (3,112) (147) (3,259)
------- ------- ------- -------
Balance at
June 30, 1999 $ 4,328 $ 1,566 $ 481 $ 6,375
======= ======= ======= =======
8
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
substrates (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
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. 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
Effective May 31, 1999 the Company increased its ownership interest in Flip Chip
Technologies, LLC ("FCT"), the Company's joint venture with Delco Electronics
Corporation, from 51% to 73.6% by converting all of its outstanding loans to FCT
and accrued interest totaling $32,832 into equity units. The Company accounted
for the increase in ownership by the purchase method of accounting and began
fully consolidating the results of FCT into the Company's financial statements
on June 1, 1999. Consequently, the Company's financial statements for the three
and nine months ended June 30, 1999 include one month of FCT's operating results
on a fully consolidated basis and FCT's results accounted for by the equity
method of accounting and reflected in Equity in Loss on Joint Ventures for the
remaining portion of each period. The Company recorded goodwill of $5,205
associated with the increase in ownership of FCT and is amortizing the goodwill
over 10 years.
9
The Company recorded a pretax loss from FCT operations for the three and nine
months ended June 30, 1999 as follows:
Three Months Ended Nine Months Ended
June 30, 1999 June 30, 1999
------------- -------------
Equity in loss of joint venture $ 1,093 $ 9,163
Consolidated with operations
of the Company 913 913
------- -------
Pretax loss from FCT operations $ 2,006 $10,076
======= =======
Pro forma operating results of the Company, assuming the increase in ownership
of FCT took place at the beginning of fiscal 1998, are as follows:
(unaudited)
Nine months ended June 30,
-----------------------------
1999 1998
--------- ---------
Net Sales $ 254,782 $ 337,386
Net income(loss) (22,951) 10,672
Earning(loss) per share - diluted $ (0.98) $ 0.45
Selected assets of FCT, which are consolidated in the Company's total assets, at
June 30, 1999, are:
June 30, 1999
-------------
Cash $ 2,441
Current assets $ 5,199
Property, plant and equipment, net 20,587
Total assets 26,400
Note 8 - COMPREHENSIVE LOSS:
For the three and nine months ended June 30, 1999 and 1998, the components of
total comprehensive income (loss) are as follows:
Three months ended Nine months ended
June 30 June 30
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net income(loss) $ (659) $ (3,124) $(24,298) $ 12,891
-------- -------- -------- --------
Foreign currency translation
adjustment (132) (618) 595 (1,733)
Minimum pension liability,
net of taxes -- -- (1,137) --
Unrealized gain(loss)
on investments,net of taxes (22) -- (116) --
-------- -------- -------- --------
Other comprehensive loss (154) (618) (658) (1,733)
-------- -------- -------- --------
Comprehensive income(loss) $ (813) $ (3,742) $(24,956) $ 11,158
======== ======== ======== ========
Prior year amounts have been restated to conform with the current year
presentation.
10
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 nine month
periods ended June 30, 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 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 nine months
of fiscal 1999. However, the Company has experienced a rebound in orders and
believes it is in the beginning of an upturn in the semiconductor cycle. The
Company does not consider its business to be seasonal in nature.
A new business segment, Advanced Packaging Technology, comprised of Flip Chip
Technologies, LLC ("FCT") and the Company's XLAM operation, was established to
reflect the operating results of the Company's strategic initiative to develop
new technologies for advanced semiconductor packaging. Effective May 31, 1999
the Company increased its ownership interest in FCT, the Company's joint venture
with Delco Electronics Corporation, from 51% to 73.6% by converting all of its
outstanding loans to FCT and accrued interest totaling $32.8 million into equity
units. The Company accounted for the increase in ownership by the purchase
method of accounting and began fully consolidating the
11
results of FCT into the Company's financial statements on June 1, 1999.
Consequently, the Company's financial statements for the three and nine months
ended June 30, 1999 include one month of FCT's operating results on a fully
consolidated basis and FCT's results accounted for by the equity method of
accounting and reflected in Equity in Loss of Joint Ventures for the remaining
portion of each period.
RESULTS OF OPERATIONS - Three and nine month periods ended June 30, 1999
compared to the three and nine months ended June 30, 1998.
As indicated above, the semiconductor industry experienced a downturn in fiscal
1998 and the first nine months of fiscal 1999. However, the Company has
experienced a rebound in orders with net bookings of $131 million in the three
months ended June 30, 1999 and $98 million in the three months ended March 31,
1999 compared to $51 million for the three months ended December 31, 1998. The
backlog of customer orders totaled $88 million at June 30, 1999 compared to $68
million at March 31, 1999 and $44 million at December 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 June 30, 1999 increased 21% over the
comparable period in the prior year while net sales for the nine months ended
June 30, 1999 were 27% below the prior year. The increase in sales for the three
months ended June 30, 1999 was due to an increase of 58% in unit sales of wire
bonders reflecting the improved business environment for semiconductor assembly
equipment and higher volume of gold wire and capillary shipments in the
Company's packaging materials business. In line with the improved business
environment for semiconductor assembly equipment, the Company's net sales in the
third quarter were 51% higher than the second quarter of fiscal 1999. However,
sales for the nine months ended June 30, 1999 were below the comparable period
in the prior year due to the industry-wide slowdown in demand for semiconductor
assembly equipment which existed during most of fiscal 1999. Net sales to
customs in Taiwan, Singapore and Hong Kong were above the prior year for the
three months ended June 30, 1999 but only sales to customers in Singapore were
above the prior year for the nine months ended June 30, 1999. Net sales to all
other major geographic regions were below the comparable periods of the prior
year for both the three and nine months ended June 30, 1999.
Gross profit as a percentage of net sales was 27.4% and 27.5% in the three and
nine months ended June 30, 1999 compared to 32.9% and 36.3 during the comparable
periods in the prior year. The lower gross margin in both the three and nine
month periods ended June 30, 1999 resulted largely from a decrease in the gross
margin for the equipment segment primarily attributable to lower average selling
prices for the Company's ball bonders due to pricing competition. The lower
gross margin in the three months ended June 30, 1999 was also negatively
impacted by the loss recorded at the Company's newly created Advanced
12
Packaging Technology business segment. This segment will continue to have a
negative impact on the Company's gross margin in the fourth quarter of fiscal
1999. The negative impacts on the Company's gross margin mentioned above were
partially offset by higher gross margins on the Company's packaging materials
products, which increased in both the three and nine months ended June 30, 1999
due primarily to the introduction in fiscal 1999 of higher margin fine pitch
products and operating efficiencies resulting from higher unit volume.
Selling, general and administrative ("SG&A") expenses increased 2.3% in the
three months ended June 30, 1999 from the comparable period in the prior year
but were 8.1% below the prior year for the nine month period ended June 30,
1999. The higher SG&A expenses in the three month period ended June 30, 1999
reflected expenses associated with the new Advanced Packaging Technology
business segment, which did not exist in the prior year, and start-up costs for
the Company's new Singapore facility. The lower SG&A expense for the nine months
ended June 30, 1999 was due primarily to the Company's reduction in work-force
that took place in the fourth quarter of fiscal 1998.
Net research and development ("R&D") costs for the three and nine months ended
June 30, 1999 were 22.5% and 27.1% below the comparable periods in the prior
year. The decrease in R&D spending in the three and nine months ended June 30,
1999 compared to the comparable periods in the prior year reflected the
Company's resizing efforts of reducing its work-force in fiscal 1999 and
refocusing its R&D efforts on new product introductions (i.e., the model 8028
ball bonder) and new product development. The Company expects to increase its
R&D spending in fiscal 2000.
Loss from operations was $.8 million and $28.1 million for three and nine month
periods ended June 30, 1999 compared to a loss from operations of $3.2 million
in the third quarter of the prior year and income from operations of $20.4
million for the nine months ended June 30, 1998. The reduced loss in the three
months ended June 30, 1999 was due primarily to the higher sales volume and
lower operating expenses partially offset by lower gross margins. The loss for
the nine months ended June 30, 1999 compared to income in the prior year was
primarily due to the lower sales for the period as described above.
In the three and nine months ended June 30, 1999, the Company recognized as
Equity in Loss of Joint Ventures 100% or $1.1 million and $9.2 million of the
loss incurred at FCT and $.2 million and $.4 million of the loss incurred on its
equity interest in Advanced Polymer Solutions, LLC. The loss recognized in FCT
was through May 31, 1999, at which time the Company increased its ownership in
FCT and began consolidating FCT in the operating results of the Company. The
Company recognized 51% of the loss at FCT or $2.3 million and $6.9 million for
the three and nine months ended June 30, 1998. See the discussion of FCT under
the "Risk Factors" section of this Item 2 for further information regarding FCT.
13
The Company's effective tax rate for fiscal 1999 is presently expected to
approximate 30%, compared to 26% for fiscal 1998.
In the three and nine months ended June 30, 1999, the Company recorded minority
interest of $.3 million reflecting the Company's joint venture partner's share
of the loss incurred at FCT for the month of June 1999.
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,
2000. Management has not completed its review of SFAS 133 but does not believe
adoption will have a significant impact on the Company's financial statements.
LIQUIDITY AND CAPITAL RESOURCES:
As of June 30, 1999, the Company had $59 million in cash and short term
investments compared to $107 million at September 30, 1998; additionally, the
Company had a total of $60 million available under a bank revolving credit
facility, which expires in March 2003. At June 30, 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 $26 million during the nine months
ended June 30, 1999 compared to cash provided by operating activities of $11
million during the comparable period in the prior year. The use of cash for
operating activities in the first nine months of fiscal 1999 was primarily the
result of the loss recorded by the Company in that period and the increase in
non-cash components of working capital, specifically accounts receivable, to
finance the increase in shipments during the third quarter.
At June 30, 1999, working capital was $161 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
14
recorded in the nine month period ended June 30, 1999 along with the funding of
joint ventures and the purchase of the XLAM technology.
During the nine months ended June 30, 1999, the Company invested approximately
$4 million in property and equipment compared to $12 million in the comparable
period of the prior year. The principal capital projects planned for the
remainder of fiscal 1999 include approximately $3 million for the purchase of
tooling and equipment necessary to commence equipping the new manufacturing
facility in Singapore and $3 million for equipment and leasehold improvements
necessary to outfit a research and manufacturing facility to develop the XLAM
technology.
In September 1998, the Company entered into a joint venture agreement to
develop, manufacture and market advanced polymer materials for semiconductor and
microelectronic packaging end users. Through June 30, 1999 the Company has
invested $2.7 million in this joint venture and has committed to invest a total
of $6 million.
The Company purchased the XLAM technology for $8 million in the second quarter
of fiscal 1999. The Company expects to invest an additional $9 million in fiscal
1999 for operational and capital expenditures and estimates additional funding
requirements will be necessary in future years.
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, 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
15
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 from $60
thousand to over $400 thousand. 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 manage new product transitions including
the qualification of 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, the acquisition of the XLAM technology and the investments in FCT (
see Investment in Flip Chip Technologies, LLC under this Risk Factors section)
and the advance polymer materials joint venture 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
16
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 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
17
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 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
18
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 technologies. Effective May 31, 1999 the Company increased its
ownership interest in FCT, from 51% to 73.6% by converting all of its
outstanding loans to FCT and accrued interest totaling $32.8 million into equity
units. Through June 30, 1999, the Company had contributed $50 million of capital
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 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
19
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 June 30, 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 June 30, 1999, the Company had non-trading investments of $2.2 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 June 30, 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.
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PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on June 30, 1999 making an Item 5
disclosure to announce that the Company increased its ownership
in Flip Chip Technologies, LLC from 51% to 73.6% by converting
all of its outstanding loans and accrued interest into equity
units of FCT.
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: August 13, 1999 By: /s/ Clifford G. Sprague
-----------------------
Clifford G. Sprague
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)