1
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, 2001
--------------
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 May 1, 2001, there were 48,939,756 shares of the Registrant's Common
Stock, Without Par Value outstanding.
2
KULICKE AND SOFFA INDUSTRIES, INC.
FORM 10 - Q MARCH 31, 2001
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -
September 30, 2000 and March 31, 2001 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended March 31, 2000
and 2001 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended March 31, 2000 and 2001 5
Notes to Condensed Consolidated Financial
Statements 6 - 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13 - 28
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 28
PART II. OTHER INFORMATION:
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28
Item 6. EXHIBITS AND REPORTS ON FORM 8 - K. 29
Signatures. 30
3
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
KULICKE AND SOFFA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, March 31,
2000 2001
(unaudited)
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 211,489 $ 69,751
Short-term investments 105,130 42,446
Accounts and notes receivable, (less allowance 188,485 136,103
for doubtful accounts: 9/30/00- $4,355;
3/31/01- $6,169)
Inventories, net 74,034 96,706
Prepaid expenses and other current assets 9,748 14,701
--------- ---------
TOTAL CURRENT ASSETS 588,886 359,707
Property, plant and equipment, net 83,867 142,364
Intangible assets, primarily goodwill, net 41,724 266,416
Other assets 8,375 9,697
--------- ---------
TOTAL ASSETS $ 722,852 $ 778,184
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion
of long-term debt $ 1,026 $ 7,626
Accounts payable 62,513 60,581
Accrued expenses 51,935 55,958
Income taxes payable 10,724 11,137
--------- ---------
TOTAL CURRENT LIABILITIES 126,198 135,302
Other liabilities 7,967 8,955
Long term debt 175,000 228,182
Deferred Taxes 4,148 24,239
Minority interest 4,197 64
--------- ---------
TOTAL LIABILITIES 317,510 396,742
--------- ---------
Commitments and contingencies -- --
SHAREHOLDERS' EQUITY:
Common stock, without par value 189,766 191,354
Retained earnings 220,263 197,588
Accumulated other comprehensive loss (4,687) (7,500)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 405,342 381,442
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 722,852 $ 778,184
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
4
KULICKE AND SOFFA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three months ended Six months ended
March 31, March 31,
--------- ---------
2000 2001 2000 2001
---- ---- ---- ----
Net sales $ 222,153 $ 150,539 $ 402,002 $ 305,923
Cost of goods sold 146,553 107,434 266,490 208,732
--------- --------- --------- ---------
Gross profit 75,600 43,105 135,512 97,191
--------- --------- --------- ---------
Selling, general and
administrative 32,539 39,681 62,362 75,021
Research and development, net 12,354 18,472 24,457 36,065
Amortization of goodwill and
intangibles 873 6,717 1,743 9,318
Resizing costs -- 1,709 -- 1,709
Purchased in-process research
and development -- -- -- 11,709
--------- --------- --------- ---------
Income (loss) from operations 29,834 (23,474) 46,950 (36,631)
Interest income 3,285 1,790 4,375 5,690
Interest expense (2,339) (3,446) (2,853) (6,110)
Other Income -- 8,016 -- 8,016
Equity in loss of
joint ventures (363) -- (709) --
--------- --------- --------- ---------
Income (loss) before income
taxes 30,417 (17,114) 47,763 (29,035)
Income tax provision (benefit) 8,564 (6,039) 13,542 (6,032)
--------- --------- --------- ---------
Income (loss) before minority
interest 21,853 (11,075) 34,221 (23,003)
Minority interest in net loss
of subsidiary 169 86 602 328
--------- --------- --------- ---------
Net income (loss) $ 22,022 $ (10,989) $ 34,823 $ (22,675)
========= ========= ========= =========
Net income (loss) per share:
Basic $ 0.46 $ (0.23) $ 0.74 $ (0.46)
========= ========= ========= =========
Diluted $ 0.40 $ (0.23) $ 0.67 $ (0.46)
========= ========= ========= =========
Weighted average common
shares outstanding:
Basic 47,586 48,797 47,340 48,773
Diluted 58,446 48,797 54,718 48,773
The accompanying notes are an integral part of these consolidated financial
statements.
4
5
KULICKE AND SOFFA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended
March 31,
---------
2000 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ 34,823 $ (22,675)
Adjustments to reconcile net income(loss) to
net cash provided by operating activities:
Depreciation and amortization 11,670 24,985
Equity in loss of joint ventures 709 --
Purchased in-process R&D -- 11,709
Minority interest in net loss of subsidiary (602) (328)
Deferred taxes 4,994 (11,026)
Changes in components of working
capital, net (27,953) 57,507
Collection of refundable income taxes 1,918 --
Other, net 3,392 3,865
--------- ---------
Net cash provided by operating activities 28,951 64,037
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale(purchase) of investments classified as
available for sale (60,604) 63,410
Purchases of property, plant and equipment (22,056) (38,509)
Purchase of Flip Chip equity units -- (5,000)
Purchase of Cerprobe Corp., net of cash -- (216,409)
Purchase of Probe Technology Corp., net of cash -- (62,512)
Investments in and loans to joint ventures (1,460) --
--------- ---------
Net cash used in investing activities (84,120) (259,020)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings 169,122 58,000
Proceeds from issuance of common stock 8,270 594
Payments on borrowings -- (5,349)
--------- ---------
Net cash provided by financing activities 177,392 53,245
--------- ---------
Changes in cash and cash equivalents 122,223 (141,738)
Cash and cash equivalents at beginning
of period 37,155 211,489
--------- ---------
Cash and cash equivalents at end of period $ 159,378 $ 69,751
========= =========
CASH PAID DURING THE PERIOD FOR:
Interest $ 64 $ 5,852
Income Taxes $ 1,022 $ 2,529
The accompanying notes are an integral part of these consolidated
financial statements
5
6
KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share and employee data)
(unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The condensed consolidated financial statement information in this report is
unaudited. However, we believe it contains all adjustments necessary to present
fairly the Company's financial position as of March 31, 2001, and the results of
its operations for the three month and six month periods ended March 31, 2000
and 2001 and its cash flows for the six month periods ended March 31, 2000 and
2001. 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, 2000.
NOTE 2 - INVENTORIES:
Inventories consist of the following:
September 30, March 31,
2000 2001
---- ----
Raw materials and supplies $ 50,394 $ 69,338
Work in process 22,687 28,739
Finished goods 17,194 21,620
--------- ---------
90,275 119,697
Inventory reserves (16,241) (22,991)
--------- ---------
$ 74,034 $ 96,706
========= =========
NOTE 3 - EARNINGS PER SHARE:
Basic net income (loss) per share ("EPS") is calculated using the weighted
average number of shares of common stock outstanding during the period. The
calculation of diluted net income (loss) per share assumes the exercise of
employee stock options and the conversion of the convertible securities to
common shares unless the inclusion of these will have an anti-dilutive impact on
net income (loss) per share. In addition, in computing diluted net income per
share if convertible securities are assumed to be converted to common shares the
after-tax amount of interest expense recognized in the period associated with
the convertible securities is added back to net income. For the three and six
months ended March 31, 2001, the exercise of stock options and the conversion of
the convertible subordinated notes were not assumed since their conversion to
common shares would have an anti-dilutive effect on net loss per share.
6
7
A reconciliation of weighted average shares outstanding-basic to the weighted
average shares outstanding-diluted appears below:
Three months ended Six months ended
March 31, March 31,
--------- ---------
2000 2001 2000 2001
---- ---- ---- ----
Weighted average shares outstanding -
Basic 47,586 48,797 47,340 48,773
Potentially dilutive securities:
Employee stock options 3,218 * 2,814 *
Convertible subordinated notes 7,642 * 4,564 *
------ ------ ------ ------
Weighted average shares outstanding -
Diluted 58,446 48,797 54,718 48,773
====== ====== ====== ======
* Due to the Company's net loss for the three and six months ended March 31,
2001, potentially dilutive securities are deemed to be antidilutive. The
weighted average number of shares for potentially dilutive employee and director
stock options was 1,024,000 and 859,000, respectively, for the three and six
months ended March 31, 2001 and for convertible subordinated notes was 7,642,000
for both the three and six months ended March 31, 2001.
The after-tax interest expense recognized by the Company in the three and six
months ended March 31, 2000 associated with the convertible subordinated notes
that was added back to net income in order to compute net income per diluted
share was $1,351,000 and $1,632,000, respectively.
NOTE 4 - OPERATING RESULTS BY BUSINESS SEGMENT:
Operating results by business segment for the three and six month periods ended
March 31, 2001 and 2000 were as follows:
Advanced
Packaging Packaging
Three months ended Equipment Materials Technology Test
March 31, 2001: Segment Segment Segment Segment(1) Corporate Total
--------------- ------- ------- ------- ---------- --------- -----
Net revenue $ 58,643 $ 39,932 $ 9,380 $ 42,584 $ -- $150,539
Cost of sales 41,869 28,733 8,441 28,391 -- 107,434
-------- -------- -------- -------- -------- --------
Gross profit 16,774 11,199 939 14,193 -- 43,105
Operating expenses 28,852 7,330 6,456 11,393 4,122 58,153
Amort. of goodwill
and intangibles -- 566 340 5,811 -- 6,717
Resizing costs 1,424 254 -- -- 31 1,709
-------- -------- -------- -------- -------- --------
Income (loss)
from operations $(13,502) $ 3,049 $ (5,857) $ (3,011) $ (4,153) $(23,474)
======== ======== ======== ======== ======== ========
7
8
Advanced
Packaging Packaging
Equipment Materials Technology Test
Segment Segment Segment Segment(1) Corporate Total
------- ------- ------- ---------- --------- -----
Six months ended
March 31, 2001:
Net revenue $ 143,240 $ 88,139 $ 17,661 $ 56,883 $ -- $ 305,923
Cost of sales 89,863 63,224 16,469 39,176 -- 208,732
--------- --------- --------- --------- --------- ---------
Gross profit 53,377 24,915 1,192 17,707 -- 97,191
Operating expenses 60,363 15,022 12,628 15,336 7,737 111,086
Amort. of goodwill
and intangibles -- 1,130 667 7,521 -- 9,318
Resizing costs 1,424 254 -- -- 31 1,709
Purchased in-process
research and
development -- -- -- 11,709 -- 11,709
--------- --------- --------- --------- --------- ---------
Income (loss)
from operations $ (8,410) $ 8,509 $ (12,103) $ (16,859) $ (7,768) $ (36,631)
========= ========= ========= ========= ========= =========
Segment assets at
March 31, 2001 $ 196,493 $ 97,548 $ 52,468 $ 309,458 $ 122,217 $ 778,184
========= ========= ========= ========= ========= =========
(1) Comprised of the recently acquired Cerprobe Corporation and Probe
Technology Corporation.
Advanced
Packaging Packaging
Equipment Materials Technology
Segment Segment Segment Corporate Total
------- ------- ------- --------- -----
Three months ended
March 31, 2000:
Net sales $ 172,845 $ 42,841 $ 6,467 $ 222,153
Cost of sales 110,094 30,424 6,035 146,553
--------- --------- --------- --------- ---------
Gross profit 62,751 12,417 432 75,600
Operating expenses 29,804 6,681 4,417 $ 3,991 44,893
Amort. of goodwill
and intangibles -- 565 308 -- 873
--------- --------- --------- --------- ---------
Income (loss)
from operations $ 32,947 $ 5,171 $ (4,293) $ (3,991) $ 29,834
========= ========= ========= ========= =========
Six months ended
March 31, 2000:
Net Sales $ 305,376 $ 85,281 $ 11,345 402,002
Cost of goods sold 194,427 60,747 11,316 266,490
--------- --------- --------- --------- ---------
Gross profit 110,949 24,534 29 135,512
Operating expenses 58,095 12,793 8,349 $ 7,582 86,819
Amort. of goodwill
and intangibles -- 1,131 612 -- 1,743
--------- --------- --------- --------- ---------
Income (loss)
from operations $ 52,854 $ 10,610 $ (8,932) $ (7,582) $ 46,950
========= ========= ========= ========= =========
Segment Assets
at March 31, 2000 $ 270,385 $ 93,163 $ 44,651 $ 234,369 $ 642,568
========= ========= ========= ========= =========
8
9
Note 5 - LONG TERM DEBT
In December 2000, the Company entered into a new $60.0 million (reducing to
$40.0 million over a three year period) bank revolving credit facility. The
facility expires in December 2003. Borrowings are subject to compliance with
financial and other covenants set forth in the revolving credit documents.
Borrowings bear interest either at a Base Rate (defined as the higher of the
prime rate or the federal funds rate plus 1/2%) or, at a LIBOR Rate (defined as
LIBOR plus 1.0% to 2.0%, depending on the ratio of senior debt to earnings
before interest, taxes, depreciation and amortization). This credit facility is
guaranteed by certain of the Company's domestic subsidiaries and requires the
Company to maintain certain financial covenants including a leverage ratio, a
liquidity ratio and a minimum net worth. The credit facility also limits the
Company's ability to mortgage, pledge or dispose of a material portion of its
assets and imposes restrictions on the Company's investments and acquisitions.
The Company also has outstanding, $175.0 million of convertible subordinated
notes. The notes are general obligations of the Company and subordinated to all
senior debt. The notes bear interest at 4 3/4%, are convertible into the
Company's common stock at $22.8997 per share and mature on December 15, 2006.
There are no financial covenants associated with the notes and there are no
restrictions on paying dividends, incurring additional debt or issuing or
repurchasing the Company's securities. Interest on the notes will be paid on
June 15 and December 15 of each year. The Company may redeem the notes in whole
or in part at any time after December 18, 2002 at prices ranging from 102.714%
at December 19, 2002 to 100.0% at December 15, 2006.
Note 6 - ACQUISITIONS
In November 2000, the Company completed a tender offer for 100.0% of the
outstanding shares of Cerprobe Corporation ("Cerprobe") for $20 per share. The
total purchase price of Cerprobe, including transaction costs, the assumption of
acquisition related liabilities and debt repayment, was approximately $225.0
million, payable in cash. In December 2000 the Company purchased all the
outstanding shares of Probe Technology Corporation ("Probe Tech") for
approximately $65.0 million, including transaction costs and the assumption of
acquisition related liabilities, payable in cash. Both Cerprobe and Probe Tech
design and manufacture semiconductor test interconnect solutions. The
acquisitions have been recorded using the purchase method of accounting and
accordingly the purchase price has been allocated to the tangible and intangible
assets acquired and liabilities assumed on the basis of their fair values on the
acquisition dates. The Company has allocated a portion of the purchase price for
each acquisition to intangible assets valued using a discount rate of 25.0% for
Cerprobe and 18.0% for Probe Tech. The portion of the purchase prices allocated
to in-process R&D projects that did not have future alternative use and to which
technological
9
10
feasibility had not been established totaled $11.3 million for Cerprobe and $0.4
million for Probe Tech and were charged to expense as of the acquisition dates.
The purchase price allocation may change upon resolution of open matters
including purchase price adjustments and the final assessment of certain
contingencies. The Company received a waiver of a bank covenant under its then
existing bank revolving credit facility, which limited the amount the Company
could spend on acquisitions, in order to complete the Cerprobe and Probe Tech
acquisitions. The Company borrowed $55.0 million under its bank revolving credit
facility to partially fund the purchase of Probe Tech. The operations of these
two companies have been combined to create a test division, which is being
disclosed as a separate business segment for financial reporting purposes.
Unaudited pro forma operating results for the six months ended March 31, 2000
and March 31, 2001 and the three months ended March 31, 2000 assuming the
acquisitions of Cerprobe and Probe Tech were consummated on October 1, 1999
appear below. The operating results presented below for the three months ended
March 31, 2001 are actual results. The unaudited pro forma information is
presented for illustrative purposes only and is not necessarily indicative of
the operating results that would have occurred if the transaction had been
consummated at the date indicated, nor is it necessarily indicative of the
future operating results of the combined businesses.
Three Months Ended Six Months Ended
March 31, March 31,
2000 2001 2000(1) 2001
---- ---- ------- ----
Net sales $ 257,455 $ 150,539 $ 462,935 $ 333,346
Net income (loss) $ 16,554 $ (10,989) $ 12,554 $ (25,156)
Diluted net income
(loss) per share $ 0.31 $ (0.23) $ 0.26 $ (0.52)
(1) The results of Cerprobe for the six months ended March 31, 2000 included a
charge of $8.8 million for in-process R&D associated with its acquisition of OZ
Technologies, Inc.
The components of the purchase price allocation for the acquisitions of Cerprobe
and Probe Tech are as follows:
Cerprobe Probe Tech
-------- ----------
Current assets $ 44,223 $ 12,180
Property, plant, equipment and
other long term assets 27,241 8,948
Acquired intangibles 80,800 30,253
Acquired in-process research
and development 11,295 414
Goodwill 105,510 16,298
Less: Liabilities assumed (75,573) (3,432)
--------- ---------
Total $ 193,496 $ 64,661
========= =========
10
11
The goodwill and intangible assets resulting from the acquisitions are being
amortized on a straight-line basis over a 10-year period.
The Cerprobe and Probe Tech in-process R&D value was comprised of several
research and development projects that were scheduled to reach completion in
2001 and 2002. At the acquisition date, research and development projects ranged
in completion from 10% to 90% complete.
In October 1998, Cerprobe filed an action against the former President, Director
and shareholder of Silicon Valley Test & Repair, Inc. (a company acquired by
Cerprobe Corporation in January 1997) seeking to rescind the acquisition. The
defendant filed counterclaims against Cerprobe. The claims filed by Cerprobe and
the counterclaims filed against Cerprobe were ultimately dismissed through
summary judgment motions and a stipulation of the parties. Opposing counsel has
filed a Motion for Award of Attorney's fees, totaling about $295,000, which the
Company intends to vigorously oppose.
Note 7 - INVESTMENT IN FLIP CHIP TECHNOLOGIES, LLC
In March 2001, the Company purchased all outstanding equity units of Flip Chip
Technologies LLC ("FCT"), not previously owned, from its former joint venture
partner, Delco Electronics Corporation, for $5.0 million in cash plus future
payments of up to $3.0 million depending on future operating revenues of FCT
over the next four fiscal years. The $3.0 million of contingent payments which
are based upon future revenues have not been recorded in the Company's financial
statements at March 31, 2001.
Note 8 - RESIZING AND ACQUISITION RESTRUCTURING
In the quarter ended March 31, 2001 the Company announced a 7.0% reduction in
its workforce. As a result, the Company recorded a resizing charge for severance
of $1.7 million for the elimination of 296 positions. In the three months ended
March 31, 2001, the Company also started integrating the operations of Cerprobe
and Probe Tech which will result in vacating several of their existing
facilities. The Company recorded an increase in goodwill of $0.6 million
associated with this integration program.
The resizing costs and acquisition restructuring reserves are included in
accrued liabilities. The components of these resizing and restructuring reserves
at March 31, 2001 were as follows:
Severance Lease Costs Other Total
--------- ----------- ----- -----
Resizing costs $1,709 $ -- $ -- $1,709
Acquisition Restructuring 84 461 101 646
------ ------ ------ ------
Balance at March 31, 2001 $1,793 $ 461 $ 101 $2,355
====== ====== ====== ======
Note 9 - OTHER INCOME
The Company recorded other income of $8.0 million in the three months ended
March 31, 2001 as the result of a cash settlement of an insurance claim
associated with a fire in our expendable tools facility.
11
12
Note 10 - COMPREHENSIVE INCOME (LOSS):
For the three and six month periods ended March 31, 2000 and 2001, the
components of total comprehensive income (loss) are as follows:
Three months ended Six months ended
March 31, March 31,
2000 2001 2000 2001
---- ---- ---- ----
Net income (loss) $ 22,022 $(10,989) $ 34,823 $(22,675)
-------- -------- -------- --------
Foreign currency translation
adjustment (672) (1,904) (455) (2,971)
Unrealized gain (loss)
on investments, net of taxes (39) 163 (35) 158
-------- -------- -------- --------
Other comprehensive loss (711) (1,741) (490) (2,813)
-------- -------- -------- --------
Comprehensive income (loss) $ 21,311 $(12,730) $ 34,333 $(25,488)
======== ======== ======== ========
Note 11 - ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 138,
is effective for fiscal years beginning after June 15, 2000. The standard
requires that all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivatives are recorded in earnings or
other comprehensive income, based on whether the instrument is designated as
part of a hedge transaction and, if so, the type of hedge transaction. The
Company adopted this statement in the first quarter of 2001. There was no
cumulative effect of adoption. The impact of SFAS No. 133 on the Company's
future results will be dependent upon the fair values of the Company's
derivatives and related financial instruments.
Note 12 - SUBSEQUENT EVENT - Accounts Receivable Securitization
In April 2001, the Company entered into a receivable securitization program in
which all domestic accounts receivable were transferred to KSI Funding
Corporation, a bankruptcy remote special purpose corporation and a wholly owned
subsidiary of the Company. Under the facility KSI Funding Corporation can sell
up to a $40.0 million interest in all domestic receivables of the company. This
facility was structured as a revolving securitization, whereby an interest in
additional accounts receivable can be sold as collections reduce the previously
sold interest. KSI Funding Corporation has not yet sold an interest in any
accounts receivable under this new facility.
12
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
In addition to historical information, this report contains statements relating
to future events or our future results. These statements are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Act of 1934, as amended (the "Exchange Act"), and
are subject to the Safe Harbor provisions created by statute. Such
forward-looking statements include, but are not limited to, statements that
relate to our future revenue, product development, demand forecasts,
competitiveness, gross margins, operating expenses and benefits expected as a
result of:
- - The projected growth rates in the overall semiconductor industry, the
semiconductor assembly equipment market and the market for
semiconductor packaging materials;
- - the anticipated development, production and licensing of our advanced
packaging technology;
- - the successful integration of recent acquisitions into our company's
operating structure and expected growth rates for these companies;
- - the projected continuing demand for wire bonders; and
- - the anticipated growing importance of the flip chip assembly process in
high-end market segments.
Generally words such as "may," "will," "should," "could," "anticipate,"
"expect," "intend," "estimate," "plan," "continue," and "believe," or the
negative of or other variation on these and other similar expressions identify
forward-looking statements. These forward-looking statements are made only as of
the date of this report. We do not undertake to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise.
Forward-looking statements are based on current expectations and involve risks
and uncertainties and our future results could differ significantly from those
expressed or implied by our forward-looking statements. These risks and
uncertainties include, without limitation, those described below and under the
heading "Risk Factors" within this section and in our reports and registration
statements filed from time to time with the Securities and Exchange Commission.
This discussion should be read in conjunction with the Condensed Consolidated
Financial Statements and Notes on pages 3 to 12 of this Form 10-Q for a full
understanding of our financial position and results of operations for the three
and six month period ended March 31, 2001.
INTRODUCTION
We design, manufacture and market capital equipment, packaging materials and
test interconnect solutions and provide flip chip bumping services for sale to
companies that manufacture and assemble semiconductor devices. We also service,
maintain, repair and upgrade assembly equipment and license our flip chip
bumping process technology. Our operating results primarily depend upon the
capital
13
14
and operating expenditures of semiconductor manufacturers and subcontract
assemblers worldwide which, in turn, depend on the current and anticipated
market demand for semiconductors and products using semiconductors. The
semiconductor industry historically has been highly volatile and has experienced
periodic downturns and upturns which have had severe effects on the
semiconductor industry's demand for capital equipment, including the assembly
equipment we manufacture and market and, to a lesser extent, the packaging
materials and test interconnect solutions we sell. We do not consider our
business to be seasonal in nature.
Due to the slowing economy and a worldwide decline in demand for semiconductors
resulting in excess capacity in the semiconductor industry and a severe
contraction in demand for semiconductor manufacturing equipment, our net sales
in the first and second quarters of fiscal 2001 were below those in the same
periods in the prior year. We expect our sales in the third quarter of fiscal
2001 to be lower than the second quarter's net sales. In reaction to the lower
sales volume, in February 2001, we announced a 7.0% reduction in our workforce.
In the first quarter of fiscal 2001, we took a step forward in our strategy to
offer the most complete, capable and cost-effective interconnect solutions by
acquiring 100.0% of the stock of Cerprobe Corporation (referred to as Cerprobe)
and 100.0% of the stock of Probe Technology Corporation (referred to as Probe
Tech). Both Cerprobe and Probe Tech design and manufacture semiconductor test
interconnect solutions. These acquisitions have been recorded using the purchase
method of accounting and have been consolidated with the Company's operating
results beginning on the date of acquisition. These two companies comprise our
test segment.
In March 2001 we purchased the 19.6% equity share of Flip Chip Technologies, LLC
(referred to as Flip Chip) previously owned by Delco Electronics Corporation for
$5.0 million in cash, with potential future payments of up to $3.0 million
depending on the future operating revenues of Flip Chip. We now own 100.0% of
Flip Chip.
RESULTS OF OPERATIONS
Sales
Net sales for the three and six months ended March 31, 2001 were 32.2% and
23.9%, respectively, lower than the comparable periods in the prior year due to
the slowing economy and a worldwide decline in demand for semiconductors. The
lower sales for the three and six months ended March 31, 2001 were primarily the
result of lower unit sales of automatic ball bonders which were 85.9% and 73.5%,
respectively, below the same period in the prior year. This was partially offset
by a higher average selling price for the automatic ball bonders, reflecting
sales of our newly introduced Models 8028S and 8028PPS automatic ball bonders
which offer increased productivity and technical performance. Packaging
materials sales were 6.7% lower than
14
15
the prior year for the three months ended March 31, 2001 but 3.4% above the
prior year for the six months ended March 31, 2001. The lower packaging material
sales in the three months ended March 31, 2001 was due to slowing demand for
gold wire and expendable tools. Sales of our advanced packaging segment for the
three and six months ended March 31, 2001 were 45.0% and 55.7%, respectively,
higher than the prior year due to higher bumping service revenue and license
income at Flip Chip. We also recorded sales at our test division for the three
months ended March 31, 2001 of $42.6 million and $56.9 million for the six
months (from the date of acquisition through March 31, 2001) ended March 31,
2001.
The geographic breakdown of net sales was as follows:
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
2000 2001 2000 2001
---- ---- ---- ----
North America ... 12% 45% 12% 41%
Asia Pacific .... 79% 39% 77% 45%
Europe .......... 5% 13% 6% 10%
Japan ........... 4% 3% 5% 4%
The lower percentage of shipments to the Asia/Pacific region was primarily due
to the majority of test division sales going to U.S. based customers and a lower
proportionate share of shipments (primarily ball bonders) to Asian based
subcontract assemblers.
Gross Profit
Gross profit, for the three and six months ended March 31, 2001, was $43.1
million and $97.2 million, respectively, compared to $75.6 million and $135.5
million, respectively, in the prior year. The lower gross profit in both the
three and six months ended March 31, 2001 was due primarily to the lower unit
sales of automatic ball bonders. Gross profit in the first and second quarters
of fiscal 2001 was also adversely effected by inventory write-offs of $1.4
million and $6.5 million, respectively, for excess and obsolete equipment
inventory. Gross margin (gross profit as a percentage of sales) for the three
and six months ended March 31, 2001 was 28.6% and 31.8%, respectively, compared
to 34.0% and 33.7%, respectively, in the prior year. Excluding the inventory
write-offs, gross margin in the three and six months ended March 31, 2001 was
32.9% and 34.4%, respectively. The Test division, which did not exist in the
prior year, recorded gross profit of $14.2 million for the three months ended
March 31, 2001 and $17.7 million for the six months. Test division gross profit
in both the three and six months ended March 31, 2001 was reduced by the
write-off of acquisition related inventory "step-up" charges of $2.4 million and
$4.2 million, respectively.
Selling, General and Administrative
15
16
Selling, general and administrative ("SG&A") expenses increased $7.1 million or
21.9% in the three months ended March 31, 2001 and $12.6 million or 20.3% for
the six months ended March 31, 2001 from the comparable periods in the prior
year. The entire increase in SG&A expense in the three and six months ended
March 31, 2001 resulted from SG&A costs of $9.8 and $13.2 million, respectively,
associated with the Test division.
Research and Development
Because technological change occurs rapidly in the semiconductor industry, we
devote substantial resources to our research and development ("R&D") programs to
maintain our technological leadership. This commitment to new product
introductions and product development resulted in an increase in R&D expense of
$6.1 million for the three months and $11.6 million for the six months ended
March 31, 2001 from the comparable periods of the prior year. The higher R&D
spending was reflected in all business segments. The increased R&D expenses also
included $1.6 million in the three months and $2.2 million in the six months
(from the date of acquisition through March 31, 2001) ended March 31, 2001
associated with the Test division.
Resizing Costs
In the quarter ended March 31, 2001 we announced a 7.0% reduction in our
workforce. As a result, we recorded a resizing charge for severance of $1.7
million for the elimination of 296 positions. In the three months ended March
31, 2001, we also started integrating the operations of Cerprobe and Probe Tech
which will result in vacating several of their existing facilities. We recorded
an increase in goodwill of $0.6 million associated with this integration
program.
We included the resizing costs and acquisition restructuring reserves in accrued
liabilities. The components of these resizing and restructuring reserves at
March 31, 2001 were as follows:
Severance Lease Costs Other Total
--------- ----------- ----- -----
Resizing costs $1,709 $ -- $ -- $1,709
Acquisition Restructuring 84 461 101 646
------ ------ ------ ------
Balance at March 31, 2001 $1,793 $ 461 $ 101 $2,355
====== ====== ====== ======
Acquisition Costs
In the first quarter of fiscal 2001, we recorded a charge of $11.7 million for
in-process R&D associated with the acquisitions of Cerprobe and Probe Tech
representing the appraised value of products still in the development stage that
did not have a future alternative use and have not reached technological
feasibility. In the three and six months ended March 31, 2001, we also recorded
amortization expense of $5.8 million and $7.5 million, respectively, associated
with the goodwill and intangible assets resulting from the purchase of Cerprobe
and Probe Tech.
16
17
Income (loss) from Operations
Loss from operations for the three and six months ended March 31, 2001 was $23.5
million and $36.6 million, respectively, compared to income from operations of
$29.8 million and $47.0 million in the comparable periods of the prior year. The
operating loss in both the three and six month periods ended March 31, 2001 was
due primarily to the lower sales and associated gross profit, additional
expenses associated with the acquisitions, higher R&D expenses, inventory
write-offs and resizing costs.
Interest
Due to the purchases of Cerprobe and Probe Tech for cash we increased our
borrowings and reduced our investment portfolio in the latter portion of the
first quarter. This resulted in higher interest expense in the both the three
and six months ended March 31, 2001 and lower interest income in the three
months ended March 31, 2001.
Other Income
We recorded other income of $8.0 million in the three months ended March 31,
2001 as the result of a cash settlement of an insurance claim associated with a
fire in our expendable tools facility.
Equity in Loss of Joint Ventures
In the three and six months ended March 31, 2000 we recorded losses of $0.4
million and $0.7 million, respectively, on our equity interest in Advanced
Polymer Solutions, LLC ("APS"), a joint venture with Polyset Company, Inc. APS.
The joint venture was dissolved in September 2000 and operations ceased at that
time.
Tax Expense
Our effective tax rate for fiscal 2001 is expected to approximate 35.5%,
compared to 28.0% in the prior year. The higher expected tax rate for fiscal
2001 is due to receiving tax benefits from expected losses from United Stated
based operations at a rate higher than the tax rate on expected income generated
from foreign operations. In the six months ended March 31, 2001 we did not
record an income tax benefit on the $11.7 million charge for in-process research
and development.
Minority Interest in Net Loss of Subsidiary
In the three and six months ended March 31, 2001, we recorded minority interest
of $0.1 million an $0.3 million, respectively, primarily reflecting our joint
venture partner's share of the loss incurred at Flip Chip prior to our purchase
of all outstanding Flip Chip equity units.
17
18
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 138,
is effective for fiscal years beginning after June 15, 2000. The standard
requires that all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivatives are recorded in earnings or
other comprehensive income, based on whether the instrument is designated as
part of a hedge transaction and, if so, the type of hedge transaction. We
adopted this statement in the first quarter of 2001. There was no cumulative
effect of adoption. The impact of SFAS No. 133 on our future results will be
dependent upon the fair values of our derivatives and related financial
instruments and could result in increased volatility.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". The SAB summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. We are required to adopt SAB 101 in the fourth quarter of fiscal
year 2001. Accordingly, any shipments previously reported as revenue, including
revenue reported for the first three quarters of fiscal 2001, which do not meet
SAB 101's guidance will be recorded as revenue in future periods. Changes in our
revenue recognition policy resulting from the guidelines of SAB 101 would not
involve the restatement of prior fiscal year statements, but would, to the
extent applicable, be reported as a change in accounting principle in the fiscal
year ended September 30, 2001, with the appropriate restatement of interim
periods as required by SFAS No. 3 "Reporting Accounting Changes in Interim
Financial Statements." We are currently assessing the full impact of SAB 101 on
our reported financial results. Based on our analysis to-date, we expect when
SAB 101 is adopted to report a cumulative adjustment to net income of between
$10.0 million and $15.0 million in fiscal 2001 for all prior annual periods
based on a revenue deferral ranging between $20.0 million and $30.0 million. We
also expect revenues in the first quarter of fiscal 2001 will be lower than
reported in this report by $5.0 million to $10.0 million and revenues in the
second quarter of fiscal 2001 will be lower than reported in this report by $2.0
million to $4.0 million as a result of adoption of SAB 101. We believe that SAB
101 will not affect the underlying strength or weakness of our business
operations as measured by the dollar value of our product shipments and cash
flows.
In September 2000, the EITF reached a final consensus on issue EITF No. 00-10,
"Accounting for Shipping and Handling Revenues and Costs." The Task Force
concluded that amounts billed to customers related to shipping and handling
should be classified as revenue. We currently classify shipping and handling
revenue as a reduction of cost of products sold. Further, the Task Force stated
that shipping and handling cost related to this revenue should either be
recorded in costs of goods sold or the Company should disclose where these costs
18
19
are recorded and the amount of these costs. We must adopt this pronouncement in
the fourth quarter of fiscal 2001. We do not believe adoption of this
pronouncement will have a material impact on our financial position or results
of operations.
In March 2001, the Emerging Issues Task Force discussed Issue No. 00-21,
"Accounting for Multiple Element Revenue Arrangements" that addresses the
accounting requirements for delivery or performance of multiple products,
services, and/or rights to use assets when performance may occur at different
points in time or over different periods of time. We do not believe that this
pronouncement will have any impact on our financial position or results of
operations.
In March 2001, the Emerging Issues Task Force reached a final consensus on Issue
No. 00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based
Sales Incentive Offers, and Offers for Free Products or Services to be Delivered
in the Future" that addresses, among other issues, the accounting requirements
of a vendor for an offer to a customer to rebate or refund a specified amount of
cash that is redeemable only if the customer completes a specified cumulative
level of revenue transactions or remains a customer for a specified period of
time. This Issue was effective for quarters ending after February 15, 2001. The
adoption of this Issue did not have any impact on our financial position or
results of operations.
LIQUIDITY AND CAPITAL RESOURCES:
As of March 31, 2001, cash, cash equivalents and investments totaled $112.2
million compared to $316.6 million at September 30, 2000. Additionally, we have
a $60.0 million (reducing to $40.0 million over a three year period) bank
revolving credit facility. The bank facility expires in December 2003. The
borrowings are subject to our compliance with financial and other covenants set
forth in the revolving credit documents. At March 31, 2001, we had $58.0 million
of cash borrowings outstanding under the facility and had utilized $1.1 million
of availability under that credit facility to support letters of credit.
Borrowings bear interest either at a Base Rate (defined as the prime rate or the
federal funds rate plus 1/2%) or, at a LIBOR Rate (defined as LIBOR plus 1.0% to
2.0%, depending on our ratio of senior debt to earnings before interest, taxes,
depreciation and amortization).
Cash provided by operating activities totaled $64.0 million during the six
months ended March 31, 2001 compared to $29.0 million during the comparable
period in the prior year. The cash provided by operation activities was due
primarily to the collection of accounts receivable.
During the six months ended March 31, 2001, we invested approximately $38.5
million in property and equipment compared to $22.1 million in the comparable
period of the prior year. The capital spending in the six months ended March 31,
2001 was primarily for information technology to develop corporate-wide
e-business capabilities, increased capacity at Flip Chip, a new wire
manufacturing facility in Taiwan and continued expansion of the manufacturing
capabilities in our existing packaging
19
20
materials facilities. Due to current business conditions we have reduced our
planned capital expenditures for the remainder of fiscal 2001 from previously
planned levels and expect total capital expenditures in the second half of
fiscal 2001 to approximate $15.0 million.
In the first quarter of fiscal 2001, we purchased two companies that design and
manufacture semiconductor test interconnect solutions, for cash. Through March
31, 2001, we had paid $216.4 million for Cerprobe and $62.5 million for Probe
Tech, net of cash acquired.
In April 2001, we entered into a receivable securitization program in which we
transferred all domestic account receivables to KSI Funding Corporation, a
bankruptcy remote special purpose corporation and, a wholly owned subsidiary of
the Company. Under the facility KSI Funding Corporation can sell up to a $40.0
million interest in all of our domestic receivables. This facility was
structured as a revolving securitization, whereby an interest in additional
account receivables can be sold as collections reduce the previously sold
interest.
We believe that anticipated cash flows from operations, working capital and
amounts available under our revolving credit facility and accounts receivable
securitization program will be sufficient to meet our liquidity and capital
requirements for at least the next 12 months. However, we may seek, as we
believe appropriate, 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:
OUR QUARTERLY OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND MAY CONTINUE TO DO
SO IN THE FUTURE
In the past, our quarterly operating results have fluctuated significantly.
Although these fluctuations are partly due to the volatile nature of the
semiconductor industry, they also reflect the impact of other factors, some of
which are outside of our control.
Some of the factors that could cause our revenues and/or operating margins to
fluctuate significantly from period to period are:
- the mix of products that we sell because, for example:
- packaging materials generally have lower margins than
assembly equipment and test interconnect solutions,
- some lines of equipment are more profitable than
others, and
- some sales arrangements have higher margins than
others;
20
21
- the volume and timing of orders for our products and any order
postponements and cancellations by our customers;
- adverse changes in our pricing, or that of our competitors;
- higher than anticipated costs of development or production of
new equipment models;
- the availability and cost of key components for our products;
- market acceptance of our new products and upgraded versions of
our products;
- our announcement of, or perception by others that we will
introduce, new or upgraded products, which could delay
customers from purchasing our products;
- the timing of acquisitions; and
- our competitors' introduction of new products.
Many of our expenses, such as research and development and selling, general and
administrative expenses, do not vary directly with our net sales. As a result, a
decline in our net sales would adversely affect our operating results. In
addition, if we were to incur additional expenses in a quarter in which we did
not experience comparable increased net sales, our operating results would
decline. Factors that could cause our expenses to fluctuate from period to
period include:
- the timing and extent of our research and development efforts;
- severance, resizing and other costs of relocating facilities
in market downturns; and
- inventory write-offs due to obsolescence.
Because our revenues and operating results are volatile and difficult to
predict, we believe that period-to-period comparisons of our operating results
are not a good indication of our future performance.
THE SEMICONDUCTOR INDUSTRY AS A WHOLE IS VOLATILE, AS ARE OUR FINANCIAL RESULTS
Our operating results are significantly affected by the capital expenditures of
semiconductor manufacturers and assemblers worldwide. Expenditures by
semiconductor manufacturers and assemblers depend on the current and anticipated
market demand for semiconductors and products that use semiconductors, such as
personal computers, telecommunications, consumer electronics and automotive
goods. Any significant downturn in the market for semiconductor devices or in
general economic conditions would likely reduce demand for our products and
adversely affect our business, financial condition and operating results.
Historically, the semiconductor industry has been volatile with sharp periodic
downturns and slowdowns. These downturns have been characterized by, among other
things, diminished product demand, excess production capacity and accelerated
erosion of selling prices. This has severely and negatively affected the
industry's demand for capital equipment, including the assembly equipment that
we manufacture and market and, to a lesser extent, the packaging materials and
test interconnect solutions that we sell. These downturns and slowdowns have
21
22
adversely affected our operating results. Downturns in the future could
similarly adversely affect our business, financial condition and operating
results.
THE INTEGRATION OF CERPROBE AND PROBE TECH INTO OUR COMPANY'S OPERATING
STRUCTURE AND EXPECTED GROWTH RATES FOR THESE COMPANIES MAY NOT BE REALIZED AND
OUR EXPECTED BENEFITS MAY NOT OCCUR
In November 2000 we acquired the stock of Cerprobe Corporation for approximately
$225.0 million and in December 2000 we acquired the stock of Probe Tech for
approximately $65.0 million. Cerprobe and Probe Tech design and manufacture
semiconductor test interconnect solutions. We have invested a significant amount
of cash to acquire these companies and will invest a significant amount of
management time and effort to integrate them into the Company's operating
structure, however, if we are unable to integrate them successfully or the
expected growth rates for these companies do not occur our business, financial
condition and operating results could be materially affected.
OUR BUSINESS DEPENDS ON ATTRACTING AND RETAINING MANAGEMENT, MARKETING AND
TECHNICAL EMPLOYEES WHO ARE IN GREAT DEMAND
As is the case with all technology companies, our future success depends on our
ability to hire and retain qualified management, marketing and technical
employees. Competition is intense in personnel recruiting in the semiconductor
and semiconductor equipment industries, particularly with respect to some
engineering disciplines. In particular, we have experienced periodic shortages
of software engineers. If we are unable to continue to attract and retain the
technical and managerial personnel we require, our business, financial condition
and operating results could be adversely affected.
WE MAY NOT BE ABLE TO RAPIDLY DEVELOP AND MANUFACTURE NEW AND ENHANCED PRODUCTS
REQUIRED TO MAINTAIN OR EXPAND OUR BUSINESS
We believe that our continued success will depend on our ability to continuously
develop and manufacture or acquire new products and product enhancements on a
timely and cost-effective basis. We also must introduce these products and
product enhancements into the market in response to customers' demands for
higher performance assembly equipment and for test interconnect solutions
customized to address technological advances in IC and capital equipment
designs. Our competitors may develop enhancements to or future generations of
competitive products that will offer superior performance, features and lower
prices that may render our products noncompetitive. We may not be able to
develop and introduce products incorporating new technologies in a timely manner
or at a price that will satisfy future customers' needs or achieve market
acceptance.
WE MAY NOT BE ABLE TO ACCURATELY FORECAST DEMAND FOR OUR PRODUCT LINES
We typically operate our business with a relatively short backlog and order
supplies and otherwise plan production based on internal forecasts of demand.
Due to these factors, we have in the past, and may again in the future, fail to
accurately forecast demand, in terms of both volume and configuration for either
our current or next-generation wire bonders. This has led to and may in the
future lead to delays in product shipments or, alternatively, an increased risk
of inventory obsolescence.
22
23
If we fail to accurately forecast demand for our products, our business,
financial condition and operating results could be materially and adversely
affected.
ADVANCED PACKAGING TECHNOLOGIES OTHER THAN WIRE BONDING MAY RENDER SOME OF OUR
PRODUCTS OBSOLETE AND OUR STRATEGY FOR PURSUING THESE OTHER TECHNOLOGIES MAY BE
COSTLY AND INEFFECTIVE
Advanced packaging technologies have emerged that may improve device performance
or reduce the size of an integrated circuit or IC package, as compared to
traditional die and wire bonding. These technologies include flip chip, chip
scale packaging and tape automated bonding. In general, these advanced
technologies eliminate the need for wires to establish the electrical connection
between a die and its package. For some devises, these advanced technologies
have largely replaced wire bonding. However, today most ICs still employ die and
wire bonding technology, and the possible extent, rate and timing of change is
difficult, if not impossible, to predict. In fact, wire bonding has proved more
durable than we originally anticipated, largely because of its reliability and
cost. However, we cannot assure you that the semiconductor industry will not, in
the future, shift a significant part of its volume into advanced packaging
technologies, such as those discussed above. Presently, Intel, Motorola, IBM and
Advanced Micro Devices, for example, have developed flip chip technologies for
internal use, and a number of other companies are also increasing their
investments in advanced packaging technologies. If a significant shift to
advanced technologies were to occur, demand for our wire bonders and related
packaging materials would diminish.
One component of our strategy is to develop the capacity to use advanced
technologies to allow us to compete in those portions of the market that
currently use these advanced technologies and to prepare for any eventual
decline in the use of wire bonding technology. There are a number of risks
associated with our strategy to diversify into new technologies:
- The technologies that we have invested in represent only some
of the advanced technologies that may one day supercede wire
bonding;
- Other companies are developing similar or alternative advanced
technologies;
- Wire bonding may continue as the dominant technology for
longer than we anticipate;
- The cost of developing advanced technologies may be
significantly greater than we expect; and
- We may not be able to develop the necessary technical,
research, managerial and other related skills to develop,
produce, market and support these advanced technologies.
As a result of these risks, we cannot assure you that any of our attempts to
develop alternative technologies will be profitable or that we will be able to
realize the benefits that we anticipate from them.
A DECLINE IN DEMAND FOR ANY OF OUR PRODUCTS COULD CAUSE OUR REVENUES TO DECLINE
SIGNIFICANTLY
Historically, our wire bonders have comprised at least 55.0% of our net sales.
If demand for, or pricing of, our wire bonders declines because
23
24
our competitors introduce superior or lower cost systems, the semiconductor
industry changes or because of other occurrences beyond our control, our
business, financial condition and operating results would be materially and
adversely affected.
BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR NEARLY ALL OUR SALES, OUR
REVENUES COULD DECLINE IF WE LOSE ANY SIGNIFICANT CUSTOMER
The semiconductor manufacturing industry is highly concentrated, with a
relatively small number of large semiconductor manufacturers and subcontract
assemblers purchasing a substantial portion of semiconductor assembly equipment,
packaging materials and test interconnect solutions.
We expect that sales of our products to a limited number of customers will
continue to account for a high percentage of our net sales for the foreseeable
future. If we lose orders from a significant customer, or if a significant
customer reduces its orders substantially, these losses or reductions will
adversely affect our business, financial condition and operating results.
WE DEPEND ON A SMALL NUMBER OF SUPPLIERS FOR MATERIALS AND, IF OUR SUPPLIERS DO
NOT DELIVER THEIR PRODUCTS TO US, WE MAY BE UNABLE TO DELIVER OUR PRODUCTS TO
OUR CUSTOMERS
Our products are complex and require materials, components and subassemblies of
an exceptionally high degree of reliability, accuracy and performance. We rely
on subcontractors to manufacture many of the components and subassemblies for
our products and we rely on sole source suppliers for some material components.
Our reliance involves a number of significant risks, including:
- - loss of control over the manufacturing process;
- - changes in our manufacturing processes, dictated by changes in the
market, that have delayed our shipments;
- - our inadvertent use of defective or contaminated materials;
- - the relatively small operations and limited manufacturing resources of
some of our contractors and suppliers, which may limit their ability to
manufacture and sell subassemblies, components or parts in the volumes
we require and at quality levels and prices we can accept;
- - reliability and quality problems we experience with certain key
subassemblies provided by single source suppliers; and
- - delays in the delivery of subassemblies, which, in turn, have caused
delays in some of our shipments.
If we are unable to deliver products to our customers on time for these or any
other reasons, or if we do not maintain acceptable product quality or
reliability in the future, our business, financial condition and operating
results would be materially and adversely affected.
WE ARE EXPANDING AND DIVERSIFYING OUR OPERATIONS, AND IF WE FAIL TO MANAGE OUR
EXPANDING AND MORE DIVERSE OPERATIONS SUCCESSFULLY, OUR BUSINESS AND FINANCIAL
RESULTS MAY BE MATERIALLY AND ADVERSELY AFFECTED
In recent years, we have broadened our product offerings to include
significantly more packaging materials. Although our strategy is to
24
25
diversify our products and services, we may not be able to develop, acquire,
introduce or market new products in a timely or cost-effective manner and the
market may not accept any new or improved products we develop, acquire,
introduce or market.
Our diversification into new lines of business and our expansion through
acquisitions and alliances has increased, and is expected to continue to
increase, demand on our management, financial resources and information and
internal control systems. Our success depends in significant part on our ability
to manage and integrate acquisitions, joint ventures and other alliances and to
continue to implement, improve and expand our systems, procedures and controls.
If we fail to do this at a pace consistent with the development of our business,
our business, financial condition and operating results would be materially and
adversely affected.
As we seek to expand our operations, we expect to encounter a number of risks,
which will include:
- - risks associated with hiring additional management and other critical
personnel;
- - risks associated with adding equipment and capacity; and
- - risks associated with increasing the scope, geographic diversity and
complexity of our operations.
In addition, sales and servicing of packaging materials, test interconnect
solutions and advanced technologies require different organizational and
managerial skills than sales of traditional wire bonding technology. We cannot
assure you that we will be able to develop the necessary skills to successfully
produce and market these different products.
WE MAY BE UNABLE TO CONTINUE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE
SEMICONDUCTOR EQUIPMENT AND PACKAGING MATERIALS INDUSTRIES
The semiconductor equipment, packaging materials and test interconnect solutions
industries are intensely competitive. Significant competitive factors in the
semiconductor equipment and test interconnect solutions markets include
performance, quality, customer support and price. Competitive factors in the
semiconductor packaging materials industry include price, delivery and quality.
In each of the markets we serve, we face competition and the threat of
competition from established competitors and potential new entrants, some of
which may have greater financial, engineering, manufacturing and marketing
resources than we have. Some of these competitors are Japanese or Korean
companies that have had and may continue to have an advantage over us in
supplying products to local customers because many of these customers appear to
prefer to purchase from local suppliers, without regard to other considerations.
We expect our competitors to improve their current products' performance, and to
introduce new products with improved price and performance characteristics. New
product introductions by our competitors or by new market entrants could hurt
our sales. If a particular semiconductor manufacturer or subcontract assembler
selects
25
26
a competitor's product for a particular assembly operation, we may not be able
to sell a product to that manufacturer or assembler for a significant period of
time because manufacturers and assemblers sometimes develop lasting relations
with suppliers, and products in our industry often go years without requiring
replacement. In addition, we may have to lower our prices in response to
price-cuts by our competitors, which could materially and adversely affect our
business, financial condition and operating results. We cannot assure you that
we will be able to continue to compete in these or other areas in the future.
WE SELL MOST OF OUR PRODUCTS TO CUSTOMERS LOCATED OUTSIDE OF THE U.S. AND WE
HAVE SUBSTANTIAL MANUFACTURING OPERATIONS LOCATED OUTSIDE OF THE U.S., BOTH OF
WHICH SUBJECT US TO RISKS FROM CHANGES IN TRADE REGULATIONS, CURRENCY
FLUCTUATIONS, POLITICAL INSTABILITY AND WAR
Approximately 80.0% of our net sales for fiscal 1998, 83.0% of our net sales for
fiscal 1999 and 91.0% of our net sales for fiscal 2000 were attributable to
sales to customers for delivery outside of the United States. We expect our
sales outside of the United States to continue to represent a substantial
portion of our future revenues. Our future performance will depend, in
significant part, on our ability to continue to compete in foreign markets,
particularly in Asia. Asian economies have been highly volatile, resulting in
significant fluctuation in local currencies, and political and economic
instability. These conditions may continue or worsen, which could materially and
adversely affect our business, financial condition and operating results. In
addition, we rely on non-U.S. suppliers for materials and components used in the
equipment that we sell. We also maintain substantial manufacturing operations in
countries other than the United States, including operations in Israel and
Singapore. As a result, a major portion of our business is subject to the risks
associated with international commerce such as, risks of war and civil
disturbances or other events that may limit or disrupt markets; expropriation of
our foreign assets; longer payment cycles in foreign markets; international
exchange restrictions; the difficulties of staffing and managing dispersed
international operations; tariff and currency fluctuations; changing political
conditions; foreign governments' monetary policies; and less protective foreign
intellectual property laws.
Because most of our foreign sales are denominated in United States dollars, an
increase in value of the United States dollar against foreign currencies,
particularly the Japanese yen, will make our products more expensive than those
offered by some of our foreign competitors. Our ability to compete overseas in
the future could be materially and adversely affected by a strengthening of the
United States dollar against foreign currencies.
The ability of our international operations to prosper also will depend, in
part, on a continuation of current trade relations between the United States and
foreign countries in which our customers operate and in which our subcontractors
have assembly operations. A change toward more protectionist trade legislation
in either the United States or foreign countries in which we do business, such
as a change in the current tariff structures, export compliance or other trade
policies, could adversely affect our ability to sell our products in foreign
markets.
26
27
OUR SUCCESS DEPENDS IN PART ON OUR INTELLECTUAL PROPERTY, WHICH WE MAY BE UNABLE
TO PROTECT
Our success depends in part on our proprietary technology. To protect this
technology, we rely principally on contractual restrictions (such as
nondisclosure and confidentiality agreements) in our agreements with employees,
vendors, consultants and customers and on the common law of trade secrets and
proprietary "know-how." We secondarily rely, in some cases, on patent and
copyright protection, which may become more important to us as we expand our
investment in advanced packaging technologies. We may not be successful in
protecting our technology for a number of reasons, including:
- - Our competitors may independently develop technology that is similar to
or better than ours;
- - Employees, vendors, consultants and customers may not abide by their
contractual agreements, and the cost of enforcing those agreements may
be prohibitive, or those agreements may prove to be unenforceable or
more limited than we anticipate;
- - Foreign intellectual property laws may not adequately protect our
intellectual property rights; and
- - Our patent and copyright claims may not be sufficiently broad to
effectively protect our technology; patents or copyrights may be
challenged, invalidated or circumvented; and we may otherwise be unable
to obtain adequate protection for our technology.
In addition, our partners in joint ventures and alliances may also have rights
to technology we develop through those joint ventures and alliances. If we are
unable to protect our technology, we could weaken our competitive position or
face significant expense to protect or enforce our intellectual property rights.
THIRD PARTIES MAY CLAIM WE ARE INFRINGING ON THEIR INTELLECTUAL PROPERTY, WHICH
COULD CAUSE US TO INCUR SIGNIFICANT LITIGATION COSTS OR OTHER EXPENSES, OR
PREVENT US FROM SELLING SOME OF OUR PRODUCTS
The semiconductor industry is characterized by rapid technological change, with
frequent introductions of new products and technologies. As a result, industry
participants often develop products and features similar to those introduced by
others, increasing the risk that their products and processes may give rise to
claims that they infringe on the intellectual property of others. We may
unknowingly infringe on the intellectual property rights of others and incur
significant liability for that infringement. If we are found to infringe on the
intellectual property rights of others, we could be enjoined from continuing to
manufacture, market or use the affected product, or be required to obtain a
license to continue manufacturing or using the affected product. A license could
be very expensive to obtain or may not be available at all. Similarly, changing
our products or processes to avoid infringing the rights of others may be costly
or impractical.
Occasionally, third parties assert that we are, or may be, infringing on or
misappropriating their intellectual property rights. In these cases, we will
defend against claims or negotiate licenses where we consider these actions
appropriate. Intellectual property cases are uncertain and involve complex legal
and factual questions. If we become involved in this type of litigation, it
could consume significant resources and divert our attention from our business.
27
28
Some of our customers have received notices of infringement from the Lemelson
Medical, Education and Research Foundation Limited Partnership (the "Lemelson
Foundation"), alleging that equipment we have supplied to our customers, and
processes this equipment performs, infringes on patents held by the Lemelson
Foundation. These notices increased substantially in 1998, the year in which the
Lemelson Foundation settled its suit against the Ford Motor Company, and entered
into license agreements with Ford, GM and Chrysler. Since the settlement, a
number of our customers, including Intel, have been sued by the Lemelson
Foundation.
Some of our customers have requested that we defend and indemnify them against
the Lemelson Foundation's claims or contribute to any settlement the customer
reaches with the Lemelson Foundation. We have received opinions from our outside
patent counsel with respect to various Lemelson Foundation patents. We are not
aware that any equipment we market or that any process performed by our
equipment infringes on the Lemelson Foundation patents and we do not believe
that the Lemelson Foundation matter or any other pending intellectual property
claim against us will materially and adversely affect our business, financial
condition or operating results. The ultimate outcome of any infringement or
misappropriation claim affecting us is uncertain, however, and we cannot assure
you that our resolution of this litigation will not materially and adversely
affect our business, financial condition and operating results.
WE MAY BE ADVERSELY AFFECTED BY ENVIRONMENTAL AND SAFETY LAWS AND REGULATIONS
We are subject to various federal, state, local and foreign laws and regulations
governing, among other things, the generation, storage, use, emission,
discharge, transportation and disposal of hazardous material, investigation and
remediation of contaminated sites and the health and safety of our employees. We
cannot assure you that any costs or liabilities associated with complying with
these environmental laws will not materially and adversely affect our business,
financial condition and operating results
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At March 31, 2001, we had a non-trading investment portfolio, excluding those
classified as cash and cash equivalents, of $42.4 million. Due to the short term
nature of the investment portfolio, if market interest rates were to increase
immediately and uniformly by 100 basis points there would be no material or
adverse affect on our business, financial condition or operating results.
PART II. OTHER INFORMATION.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 Annual Meeting of Shareholders of the Company was held on February 13,
2001.
At this meeting, Messrs. Allison F. Page and C. William Zadel were reelected to
the Board of Directors of the Company for terms expiring at the 2005 Annual
Meeting. In such election, 45,047,671 votes and
28
29
45,081,201 votes were cast for Mr. Page and Mr. Zadel, respectively. Under
Pennsylvania Law, votes cannot be cast against a candidate. Proxies filed by the
holders of 1,113,111 shares and 1,079,581 shares at the 2001 Annual Meeting
withheld authority to vote for Mr. Page and Mr. Zadel, respectively.
Also, at the meeting, 17,718,720 shares were voted in favor of the proposal to
approve the 2001 Employee Stock Option Plan, and 7,338,614 shares were voted
against such proposal. Proxies filed by the holders of 157,102 shares at the
2001 Annual Meeting instructed the proxy holders to abstain from voting on such
proposal and "Broker non votes" received at the 2001 Annual Meeting totaled
20,946,346 shares for such proposal.
Lastly, 45,890,836 shares were voted in favor of the reappointment of
PricewaterhouseCoopers LLP as independent accountants of the Company to serve
until the 2002 Annual Meeting, and 170,541 shares were voted against such
proposal. Proxies filed by the holders of 99,405 shares at the 2001 Annual
Meeting instructed the proxy holders to abstain from voting on such proposal.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed a Form 8-K/A on January 26, 2001 amending
and restating subparagraphs (a) and (b) of Item 7 of its Form
8-K filed on December 6, 2000. The amendment and restatement
reflected the incorporation by reference of the Financial
Statements and Pro Forma Financial Information and Exhibits
associated with the acquisition of Cerprobe Corporation that
appear in the Company's Form 10-K filed on December 27, 2000.
29
30
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 15, 2001 By:/s/ CLIFFORD G. SPRAGUE
- ------------------- --------------------------------
Clifford G. Sprague
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
30