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 June 30, 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 of incorporation) (IRS Employer
Identification No.)
2101 BLAIR MILL ROAD, WILLOW GROVE, PENNSYLVANIA 19090
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(215) 784-6000
(Registrant's telephone number)
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, 2001, there were 49,015,752 shares of the Registrant's Common
Stock, Without Par Value outstanding.
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KULICKE AND SOFFA INDUSTRIES, INC.
FORM 10 - Q JUNE 30, 2001
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
September 30, 2000 and June 30, 2001 3
Consolidated Statements of Operations
Three and Nine Months Ended June 30,
2000 and 2001 4
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2000 and 2001 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15-29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 29
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29
SIGNATURES 30
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PART I . FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, JUNE 30,
2000 2001
--------- ---------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 211,489 $ 89,032
Short-term investments 105,130 43,767
Accounts and notes receivable, net of allowance for doubtful
accounts of $4,355 at 9/30/00 and $6,169 at 6/30/01 188,485 103,532
Inventories, net 74,034 87,453
Prepaid expenses and other current assets 9,748 17,134
--------- ---------
TOTAL CURRENT ASSETS 588,886 340,918
Property, plant and equipment, net 83,867 139,215
Intangible assets, primarily goodwill, net 41,724 259,720
Other assets 8,375 11,100
--------- ---------
TOTAL ASSETS $ 722,852 $ 750,953
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long term debt $ 1,026 $ 6,626
Accounts payable 62,513 56,307
Accrued expenses 51,935 50,777
Income taxes payable 10,724 10,573
--------- ---------
TOTAL CURRENT LIABILITIES 126,198 124,283
Other liabilities 7,967 8,679
Long term debt 175,000 227,933
Deferred taxes 4,148 18,086
Minority interest 4,197 49
--------- ---------
TOTAL LIABILITIES $ 317,510 $ 379,030
========= =========
Commitments and contingencies -- --
SHAREHOLDERS' EQUITY:
Common stock, without par value 189,766 192,448
Retained earnings 220,263 188,112
Accumulated other comprehensive loss (4,687) (8,637)
--------- ---------
TOTAL SHAREHOLDER'S EQUITY 405,342 371,923
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 722,852 $ 750,953
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
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4
KULICKE AND SOFFA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2000 2001 2000 2001
--------- --------- --------- ---------
Net Sales $ 268,258 $ 130,927 $ 670,260 $ 436,850
Cost of goods sold 166,980 89,461 433,470 298,193
--------- --------- --------- ---------
Gross profit 101,278 41,466 236,790 138,657
Selling, general and administrative 35,554 33,378 97,916 108,399
Research and development, net 12,509 13,556 36,966 49,621
Amortization of goodwill and intangibles 867 6,730 2,610 16,048
Resizing costs -- -- -- 1,709
Purchased in-process research
and development -- -- -- 11,709
--------- --------- --------- ---------
Income (loss) from operations 52,348 (12,198) 99,298 (48,829)
Interest income 3,145 1,307 7,520 6,997
Interest expense (2,525) (3,481) (5,378) (9,591)
Other income -- -- -- 8,016
Equity in loss of joint ventures (340) -- (1,049) --
--------- --------- --------- ---------
Income (loss) before income taxes 52,628 (14,372) 100,391 (43,407)
Income tax provision (benefit) 14,858 (4,881) 28,400 (10,913)
--------- --------- --------- ---------
Income (loss) before minority interest 37,770 (9,491) 71,991 (32,494)
Minority interest in net loss of subsidiary 437 15 1,039 343
--------- --------- --------- ---------
NET INCOME (LOSS) $ 38,207 $ (9,476) $ 73,030 $ (32,151)
========= ========= ========= =========
NET INCOME (LOSS) PER SHARE:
Basic $ 0.79 $ (0.19) $ 1.53 $ (0.66)
========= ========= ========= =========
Diluted $ 0.67 $ (0.19) $ 1.36 $ (0.66)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 48,382 48,929 47,688 48,829
Diluted 58,637 48,929 56,016 48,829
The accompanying notes are an integral part of
these consolidated financial statements.
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KULICKE AND SOFFA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NINE MONTHS ENDED
JUNE 30,
--------------------------------------
2000 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 73,030 $ (32,151)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 18,034 40,143
Equity in loss of joint ventures 1,049 --
Purchased in-process R&D -- 11,709
Minority interest in net loss of subsidiary (1,039) (343)
Deferred taxes 10,677 (17,271)
Changes in components of working capital, net (54,303) 66,675
Collection of refundable income taxes 1,918 --
Other, net 3,156 4,519
--------- ---------
Net cash provided by operating activities 52,522 73,281
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of investments classified as available for sale (88,673) 60,091
Purchases of property, plant and equipment (27,050) (44,421)
Purchase of Flip Chip equity units -- (5,000)
Purchase of Cerprobe Corp., net of cash received -- (216,409)
Purchase of Probe Technology Corp., net of cash received -- (62,512)
Investments in and loans to joint ventures (1,866) --
--------- ---------
Net cash used in investing activities (117,589) (268,251)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from borrowings 168,985 58,000
Payments on borrowings -- (6,598)
Proceeds from issuance of common stock 14,611 1,111
Proceeds from sale of receivables -- 20,000
--------- ---------
Net cash provided by financing activities 183,596 72,513
--------- ---------
Changes in cash and cash equivalents 118,529 (122,457)
Cash and cash equivalents at beginning of period 37,155 211,489
--------- ---------
Cash and cash equivalents at end of period $ 155,684 $ 89,032
========= =========
CASH PAID DURING THE PERIOD FOR:
Interest $ 4,277 $ 11,187
Income taxes $ 5,147 $ 4,348
The accompanying notes are an integral part of
these consolidated financial statements.
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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data and employee data)
June 30, 2001
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statement information for fiscal year 2001
in this report is unaudited. However, we believe these financial statements
contain all adjustments, consisting of normal recurring adjustments, necessary
to present fairly the Company's financial position as of June 30, 2001, and the
results of its operations for the three month and nine month periods ended June
30, 2000 and 2001 and its cash flows for the nine month periods ended June 30,
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, JUNE 30,
2000 2001
--------- ---------
Raw materials and supplies $ 50,394 $ 65,809
Work in process 22,687 25,037
Finished Goods 17,194 20,127
--------- ---------
90,275 110,973
Inventory reserves (16,241) (23,520)
--------- ---------
$ 74,034 $ 87,453
========= =========
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, the after-tax amount of interest expense recognized in the period
associated with the convertible subordinated notes is added back to net income
as if the convertible securities had been converted to common shares at the
beginning of the period. For the three and nine month periods ended June 30,
2001, the exercise of stock options and the conversion of the convertible
securities were not assumed since their conversion to common stock would have an
anti-dilutive effect on net loss per share.
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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data and employee data)
June 30, 2001
- --------------------------------------------------------------------------------
A reconciliation of the weighted average shares outstanding-basic to the
weighted average shares outstanding-diluted appears below:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2000 2001 2000 2001
------ ------ ------ ------
Weighted average shares outstanding -
Basic 48,382 48,929 47,688 48,829
Potentially dilutive securities:
Employee stock options 2,613 * 2,744 *
Convertible subordinated notes 7,642 * 5,584 *
------ ------ ------ ------
Weighted average shares outstanding -
Diluted 58,637 48,929 56,016 48,829
====== ====== ====== ======
*Due to the Company's net loss for the three month and nine month periods ended
June 30, 2001, potentially dilutive securities are deemed to be antidilutive.
The weighted average number of shares for potentially dilutive employee and
director stock options was 1,304,000 and 961,000, respectively, for the three
and nine-month periods ended June 30, 2001 and 7,642,000 for the convertible
subordinated notes for both the three and nine-month periods then ended.
The after-tax interest expense recognized by the Company in the three and nine
months ended June 30, 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 $2,983,000, respectively.
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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data and employee data)
June 30, 2001
- --------------------------------------------------------------------------------
NOTE 4 - OPERATING RESULTS BY BUSINESS SEGMENT
Operating results by business segment for the three and nine-month periods ended
June 30, 2000 and 2001 were as follows:
THREE MONTHS ENDED JUNE 30, 2001
ADVANCED
PACKAGING PACKAGING
EQUIPMENT MATERIALS TECHNOLOGY TEST (1)
SEGMENT SEGMENT SEGMENT SEGMENT CORPORATE TOTAL
--------- --------- --------- --------- ---------- ---------
Net sales $ 52,222 $ 33,216 $ 11,340 $ 34,149 $ 130,927
Cost of goods sold 33,545 24,649 7,819 23,448 89,461
--------- --------- --------- --------- ---------- ---------
Gross profit 18,677 8,567 3,521 10,701 -- 41,466
Operating expenses 21,831 5,678 5,774 9,774 $ 3,877 46,934
Amortization of goodwill
and intangibles 568 352 5,810 6,730
--------- --------- --------- --------- ---------- ---------
Income (loss) from operations $ (3,154) $ 2,321 $ (2,605) $ (4,883) $ (3,877) $ (12,198)
========= ========= ========= ========= ========== =========
NINE MONTHS ENDED JUNE 30, 2001
ADVANCED
PACKAGING PACKAGING
EQUIPMENT MATERIALS TECHNOLOGY TEST (1)
SEGMENT SEGMENT SEGMENT SEGMENT CORPORATE TOTAL
--------- --------- --------- --------- --------- ---------
Net sales $ 195,462 $ 121,355 $ 29,001 $ 91,032 $ 436,850
Cost of goods sold 123,408 87,873 24,288 62,624 298,193
--------- --------- --------- --------- --------- ---------
Gross profit 72,054 33,482 4,713 28,408 -- 138,657
Operating expenses 82,194 20,700 18,402 25,110 $ 11,614 158,020
Amortization of goodwill
and intangibles -- 1,698 1,019 13,331 16,048
Resizing costs 1,424 254 31 1,709
Purchased in-process research
and development 11,709 11,709
--------- --------- --------- --------- --------- ---------
Income (loss) from operations $ (11,564) $ 10,830 $ (14,708) $ (21,742) $ (11,645) $ (48,829)
========= ========= ========= ========= ========= =========
Segment assets at June 30, 2001 $ 186,741 $ 88,346 $ 49,734 $ 282,024 $ 144,108 $ 750,953
========= ========= ========= ========= ========= =========
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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data and employee data)
June 30, 2001
- --------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2000
ADVANCED
PACKAGING PACKAGING
EQUIPMENT MATERIALS TECHNOLOGY
SEGMENT SEGMENT SEGMENT CORPORATE TOTAL
-------- -------- -------- -------- --------
Net sales $215,957 $ 47,677 $ 4,624 $268,258
Cost of goods sold 127,820 33,818 5,342 166,980
-------- -------- -------- -------- --------
Gross profit 88,137 13,859 (718) -- 101,278
Operating expenses 32,471 7,106 4,471 $ 4,015 48,063
Amortization of goodwill
and intangibles -- 566 301 867
-------- -------- -------- -------- --------
Income (loss) from operations $ 55,666 $ 6,187 $ (5,490) $ (4,015) $ 52,348
======== ======== ======== ======== ========
NINE MONTHS ENDED JUNE 30, 2000
ADVANCED
PACKAGING PACKAGING
EQUIPMENT MATERIALS TECHNOLOGY
SEGMENT SEGMENT SEGMENT CORPORATE TOTAL
--------- --------- --------- --------- ---------
Net Sales $ 521,333 $ 132,958 $ 15,969 $ 670,260
Cost of goods sold 322,247 94,565 16,658 433,470
--------- --------- --------- --------- ---------
Gross profit 199,086 38,393 (689) -- 236,790
Operating expenses 90,566 19,899 12,820 $ 11,597 134,882
Amortization of goodwill
and intangibles -- 1,697 913 -- 2,610
--------- --------- --------- --------- ---------
Income from operations $ 108,520 $ 16,797 $ (14,422) $ (11,597) $ 99,298
========= ========= ========= ========= =========
Segment assets at June 30, 2000 $ 301,960 $ 95,051 $ 44,737 $ 252,995 $ 694,743
========= ========= ========= ========= =========
(1) The test segment is comprised of Cerprobe Corporation and Probe
Technology Corporation.
NOTE 5 - LONG TERM DEBT
In December 2000, the Company entered into a $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
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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data and employee data)
June 30, 2001
- --------------------------------------------------------------------------------
restrictions on the Company's investments and acquisitions. At June 30, 2001,
the Company had $57.0 million of cash borrowing outstanding under this facility.
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 is payable 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
price allocated to in-process R&D projects that did not have future alternative
use and to which technological feasibility had not been established totaled
$11.3 million for Cerprobe and $0.4 million for Probe Tech. These amounts 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 disclosed as a separate business segment for financial
reporting purposes.
Unaudited pro forma operating results for the nine months ended June 30, 2000
and 2001 and the three months ended June 30, 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 June 30, 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.
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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data and employee data)
June 30, 2001
- --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2000 2001 2000 (1) 2001
--------- --------- --------- ---------
Net sales $ 307,995 $ 130,927 $ 770,930 $ 464,273
Net income (loss) $ 34,633 $ (9,476) $ 47,187 $ (34,632)
Diluted net income (loss) per share $ 0.61 $ (0.19) $ 0.90 $ (0.71)
(1) The results of Cerprobe for the nine months ended June 30, 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
========= =========
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.
The lawsuit between Cerprobe and the former President, Director and shareholder
of Silicon Valley Test & Repair, Inc. (a company acquired by Cerprobe
Corporation in January 1997) was settled and dismissed in June 2001, with
Cerprobe paying $280,000 in attorney's fees to opposing counsel. This amount has
been charged to goodwill in the opening balance sheet, as a cost of the Cerprobe
acquisition.
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 June 30, 2001.
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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data and employee data)
June 30, 2001
- --------------------------------------------------------------------------------
NOTE 8 - RESIZING AND ACQUISITION RESTRUCTURING
In the nine months ended June 30, 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 same period, the
Company also began 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 charges
and the remaining reserves at June 30, 2001 are 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
Spending under programs (749) (31) (70) (850)
------- ------- ------- -------
Balance at June 30, 2001 $ 1,044 $ 430 $ 31 $ 1,505
======= ======= ======= =======
At June 30, 2001, 288 of the planned 296 positions have been eliminated, and the
remainder will be eliminated in the fourth quarter of this fiscal year. The
integration of Cerprobe and Probe Tech continues, and 3 of the 6 facilities
identified for closure have been vacated at June 30, 2001. Severance and lease
payments are expected to extend over the next four years.
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.
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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data and employee data)
June 30, 2001
- --------------------------------------------------------------------------------
NOTE 10 - COMPREHENSIVE INCOME (LOSS)
For the three and nine month periods ended June 30, 2000 and 2001, the
components of total comprehensive income (loss) are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2000 2001 2000 2001
-------- -------- -------- --------
Net income / (loss) $ 38,207 $ (9,476) $ 73,030 $(32,151)
-------- -------- -------- --------
Foreign currency translation adjustment 307 (980) (148) (3,951)
Unrealized gain / (loss) on investments,
net of taxes 4 (157) (31) 1
-------- -------- -------- --------
Other comprehensive income / (loss) 311 (1,137) (179) (3,950)
-------- -------- -------- --------
Comprehensive income / (loss) $ 38,518 $(10,613) $ 72,851 $(36,101)
======== ======== ======== ========
NOTE 11 - 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 customer receivables can be sold as collections reduce the previously
sold interest. In May, KSI Funding received $20.0 million for receivables sold
under this facility.
NOTE 12 - ACCOUNTING PRONOUNCEMENTS
SFAS 133
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.
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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data and employee data)
June 30, 2001
- --------------------------------------------------------------------------------
SFAS 141
In July 2001, the FASB issued SFAS 141, "Business Combinations," which is
required for all business combinations initiated after June 30, 2001. The
standard eliminates the use of the pooling-of-interest method and improves the
accounting and reporting for business combinations. The Company has adopted the
standard as required effective July 1, 2001. The adoption will not have a
material effect on the Company's results of operations or cash flows.
SFAS 142
Also in July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets." This standard requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. This change is expected to
provide investors with greater information regarding the economic value of
goodwill and its impact on earnings. The Company will be required to adopt this
standard in fiscal 2003, however early adoption in fiscal 2002 will be
permitted. The Company has not yet determined the impact to its financial
statements of adoption of this standard.
SAB 101
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. The Company is 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 the Company's 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." The Company is currently
assessing the full impact of SAB 101 on its reported financial results. Based on
the Company's analysis to-date, the Company expects when SAB 101 is adopted to
report a cumulative adjustment to net income of between $6.0 million and $10.0
million in fiscal 2001 for all prior annual periods based on a revenue deferral
ranging between $20.0 million and $25.0 million. The Company expects that
revenues in the first quarter of fiscal 2001 will be lower than previously
reported by $2.0 million to $5.0 million, and revenues in the second quarter of
fiscal 2001 will be lower than previously reported by $2.0 million to $4.0
million as a result of adoption of SAB 101. The Company expects that revenues in
the third quarter of fiscal 2001 will be lower than reported herein by less than
$2.0 million. The Company does not believe that SAB 101 will affect the
underlying strength or weakness of our business operations as measured by the
dollar value of our product shipments and cash flows.
EITF DISCUSSIONS AND CONSENSUS
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. The Company currently classifies 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 are recorded and the amount of these costs. The Company must adopt
this pronouncement in the fourth quarter of fiscal 2001. The Company does not
believe adoption of this pronouncement will have a material impact on its
financial position or results of operations.
In March 2001, the EITF 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. The Company does not believe that this pronouncement will have
any impact on its financial position or results of operations.
In March 2001, the EITF 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 the Company's financial
position or results of operations.
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15
KULICKE AND SOFFA INDUSTRIES, INC.
June 30, 2001
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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 6 to 14 of this Form 10-Q for a full
understanding of our financial position and results of operations for the three
and nine month periods ended June 30, 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, license our flip chip bumping
process technology and are developing high density interconnect substrates. We
sell our products to semiconductor device manufacturers and contract
manufacturers, which are primarily located in or have operations in the
Asia/Pacific region. Sales to customers outside of the United States accounted
for 91% of net sales for fiscal 2000 and 60% for the nine months ended June 30,
2001 and are expected to continue to represent a substantial portion of our
future revenues. To support our international sales, we currently have major
manufacturing operations in the United States, Israel and Singapore, sales
facilities in the United States, France, Germany, Hong Kong, Japan, Korea,
Malaysia, the Philippines, Scotland, Singapore, Taiwan and Thailand, and
applications labs in Japan, Singapore and Taiwan.
Due to the slowing economy and a worldwide decline in demand for semiconductors,
the semiconductor industry has experienced excess capacity and a severe
contraction in demand for semiconductor manufacturing equipment. As a result,
our net sales in the first three quarters of fiscal 2001 were significantly
below those in the same periods in the prior year. Net sales have declined
sequentially each quarter in fiscal 2001. We expect to experience continued
declines in net sales in the fourth quarter of fiscal 2001 and that sales will
remain weak through the first half of 2002. In addition, as a result of the
expected decline in sales, we anticipate that our gross margin will decline in
the fourth quarter of fiscal 2001, from that reported in the third quarter of
fiscal 2001. Our backlog of customer orders at June 30, 2001 was $57.0 million
as compared to $153.0 million at June 30, 2000 and $84.0 million at March 31,
2001. In anticipation of the slowing economy, we reduced our workforce by 7% in
the third quarter ended June 30, 2001 and we expect to take additional cost
reduction measures in the fourth quarter of fiscal 2001 to realign our cost
structure to more closely reflect anticipated revenues, which may involve
certain one-time charges.
Staff Accounting Bulletin No. 101 ("SAB 101") issued by the SEC becomes
applicable to us in the fourth quarter of 2001. Based on our analysis to-date,
we expect when SAB 101 is adopted to report a cumulative adjustment to net
income of between $6.0 million and $10.0 million in fiscal 2001 for all prior
annual periods based on a revenue deferral ranging between $20.0 million and
$25.0 million. We also expect that revenues in the first quarter of fiscal 2001
will be lower than previously reported by $2.0 million to $5.0 million and
revenues in the second quarter of fiscal 2001 will be lower than previously
reported by $2.0 million to $4.0 million as a result of our adoption of SAB 101.
We expect that revenues in the third quarter of fiscal 2001 will be lower than
reported herein by less than $2.0 million. It is difficult to predict the net
effect of this pronouncement on revenues in the fourth quarter of fiscal 2001.
However, to the extent revenue deferrals from prior periods, which are
recognized in the fourth quarter, do not equal deferrals from the fourth quarter
to future periods, our results for the fourth quarter could be different than
anticipated. 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. See "Recently Issued Accounting
Pronouncements."
In the first quarter of fiscal 2001, we took a step forward in our strategy
to offer complete and cost-effective interconnect solutions by acquiring 100% of
the stock of Cerprobe and 100% of the stock of 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 our operating results beginning on the date of
acquisition. These two companies comprise our test segment. Refer to Footnote 6
in the Notes to the Unaudited Condensed Consolidated Financial Statements for
additional information regarding these acquisitions.
In March 2001, we purchased the 19.6% equity share of Flip Chip previously
owned by Delco Electronics Corporation for $5.0 million in cash, with a
contingent future cash payment of up to $3.0 million depending upon the future
operating revenues of Flip Chip. We now own 100% of Flip Chip.
Our business is currently divided into four segments:
EQUIPMENT
We design, manufacture and market semiconductor assembly equipment. Our
principal product line is our family of wire bonders, which are used to connect
very fine wires, typically made of gold or aluminum, between the bonding pads on
semiconductor die and the leads on an IC package to which the die has been
attached. In fiscal 2001, we began selling the Models 8028S and 8028PPS
automatic ball bonders which, with their improved technical performance and
productivity, have accounted for the majority of ball bonders we sold in the
first nine months of fiscal 2001.
In fiscal 2000 we relocated our automatic ball bonder manufacturing from the
United States to Singapore and were able to ramp up production to historically
high levels to meet record demand in fiscal 2000.
PACKAGING MATERIALS
We design, manufacture and market a range of packaging materials to
semiconductor device assemblers including very fine (typically 0.001 inches in
diameter) gold, aluminum and copper wire, capillaries, wedges, die collets and
saw blades, all of which are used in the semiconductor packaging process. Our
packaging materials are optimized for use with our wire bonders to providing
leading-edge efficiencies and capabilities. We expect to expand this business in
an effort to increase our revenues from materials used in the assembly of ICs.
ADVANCED PACKAGING TECHNOLOGY
This business segment reflects the operating results of our strategic initiative
to develop new technologies for advanced semiconductor packaging. It is
comprised of Flip Chip and our X-LAM business unit.
Through Flip Chip we license our flip chip technology, provide wafer bumping
services and market a wafer level chip scale package named "UltraCSP." Our flip
chip technology was developed by a joint venture between Delco and us.
We established our X-LAM business unit to develop, manufacture and market high
density interconnect substrates using either flip chip or advanced wire bonding
interconnection schemes. We purchased the X-LAM technology for $8.0 million in
fiscal 1999 and operate a research/manufacturing facility in Milpitas,
California to fully develop and market the technology. In fiscal 2001, we
shipped high density substrates to customers for qualification.
Flip Chip reported its first operating profits in the third quarter of fiscal
2001 but is expected to record an operating loss in the fourth quarter of fiscal
2001. X-LAM has not been profitable to date.
TEST INTERCONNECT SOLUTIONS
Our test interconnect solutions provide a broad range of products used to test
semiconductors during wafer fabrication (wafer probing) and after they have been
assembled and packaged (package or final testing). Our products include probe
cards, automatic test equipment interface assemblies, ATE test boards, and test
socket/contractors. Most of the test interconnect products we offer are custom
designed or customized for a specific semiconductor or application.
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KULICKE AND SOFFA INDUSTRIES, INC.
June 30, 2001
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RESULTS OF OPERATIONS
SALES
Net sales for the quarter ended June 30, 2001 were $130.9 million, a decline of
51.2% from the same period in the prior year, due to the continued slowing
demand for semiconductors. This decline in sales reflected a 75.8% decline in
sales for the equipment segment, primarily a reduction in the unit sales and
average selling price of automatic ball bonders compared with the same period in
fiscal 2000. Net sales in the packaging materials segment were down 30.3% from
the same quarter in fiscal 2000, due to slowing demand for gold wire and
expendable tools. Net sales in the advanced packaging segment were up 145.2%
from the prior year due to higher bumping service revenue at Flip Chip. The
newly formed test segment provided sales of $34.1 million for the current
quarter.
Net sales for the nine months ended June 30, 2001 were $436.9 million, down
34.8% from the $670.3 million reported for the comparable period in fiscal 2000.
Consistent with results reported for the third quarter, year-to-date sales for
the equipment segment were down 62.5%, due to lower revenues from sales of
automatic ball bonders; slightly offset by higher unit sales of automatic dicing
saws. Net sales in the packaging materials segment were down 8.7% year to date,
as compared with the prior year, primarily due to reduced demand for gold wire
and expendable tools. Higher bumping service revenues and license income at Flip
Chip contributed to an 81.6% increase in net sales for the nine months ended
June 30, 2001 for the advanced packaging materials segment over the same period
in the prior year. Year-to-date sales for the test division were $91.0 million
for the period from the dates of acquisition through June 30, 2001.
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17
KULICKE AND SOFFA INDUSTRIES, INC.
June 30, 2001
- --------------------------------------------------------------------------------
For the three and nine months ended June 30, 2000 and 2001, the breakdown of
shipments to major geographic regions is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 2001 2000 2001
---- ---- ---- ----
North America 8% 39% 11% 40%
Asia Pacific 80% 38% 78% 43%
Europe 5% 13% 5% 11%
Japan 6% 9% 6% 6%
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
In the quarter ended June 30, 2001, gross profit was $41.5 million, a decline of
59.0% from $101.3 million in the prior year. The lower gross profit was due
primarily to the lower unit sales and lower average selling price for automatic
ball bonders in the equipment segment, resulting in a decline of 78.8% in gross
profit for the segment. Gross margin (gross profit as a percentage of sales) was
31.7% for the current quarter, compared to 37.8% for the comparable quarter in
the prior year. The decline in gross margin was primarily due to the lower
average selling price in the equipment segment, and lower margins for the test
division, as compared to the margins for the Company as a whole in the prior
year. The equipment segment experienced a 5.0% decline in gross margin from the
prior year. Flip Chip reported gross profit of $3.3 million.
Gross profit for the nine months ended June 30, 2001 was $138.7 million,
compared $236.8 million in the prior year, a decline of 41.4%. The lower gross
profit was due primarily to the lower average selling price and lower unit sales
in the equipment segment. Gross profit in the first nine months of fiscal 2001
was also adversely effected by inventory write-offs of $7.9 million as compared
with total write downs of $2.3 million for the same period in fiscal 2000. Gross
margin was 31.7% for the nine months ended June 30, 2001, as compared to 35.3%
in the prior year. Excluding the inventory write-offs, gross margin for the nine
months ended June 30, 2001 was 33.5%, as compared to 35.7%, for the comparable
period in fiscal 2000. The newly formed test division reported gross profit of
$28.4 million for the nine months ended June 30, 2001, which was negatively
impacted by acquisition related inventory "step-up" costs of $4.2 million. The
gross margins for the test segment and the advanced packaging technology
segments were 31.2% and 16.3%, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses decreased $2.2 million or
6.1% in the three months ended June 30, 2001 as compared to the same period in
the prior year due primarily to reductions in payroll, and other cost saving
initiatives which began in the second quarter of the fiscal year. Expenses
incurred in the test division, which amounted to $8.6 million for the quarter
ended June 30, 2001, offset the majority of these cost savings. In the nine
months ended June 30, 2001, SG&A expenses increased $10.5 million or 10.7% from
the same period in the prior year, due to $21.8 million of SG&A expenses
associated with the test division, partially offset by reductions in
expenditures for employee
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KULICKE AND SOFFA INDUSTRIES, INC.
June 30, 2001
- --------------------------------------------------------------------------------
compensation, outside services and other administrative functions. The expense
reduction and cost containment actions initiated earlier in fiscal 2001 led to a
sequential reduction of $6.3 million or 15.9% in SG&A expenses in the third
quarter as compared to the second quarter.
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
$1.0 million or 8.4% for the three months and $12.7 million or 34.2% for the
nine months ended June 30, 2001 from the comparable periods of the prior year.
The increased R&D expenses also included $1.2 million in the three months and
$3.3 million in the nine months (from the date of acquisition through June 30,
2001) ended June 30, 2001 associated with the test division. In the third
quarter of fiscal 2001, the Company aligned spending on R&D activities to
current economic conditions, resulting in a sequential reduction in R&D spending
of $4.9 million or 26.6% as compared to the second quarter of fiscal 2001.
RESIZING COSTS
In the third quarter, we began implementing the resizing plans announced in the
second quarter of fiscal 2001, which resulted in a 7.0% reduction in our
workforce. In the nine months ended June 30, 2001, we recorded a resizing charge
for severance of $1.7 million for the elimination of 296 positions and we may
incur additional resizing costs in the near term. No new charges were recorded
in the third quarter. During the second quarter, we began 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. Both programs are ongoing, and
continuing as planned. Refer to Footnote 8 in the Notes to the Unaudited
Condensed Consolidated Financial Statements for additional detail regarding
these programs, and the spending incurred to date.
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 nine months ended June 30, 2001, we recorded
amortization expense of $5.8 million and $13.3 million, respectively, associated
with the goodwill and intangible assets resulting from the purchase of Cerprobe
and Probe Tech.
INCOME (LOSS) FROM OPERATIONS
Loss from operations for the three and nine months ended June 30, 2001 was $12.2
million and $48.8 million, respectively, compared to income from operations of
$52.3 million and $99.3 million in the comparable periods of the prior year. The
operating loss in both the three and nine month periods ended June 30, 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.
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KULICKE AND SOFFA INDUSTRIES, INC.
June 30, 2001
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INTEREST
As a result of the Cerprobe and Probe Tech acquisition, we increased our
borrowings and reduced our investment portfolio in the latter portion of the
first quarter to fund these purchases. This resulted in higher interest expense
in the both the three and nine months ended June 30, 2001 and lower interest
income for the same periods.
OTHER INCOME
Results for the nine months ended June 30, 2001 include other income of $8.0
million associated with the 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 nine months ended June 30, 2000, we recorded losses of $0.3
million and $1.0 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 34.0%,
compared to 28.0% in the prior year. The higher expected tax rate for fiscal
2001 is due primarily to the tax benefits associated with expected losses from
United States based operations at a rate higher than the tax rate on expected
income generated from foreign operations. In the nine months ended June 30, 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 nine months ended June 30, 2001, we recorded minority interest
of $15 thousand and $0.3 million, respectively. The results for the three months
ended June 30, 2001 include minority interest in a foreign Probe Tech
subsidiary. The nine month results reflect the interest of our joint venture
partner's share of the loss incurred at Flip Chip prior to our purchase of all
outstanding Flip Chip equity units and the minority interest of the foreign
Probe Tech subsidiary from the date of our acquisition of Probe Tech.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS 133
In June 1998, the Financial Accounting Standards Board (FASB) 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.
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20
KULICKE AND SOFFA INDUSTRIES, INC.
June 30, 2001
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SFAS 141
In July 2001, the FASB issued SFAS 141, "Business Combinations," which is
required for all business combinations initiated after June 30, 2001. The
standard eliminates the use of the pooling-of-interest method and improves the
accounting and reporting for business combinations. We have adopted the standard
as required effective July 1, 2001. The adoption will not have a material effect
on our results of operations or cash flows.
SFAS 142
Also in July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets." This standard requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. This change is expected to
provide investors with greater information regarding the economic value of
goodwill and its impact on earnings. We will be required to adopt this standard
in fiscal 2003, however early adoption in fiscal 2002 will be permitted. We have
not yet determined the impact to our financial statements of adoption of this
standard.
SAB 101
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
$6.0 million and $10.0 million in fiscal 2001 for all prior annual periods based
on a revenue deferral ranging between $20.0 million and $25.0 million. We also
expect revenues in the first quarter of fiscal 2001 will be lower than
previously reported by $2.0 million to $5.0 million, and revenues in the second
quarter of fiscal 2001 will be lower than previously reported by $2.0 million to
$4.0 million as a result of adoption of SAB 101. We expect that revenues in the
third quarter of fiscal 2001 will be lower than reported herein by less than
$2.0 million. 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.
EITF DISCUSSIONS AND CONSENSUS
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
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.
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KULICKE AND SOFFA INDUSTRIES, INC.
June 30, 2001
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In March 2001, the EITF 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 EITF 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 June 30, 2001, cash, cash equivalents and investments totaled $132.8
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 credit 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 June 30, 2001, we had $57.0 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).
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, our wholly owned subsidiary.
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. In the third
quarter, we sold receivables under this agreement amounting to $20.0
million.
Cash provided by operating activities totaled $73.3 million during the nine
months ended June 30, 2001 compared to $52.5 million during the comparable
period in the prior year. The cash provided by operating activities for the nine
months ended June 30, 2001 was due primarily to the collection of accounts
receivable.
During the nine months ended June 30, 2001, we invested approximately $44.5
million in property and equipment compared to $27.0 million in the comparable
period of the prior year. The capital spending in the nine months ended June 30,
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 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 fourth quarter of fiscal 2001 to be less than $8.0 million.
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In the first quarter of fiscal 2001, we purchased two companies that design and
manufacture semiconductor test interconnect solutions, for cash. During the
nine months ended June 30, 2001, we paid $216.4 million for Cerprobe and
$62.5 million for Probe Tech, net of cash acquired.
We believe that anticipated cash flows from operations, working capital and
amounts available under our 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 our products, semiconductor and semiconductor
capital equipment industry conditions, competitive factors and the nature
and size of strategic business opportunities which we may elect to pursue.
RISK FACTORS
THE SEMICONDUCTOR INDUSTRY AS A WHOLE IS VOLATILE AND IS CURRENTLY EXPERIENCING
A SIGNIFICANT DOWNTURN.
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 equipment, consumer electronics and
automotive goods. Significant downturns in the market for semiconductor devices
or in general economic conditions reduce demand for our products and materially
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. The semiconductor industry is in a
downturn and has weakened significantly recently and we expect conditions to
further weaken during the remainder of fiscal 2001 and to remain weak into 2002.
This downturn is among the worst we have experienced: orders have been pushed
out or cancelled, significantly reducing our backlog, sales have declined
rapidly and we have, among other things, undertaken a significant resizing and
have deferred capital expenditures. We cannot assure you as to when the current
downturn will end or that it will not continue to worsen. This current downturn,
like past downturns, has materially and adversely affected our operating results
and we expect that it will continue to materially and adversely affect our
business, financial condition and operating results in the near term.
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,
which we expect will continue to be the case. Although these fluctuations are
partly due to the volatile nature of the semiconductor industry, they also
reflect the impact of other factors. Many of the factors that affect our
operating results 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:
- market downturns;
- the mix of products that we sell because, for example:
- some packaging materials 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;
- the volume and timing of orders for our products and any order
postponements and cancellations by our customers;
- the cancellation, deferral or rescheduling of orders, because
virtually all orders are subject to cancellation, deferral or
rescheduling by the customer without prior notice and with limited or
no penalties;
- 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 cause customers to delay
purchasing our products;
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- the timing of acquisitions; and
- our competitors' introduction of new products.
Many of our expenses, such as research and development, selling, general and
administrative expenses, and interest expense 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; 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.
OUR BUSINESS DEPENDS ON ATTRACTING AND RETAINING MANAGEMENT, MARKETING AND
TECHNICAL EMPLOYEES WHO ARE IN GREAT DEMAND.
As is the case with many other 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, specifically 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 materially and adversely affected.
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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 non-competitive. The development of new
products may require significant capital expenditures over an extended period of
time, and some products that we seek to develop may never become profitable. In
fiscal 2001, for example, we have incurred significant losses in connection with
our efforts to develop and commercialize X-LAM technology, and we anticipate
continuing to incur such losses in the near term. In addition, the
commercialization of X-LAM may require substantial capital investments for
production facilities. In addition, we may not be able to develop and introduce
products incorporating new technologies in a timely manner or at a price that
will satisfy our customers' future 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. If we fail to accurately forecast demand for our
products, including assembly equipment, packaging materials, test interconnect
solutions and advanced packaging technologies, 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 IC package, as compared to traditional die and wire
bonding. These technologies include flip chip and wafer scale packaging. In
general, these advanced technologies eliminate the need for wires to establish
the electrical connection between a die and its package. For some devices, these
advanced technologies have largely replaced wire bonding. 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. If a significant shift to advanced technologies were to occur, demand for
our wire bonders and related packaging materials and test interconnect solutions
would diminish.
One component of our strategy is to develop next generation technologies to
allow us 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 supersede 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.
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A DECLINE IN DEMAND FOR ANY OF OUR PRODUCTS COULD CAUSE OUR REVENUE TO DECLINE
SIGNIFICANTLY.
Prior to our recent acquisitions of businesses in the test interconnect segment,
our wire bonders have comprised over 50% of our net sales. If demand for, or
pricing of, our wire bonders declines because our competitors introduce superior
or lower cost systems, the semiconductor industry changes or because of other
events beyond our control, our business, financial condition and operating
results could be materially and adversely affected. Advanced packaging
technologies and test interconnect solutions are less significant as a
percentage of our revenues than wire bonders, but any deterioration in the
demand for or prices of these products would materially and adversely affect
our business, financial condition and operating results.
BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR MOST OF 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, test interconnect solutions and flip chip bumping services
and technology. Sales to a relatively small number of customers account for a
significant percentage of our net sales. In fiscal 2000, sales to Advanced
Semiconductor Engineering accounted for 15.3% of our net sales and sales to
Amkor Technologies accounted for 10.1% of our net sales. In fiscal 1999 no
customer accounted for more than 10% of total net sales. However, in fiscal
1998, sales to Intel accounted for 17.6% of our net sales.
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
materially and adversely affect our business, financial condition and operating
results.
WE DEPEND ON A SMALL NUMBER OF SUPPLIERS FOR RAW MATERIALS, COMPONENTS AND
SUBASSEMBLIES 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 raw 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 important
components and raw materials, including gold. As a result, we are exposed to 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 may delay our shipments;
- - our inadvertent use of defective or contaminated raw 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;
- - the exposure of our suppliers and subcontractors to disruption for a
variety of reasons, including work stoppage, fire, earthquake, flooding or
other natural disasters; and
- - delays in the delivery of raw materials or subassemblies, which, in turn,
may cause delays in some of our shipments; and
- - the loss of suppliers as a result of the consolidation of suppliers in the
industry.
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.
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KULICKE AND SOFFA INDUSTRIES, INC.
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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 and advanced packaging services and
technology. Additionally, during fiscal 2001, we acquired two companies that
design and manufacture test interconnect solutions, Cerprobe Corporation and
Probe Technology Corporation, and we have combined their operations to create
our test division. The success of this combination requires the integration of
formerly separate businesses into one another and then into our operating and
management structure. If this integration is unsuccessful or slower than
anticipated, the benefits of these acquisitions may be deferred or may not be
realized. Although our strategy is to 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, demands 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 could 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 packaging technologies often 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, PACKAGING MATERIALS, TEST INTERCONNECT AND ADVANCED
PACKAGING TECHNOLOGY INDUSTRIES.
The semiconductor equipment, packaging materials, test interconnect solutions
and advanced packaging technology industries are intensely competitive. In the
semiconductor equipment, test interconnect solutions and advanced packaging
technology markets, the significant competitive factors include performance
quality, customer support and price, and in the semiconductor packaging
materials industry include price, delivery and quality.
In each of our markets, we face competition and the threat of competition from
established competitors and potential new entrants, some of which have
significantly greater financial, engineering, manufacturing and marketing
resources than we have. Some of these competitors are Asian and European
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 and materials with improved price and performance
characteristics. New product and materials introductions by our competitors or
by new market entrants could hurt our sales. If a particular semiconductor
manufacturer or subcontract assembler selects a competitor's product or
materials for a
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particular assembly operation, we may not be able to sell products or materials
to that manufacturer or assembler for a significant period of time because
manufacturers and assemblers sometimes develop lasting relations with suppliers,
and assembly equipment in our industry often goes 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 UNITED STATES,
WE HAVE SUBSTANTIAL MANUFACTURING OPERATIONS LOCATED OUTSIDE OF THE UNITED
STATES, AND WE RELY ON INDEPENDENT FOREIGN DISTRIBUTION CHANNELS FOR CERTAIN
PRODUCT LINES, ALL OF WHICH SUBJECT US TO RISKS FROM CHANGES IN TRADE
REGULATIONS, CURRENCY FLUCTUATIONS, POLITICAL INSTABILITY AND WAR.
Approximately 80% of our net sales for fiscal 1998, 83% of our net sales for
fiscal 1999, 91% of our net sales for fiscal 2000 and approximately 60% of our
net sales for the nine months ended June 30, 2001 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 large 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. We also rely on non-U.S. suppliers
for materials and components used in the equipment that we sell and we maintain
substantial manufacturing operations in countries other than the United States,
including operations in Israel, Singapore and Taiwan. We manufacture
substantially all of our automatic ball bonders in Singapore. In addition, we
rely on independent foreign distribution channels for certain product lines. 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
and materials suppliers have 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 materially and adversely affect our
ability to sell our products in foreign markets.
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 primarily 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 also 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:
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- - 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 and alliances may also have rights to technology that
we develop through these joint ventures and alliances. We may incur significant
expense to protect or enforce our intellectual property rights. If we are unable
to protect our intellectual property rights, our competitive position may be
weakened.
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 on 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.
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
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of this litigation will not materially and adversely affect our business,
financial condition and operating results.
WE MAY BE MATERIALLY AND ADVERSELY AFFECTED BY ENVIRONMENTAL AND SAFETY LAWS AND
REGULATIONS.
We are subject to various and frequently changing 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. Increasingly, public attention has focused on the
environmental impact of manufacturing operations and the risk to neighbors of
chemical releases from such operations.
Proper waste disposal plays an important role in the operation of our
manufacturing plants. In many of our facilities we maintain wastewater treatment
systems that remove metals and other contaminants from process wastewater. These
facilities operate under effluent discharge permits that must be renewed
periodically. A violation of those permits may lead to revocation of the
permits, fines, penalties or the incurrence of capital or other costs to comply
with the permits.
In the future, applicable land use and environmental regulations may: (1) impose
upon us the need for additional capital equipment or other process requirements,
(2) restrict our ability to expand our operations, (3) subject us to liability,
and/or (4) cause us to curtail our operations. 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 June 30, 2001, we had a non-trading investment portfolio, excluding those
classified as cash and cash equivalents, of $43.7 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
adverse effect on our business, financial condition or operating results.
PART II. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Receivables purchase agreement among KSI Funding Corporation,
Kulicke and Soffa Industries, Inc., Market Street Funding
Corporation, and PNC Bank, National Association dated April
17, 2001.
10.2 Purchase and sale agreement between American Fine Wire
Corporation, Cerprobe Corporation, Kulicke and Soffa
Industries, Inc., Probe Technology Corporation and Semitec, as
the Originators, and KSI Funding Corporation, dated April 17,
2001.
(b) Reports on Form 8-K
None
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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 8, 2001 By: /s/ CLIFFORD G. SPRAGUE
--------------------------------------
Clifford G. Sprague
Senior Vice President, Chief Financial
Officer
(Principal Financial Officer)
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