Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
 
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.)
 
23A Serangoon North Avenue 5, #01-01 K&S Corporate Headquarters, Singapore 554369
(Address of principal executive offices and Zip Code)
(215) 784-6000
(Registrant's telephone number, including area code) 
Indicate by check mark whether the 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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
 
Smaller reporting company ¨
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
 
As of May 29, 2018, there were 69,107,600 shares of the Registrant's Common Stock, no par value, outstanding.


Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
 
FORM 10 – Q
 
March 31, 2018
 Index
 
 
 
Page Number
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
Item 1.
FINANCIAL STATEMENTS (Unaudited)
 
 
 
 
 
Consolidated Condensed Balance Sheets as of March 31, 2018 and September 30, 2017
 
 
 
 
Consolidated Condensed Statements of Operations for the three and six months ended March 31, 2018 and April 1, 2017 (As Restated)
 
 
 
 
Consolidated Condensed Statements of Comprehensive Income for the three and six months ended March 31, 2018 and April 1, 2017 (As Restated)
 
 
 
 
Consolidated Condensed Statements of Cash Flows for the six months ended March 31, 2018 and April 1, 2017 (As Restated)
 
 
 
 
Notes to Consolidated Condensed Financial Statements
 
 
 
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
Item 4.
CONTROLS AND PROCEDURES
 
 
 
PART II - OTHER INFORMATION
 
 
 
Item 1A.
RISK FACTORS
 
 
 
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES
 
 
 
Item 6.
EXHIBITS
 
 
 
 
SIGNATURES




Table of Contents

PART I. - FINANCIAL INFORMATION
Item 1. – FINANCIAL STATEMENTS
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
Unaudited
 
As of
 
March 31, 2018
 
September 30, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
340,151

 
$
392,410

Restricted cash
535

 
530

Short-term investments
288,000

 
216,000

Accounts and other receivable, net of allowance for doubtful accounts of $680 and $79 respectively
224,484

 
198,480

Inventories, net
118,831

 
122,023

Prepaid expenses and other current assets
23,754

 
23,939

Total current assets
995,755

 
953,382

 
 
 


Property, plant and equipment, net
75,619

 
67,762

Goodwill
57,478

 
56,318

Intangible assets, net
60,180

 
62,316

Deferred income taxes
10,922

 
27,771

Equity investments
1,479

 
1,502

Other assets
2,577

 
2,056

TOTAL ASSETS
$
1,204,010

 
$
1,171,107

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
82,716

 
$
51,354

Accrued expenses and other current liabilities
85,133

 
124,847

Income taxes payable
19,340

 
16,780

Total current liabilities
187,189

 
192,981

 
 
 
 
Financing obligation
16,257

 
16,074

Deferred income taxes
27,800

 
27,152

Income taxes payable
83,626

 
6,438

Other liabilities
9,211

 
8,432

TOTAL LIABILITIES
$
324,083

 
$
251,077

 
 
 
 
Commitments and contingent liabilities (Note 16)


 


 
 
 
 
SHAREHOLDERS' EQUITY:
 

 
 

Preferred stock, without par value:
 

 
 

Authorized 5,000 shares; issued - none
$

 
$

Common stock, no par value:
 

 
 

Authorized 200,000 shares; issued 84,589 and 83,953, respectively; outstanding 69,787 and 70,197 shares, respectively
513,315

 
506,515

Treasury stock, at cost, 14,802 and 13,756 shares, respectively
(182,354
)
 
(157,604
)
Retained earnings
539,871

 
569,080

Accumulated other comprehensive income
9,095

 
2,039

TOTAL SHAREHOLDERS' EQUITY
$
879,927

 
$
920,030

 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
1,204,010

 
$
1,171,107

The accompanying notes are an integral part of these consolidated condensed financial statements.


1

Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Unaudited
 
Three months ended
 
Six months ended
 
March 31, 2018
 
April 1, 2017
As Restated
 
March 31, 2018
 
April 1, 2017
As Restated
Net revenue
$
221,772

 
$
199,613

 
$
435,463

 
$
349,252

Cost of sales
122,325

 
107,350

 
238,814

 
188,562

Gross profit
99,447

 
92,263

 
196,649

 
160,690

Selling, general and administrative
32,354

 
30,740

 
60,147

 
58,603

Research and development
28,657

 
25,020

 
58,907

 
46,525

Operating expenses
61,011

 
55,760

 
119,054

 
105,128

Income from operations
38,436

 
36,503

 
77,595

 
55,562

Interest income
2,986

 
1,579

 
4,961

 
2,751

Interest expense
(270
)
 
(261
)
 
(536
)
 
(523
)
Income before income taxes
41,152

 
37,821

 
82,020

 
57,790

Income tax expense
4,800

 
5,151

 
115,212

 
7,724

Share of results of equity-method investee, net of tax
39

 

 
23

 

Net income/(loss)
$
36,313

 
$
32,670

 
$
(33,215
)
 
$
50,066

 
 
 
 
 
 
 
 
Net income/(loss) per share:
 

 
 

 
 

 
 

Basic
$
0.52

 
$
0.46

 
$
(0.47
)
 
$
0.71

Diluted
$
0.51

 
$
0.45

 
$
(0.47
)
 
$
0.69

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
70,361

 
70,964

 
70,467

 
70,909

Diluted
71,425

 
72,270

 
70,467

 
72,039

 The accompanying notes are an integral part of these consolidated condensed financial statements.



2

Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Unaudited
 
Three months ended
 
Six months ended
 
March 31, 2018
 
April 1, 2017
As Restated
 
March 31, 2018
 
April 1, 2017
As Restated
Net income/(loss)
$
36,313

 
$
32,670

 
$
(33,215
)
 
$
50,066

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
5,222

 
1,138

 
7,592

 
(3,443
)
Unrecognized actuarial (loss)/gain, on pension plan, net of tax
(37
)
 
(42
)
 
(25
)
 
85

 
5,185

 
1,096

 
7,567

 
(3,358
)
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Unrealized gain/(loss) on derivative instruments, net of tax
540

 
1,120

 
1,029

 
(472
)
Reclassification adjustment for (gain)/loss on derivative instruments recognized, net of tax
(494
)
 
477

 
(1,540
)
 
1,006

Net decrease from derivatives designated as hedging instruments, net of tax
46

 
1,597

 
(511
)
 
534

 
 
 
 
 
 
 
 
Total other comprehensive income/(loss)
5,231

 
2,693

 
7,056

 
(2,824
)
 
 
 
 
 
 
 
 
Comprehensive income/(loss)
$
41,544

 
$
35,363

 
$
(26,159
)
 
$
47,242

The accompanying notes are an integral part of these consolidated condensed financial statements.













3

Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
 
Six months ended
 
March 31, 2018
 
April 1, 2017
As Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net (loss)/income
$
(33,215
)
 
$
50,066

Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
9,212

 
7,775

Equity-based compensation and employee benefits
5,331

 
6,680

(Excess tax benefits)/Reversal of excess tax benefits from stock-based compensation
(50
)
 
742

Adjustment for doubtful accounts
678

 
(191
)
Adjustment for inventory valuation
2,822

 
3,445

Deferred income taxes
22,823

 
4,872

Gain on disposal of property, plant and equipment
(425
)
 
(1,050
)
Unrealized foreign currency translation
6,046

 
(4,789
)
Share of results of equity-method investee
23

 

Changes in operating assets and liabilities:
 

 
 

Accounts and other receivable
(26,328
)
 
(39,094
)
Inventory
157

 
(17,556
)
Prepaid expenses and other current assets
160

 
(1,141
)
Accounts payable, accrued expenses and other current liabilities
(9,793
)
 
35,331

Income taxes payable
79,908

 
(3,821
)
Other, net
(276
)
 
1,709

Net cash provided by operating activities
57,073

 
42,978

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchases of property, plant and equipment
(11,700
)
 
(17,439
)
Proceeds from sales of property, plant and equipment
244

 
1,352

Purchase of equity investments

 
(1,312
)
Purchase of short-term investments
(325,000
)
 
(139,000
)
Maturity of short-term investments
253,000

 
124,000

Net cash used in investing activities
(83,456
)
 
(32,399
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Payment on debts
(346
)
 
(290
)
Proceeds from exercise of common stock options
55

 
389

Repurchase of common stock
(23,950
)
 

Reversal of excess tax benefits from stock-based compensation

 
(742
)
Net cash used in financing activities
(24,241
)
 
(643
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(1,630
)
 
1,360

Changes in cash, cash equivalents and restricted cash
(52,254
)
 
11,296

Cash, cash equivalents and restricted cash at beginning of period*
392,940

 
423,907

Cash, cash equivalents and restricted cash at end of period
$
340,686

 
$
435,203

* Certain time deposits as at October 1, 2016 have been corrected from cash equivalents to short-term investments for comparative purposes.
 
 
 
CASH PAID FOR:
 

 
 

Interest
$
536

 
$
523

Income taxes
$
10,728

 
$
5,454

The accompanying notes are an integral part of these consolidated condensed financial statements. 


4

Table of Contents
KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited



NOTE 1: BASIS OF PRESENTATION
These consolidated condensed financial statements include the accounts of Kulicke and Soffa Industries, Inc. and its subsidiaries (the “Company”), with appropriate elimination of intercompany balances and transactions.
The interim consolidated condensed financial statements are unaudited and, in management's opinion, include all adjustments (consisting only of normal and recurring adjustments except as described in Note 2) necessary for a fair statement of results for these interim periods. The interim consolidated condensed financial statements do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's amended Annual Report on Form 10-K/A for the fiscal year ended September 30, 2017, filed with the Securities and Exchange Commission, which includes Consolidated Balance Sheets as of September 30, 2017 and October 1, 2016, and the related Consolidated Statements of Operations, Statements of Other Comprehensive Income, Changes in Shareholders' Equity and Cash Flows for each of the years in the three-year period ended September 30, 2017. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full year.
Fiscal Year    
Each of the Company's first three fiscal quarters end on the Saturday that is 13 weeks after the end of the immediately preceding fiscal quarter. The fourth quarter of each fiscal year ends on the Saturday closest to September 30. Fiscal 2018 quarters end on December 30, 2017, March 31, 2018, June 30, 2018 and September 29, 2018. In fiscal years consisting of 53 weeks, the fourth quarter will consist of 14 weeks. Fiscal 2017 quarters ended on December 31, 2016, April 1, 2017, July 1, 2017 and September 30, 2017.
Nature of Business
The Company designs, manufactures and sells capital equipment and tools as well as services, maintains, repairs and upgrades equipment, all used to assemble semiconductor devices. The Company's operating results depend upon the capital and operating expenditures of semiconductor device manufacturers, integrated device manufacturers, outsourced semiconductor assembly and test providers (“OSATs”), and other electronics manufacturers including automotive electronics suppliers, worldwide which, in turn, depend on the current and anticipated market demand for semiconductors and products utilizing semiconductors. The semiconductor industry is highly volatile and experiences downturns and slowdowns which can have a severe negative effect on the semiconductor industry's demand for semiconductor capital equipment, including assembly equipment manufactured and sold by the Company and, to a lesser extent, tools, including those sold by the Company. These downturns and slowdowns have in the past adversely affected the Company's operating results. The Company believes such volatility will continue to characterize the industry and the Company's operations in the future.
Use of Estimates
The preparation of consolidated condensed financial statements requires management to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, net revenue and expenses during the reporting periods, and disclosures of contingent assets and liabilities as of the date of the consolidated condensed financial statements. On an ongoing basis, management evaluates estimates, including but not limited to, those related to accounts receivable, reserves for excess and obsolete inventory, carrying value and lives of fixed assets, goodwill and intangible assets, valuation allowances for deferred tax assets and deferred tax liabilities, repatriation of un-remitted foreign subsidiary earnings, equity-based compensation expense, and warranties. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable. As a result, management makes judgments regarding the carrying values of the Company's assets and liabilities that are not readily apparent from other sources. Authoritative pronouncements, historical experience and assumptions also are used as the basis for making estimates, and on an ongoing basis, management evaluates these estimates. Actual results may differ from these estimates.
Vulnerability to Certain Concentrations
Financial instruments which may subject the Company to concentrations of credit risk as of March 31, 2018 and September 30, 2017 consisted primarily of trade receivables. The Company manages credit risk associated with investments by investing its excess cash in highly rated debt instruments of the U.S. Government and its agencies, financial institutions, and corporations. The Company has established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity. These guidelines are periodically reviewed and modified as appropriate. The Company does not have any exposure to sub-prime financial instruments or auction rate securities.


5

Table of Contents
KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


The Company's trade receivables result primarily from the sale of semiconductor equipment, related accessories and replacement parts, and expendable tools to a relatively small number of large manufacturers in a highly concentrated industry. Write-offs of uncollectible accounts have historically not been significant. The Company actively monitors its customers' financial strength to reduce the risk of loss.
The Company's products are complex and require raw materials, components and subassemblies having a high degree of reliability, accuracy and performance. The Company relies on subcontractors to manufacture many of these components and subassemblies and it relies on sole source suppliers for some important components and raw material inventory.
Foreign Currency Translation and Remeasurement
The majority of the Company's business is transacted in U.S. dollars; however, the functional currencies of some of the Company's subsidiaries are their local currencies. In accordance with ASC No. 830, Foreign Currency Matters (“ASC 830”), for a subsidiary of the Company that has a functional currency other than the U.S. dollar, gains and losses resulting from the translation of the functional currency into U.S. dollars for financial statement presentation are not included in determining net income, but are accumulated in the cumulative translation adjustment account as a separate component of shareholders' equity (accumulated other comprehensive income / (loss)). Under ASC 830, cumulative translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. Gains and losses resulting from foreign currency transactions are included in the determination of net income.
The Company's operations are exposed to changes in foreign currency exchange rates due to transactions denominated in currencies other than the location's functional currency. The Company is also exposed to foreign currency fluctuations that impact the remeasurement of net monetary assets of those operations whose functional currency, the U.S. dollar, differs from their respective local currencies, most notably in Israel, Malaysia, Singapore and Switzerland. In addition to net monetary remeasurement, the Company has exposures related to the translation of subsidiary financial statements from their functional currency, the local currency, into its reporting currency, the U.S. dollar, most notably in Netherlands, China, Taiwan, Japan and Germany. The Company's U.S. operations also have foreign currency exposure due to net monetary assets denominated in currencies other than the U.S. dollar.
Derivative Financial Instruments
The Company’s primary objective for holding derivative financial instruments is to manage the fluctuation in foreign exchange rates and accordingly is not speculative in nature. The Company’s international operations are exposed to changes in foreign exchange rates as described above. The Company has established a program to monitor the forecasted transaction currency risk to protect against foreign exchange rate volatility. Generally, the Company uses foreign exchange forward contracts in these hedging programs. These instruments, which have maturities of up to twelve months, are recorded at fair value and are included in prepaid expenses and other current assets, or accrued expenses and other current liabilities.
Our accounting policy for derivative financial instruments is based on whether they meet the criteria for designation as a cash flow hedge. A designated hedge with exposure to variability in the functional currency equivalent of the future foreign currency cash flows of a forecasted transaction is referred to as a cash flow hedge. The criteria for designating a derivative as a cash flow hedge include the assessment of the instrument’s effectiveness in risk reduction, matching of the derivative instrument to its underlying transaction, and the assessment of the probability that the underlying transaction will occur. For derivatives with cash flow hedge accounting designation, we report the after-tax gain / (loss) from the effective portion of the hedge as a component of accumulated other comprehensive income / (loss) and reclassify it into earnings in the same period in which the hedged transaction affects earnings and in the same line item on the Consolidated Condensed Statement of Operations as the impact of the hedged transaction. Derivatives that we designate as cash flow hedges are classified in the Consolidated Condensed Statement of Cash Flows in the same section as the underlying item, primarily within cash flows from operating activities.
The hedge effectiveness of these derivative instruments is evaluated by comparing the cumulative change in the fair value of the hedge contract with the cumulative change in the fair value of the forecasted cash flows of the hedged item.
If a cash flow hedge is discontinued because it is no longer probable that the original hedged transaction will occur as previously anticipated, the cumulative unrealized gain or loss on the related derivative is reclassified from accumulated other comprehensive income / (loss) into earnings. Subsequent gain / (loss) on the related derivative instrument is recognized into earnings in each period until the instrument matures, is terminated, is re-designated as a qualified cash flow hedge, or is sold. Ineffective portions of cash flow hedges, as well as amounts excluded from the assessment of effectiveness, are recognized in earnings.


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Table of Contents
KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Cash equivalents are measured at fair value based on level one measurement, or quoted market prices, as defined by ASC No. 820, Fair Value Measurements and Disclosures.
Investments
Investments, other than cash equivalents, are classified as “trading,” “available-for-sale” or “held-to-maturity,” in accordance with ASC No. 320, Investments-Debt & Equity Securities, and depending upon the nature of the investment, its ultimate maturity date in the case of debt securities, and management's intentions with respect to holding the securities. Investments classified as “trading” are reported at fair market value, with unrealized gains or losses included in earnings. Investments classified as “available-for-sale” are reported at fair market value, with net unrealized gains or losses reflected as a separate component of shareholders' equity (accumulated other comprehensive income / (loss)). The fair market value of trading and available-for-sale securities is determined using quoted market prices at the balance sheet date. Investments classified as held-to-maturity are reported at amortized cost. Realized gains and losses are determined on the basis of specific identification of the securities sold.
Equity Investments
The Company applies the equity method of accounting to investments that provide it with ability to exercise significant influence over the entities in which it lacks controlling financial interest and is not a primary beneficiary. Our proportionate share of the income or loss is recognized on a one-quarter lag and is recorded as share of results of equity-method investee, net of tax.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from its customers' failure to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company is also subject to concentrations of customers and sales to a few geographic locations, which could also impact the collectability of certain receivables. If global or regional economic conditions deteriorate or political conditions were to change in some of the countries where the Company does business, it could have a significant impact on the results of operations, and the Company's ability to realize the full value of its accounts receivable.
Inventories
Inventories are stated at the lower of cost (on a first-in first-out basis) or net realizable value. The Company generally provides reserves for obsolete inventory and for inventory considered to be in excess of demand. Demand is generally defined as 18 months forecasted future consumption for equipment, 24 months forecasted future consumption for spare parts, and 12 months forecasted future consumption for tools. Forecasted consumption is based upon internal projections, historical sales volumes, customer order activity and a review of consumable inventory levels at customers' facilities. The Company communicates forecasts of its future consumption to its suppliers and adjusts commitments to those suppliers accordingly. If required, the Company reserves the difference between the carrying value of its inventory and the lower of cost or net realizable value, based upon projections about future consumption, and market conditions. If actual market conditions are less favorable than projections, additional inventory reserves may be required.
Inventory reserve provision for certain subsidiaries is determined based on management's estimate of future consumption for equipment and spare parts. This estimate is based on historical sales volumes, internal projections and market developments and trends.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. The cost of additions and those improvements which increase the capacity or lengthen the useful lives of assets are capitalized, while repair and maintenance costs are expensed as incurred. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives as follows: buildings 25 years; machinery, equipment, furniture and fittings 3 to 10 years; toolings 1 year; and leasehold improvements are based on the shorter of the life of lease or life of asset. Purchased computer software costs related to business and financial systems are amortized over a five-year period on a straight-line basis. Land is not depreciated.
Valuation of Long-Lived Assets
In accordance with ASC No. 360, Property, Plant & Equipment ("ASC 360"), the Company's property, plant and equipment is tested for impairment based on undiscounted cash flows when triggering events occur, and if impaired, written-down to fair value based on either discounted cash flows or appraised values. ASC 360 also provides a single accounting model for long-lived assets


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Table of Contents
KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


to be disposed of by sale and establishes additional criteria that would have to be met to classify an asset as held for sale. The carrying amount of an asset or asset group is not recoverable to the extent it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. Estimates of future cash flows used to test the recoverability of a long-lived asset or asset group must incorporate the entity's own assumptions about its use of the asset or asset group and must factor in all available evidence.
ASC 360 requires that long-lived assets be tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Such events include significant under-performance relative to historical internal forecasts or projected future operating results; significant changes in the manner of use of the assets; significant negative industry or economic trends; or significant changes in market capitalization. During the three and six months ended March 31, 2018, no "triggering" events occurred.
Accounting for Impairment of Goodwill
Goodwill was recorded for the acquisitions of Orthodyne Electronics Corporation ("Orthodyne"), Assembléon B.V. ("Assembléon") and Liteq B.V. ("Liteq") in fiscal 2009, 2015 and 2017, respectively.
ASC No. 350, Intangibles-Goodwill and Other ("ASC 350") requires goodwill and other intangible assets with indefinite lives to be reviewed for impairment annually, or more frequently if circumstances indicate a possible impairment. We assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, after assessing the qualitative factors, a company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then performing the two-step impairment test is unnecessary. However, if a company concludes otherwise, then it is required to perform the first step of the two-step goodwill impairment test. If the carrying value of a reporting unit exceeds its fair value in the first step of the test, then a company is required to perform the second step of the goodwill impairment test to measure the amount of the reporting unit's goodwill impairment loss, if any. 
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Under this guidance, the goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value, although it cannot exceed the total amount of goodwill allocated to that reporting unit. This ASU will be effective for us beginning in our first quarter of 2021 and early adoption is permitted. During the third quarter of 2017, we elected to prospectively adopt ASU2017-04. This eliminates the requirement to perform step 2 of the goodwill impairment test.
As part of the annual evaluation, the Company performs an impairment test of its goodwill in the fourth quarter of each fiscal year to coincide with the completion of its annual forecasting and refreshing of its business outlook processes. On an ongoing basis, the Company monitors if a “triggering” event has occurred that may have the effect of reducing the fair value of a reporting unit below its respective carrying value. Adverse changes in expected operating results and/or unfavorable changes in other economic factors used to estimate fair values could result in a non-cash impairment charge in the future.
Impairment assessments inherently involve judgment as to the assumptions made about the expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact the assumptions as to prices, costs, growth rates or other factors that may result in changes in the estimates of future cash flows. Although the Company believes the assumptions that it has used in testing for impairment are reasonable, significant changes in any one of the assumptions could produce a significantly different result. Indicators of potential impairment may lead the Company to perform interim goodwill impairment assessments, including significant and unforeseen customer losses, a significant adverse change in legal factors or in the business climate, a significant adverse action or assessment by a regulator, a significant stock price decline or unanticipated competition.
For further information on goodwill and other intangible assets, see Note 6 below.
Revenue Recognition
In accordance with ASC No. 605, Revenue Recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, the collectability is reasonably assured, and customer acceptance, when applicable, has been received or we otherwise have been released from customer acceptance obligations. If terms of the sale provide for a customer acceptance period, revenue is recognized upon the expiration of the acceptance period or customer acceptance, whichever occurs first. Service revenue is generally recognized over the period that the services are provided.


8

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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


Shipping and handling costs billed to customers are recognized in net revenue. Shipping and handling costs paid by the Company are included in cost of sales.
Research and Development
The Company charges research and development costs associated with the development of new products to expense when incurred. In certain circumstances, pre-production machines that the Company intends to sell are carried as inventory until sold.
Income Taxes
In accordance with ASC No. 740, Income Taxes, deferred income taxes are determined using the balance sheet method. The Company records a valuation allowance to reduce its deferred tax assets to the amount it expects is more likely than not to be realized. While the Company has considered future taxable income and its ongoing tax planning strategies in assessing the need for the valuation allowance, if it were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period when such determination is made. Likewise, should the Company determine it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax asset would decrease income in the period when such determination is made.
In accordance with ASC No. 740 Topic 10, Income Taxes, General (“ASC 740.10”), the Company accounts for uncertain tax positions taken or expected to be taken in its income tax return. Under ASC 740.10, the Company utilizes a two-step approach for evaluating uncertain tax positions. Step one, or recognition, requires a company to determine if the weight of available evidence indicates a tax position is more likely than not to be sustained upon examination solely based on its technical merit. Step two, or measurement, is based on the largest amount of benefit, which is more likely than not to be realized on settlement with the taxing authority, including resolution of related appeals or litigation processes, if any.
Equity-Based Compensation
The Company accounts for equity-based compensation under the provisions of ASC No. 718, Compensation - Stock Compensation (“ASC 718”). ASC 718 requires the recognition of the fair value of the equity-based compensation in net income. Compensation expense associated with Relative TSR Performance Restricted Stock is determined using a Monte-Carlo valuation model, and compensation expense associated with time-based and Special/Growth Performance Restricted Stock is determined based on the number of shares granted and the fair value on the date of grant. See Note 12 for a summary of the terms of these performance-based awards. The fair value of the Company's stock option awards are estimated using a Black-Scholes option valuation model. The fair value of equity-based awards is amortized over the vesting period of the award and the Company elected to use the straight-line method for awards granted after the adoption of ASC 718.
Earnings per Share
Earnings per share (“EPS”) are calculated in accordance with ASC No. 260, Earnings per Share. Basic EPS include only the weighted average number of common shares outstanding during the period. Diluted EPS include the weighted average number of common shares and the dilutive effect of stock options, restricted stock and share unit awards and convertible subordinated notes outstanding during the period, when such instruments are dilutive.
In accordance with ASC No. 260.10.55, Earnings per Share - Implementation & Guidance, the Company treats all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends as participating in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted EPS must be applied.
Accounting for Business Acquisitions
The Company accounts for business acquisitions in accordance with ASC No. 805, Business Combinations. The fair value of the net assets acquired and the results of operations of the acquired businesses are included in the Unaudited Consolidated Condensed Financial Statements from the acquisition date forward. The Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and results of operations during the reporting period. Estimates are used in accounting for, among other things, the fair value of acquired net operating assets, property and equipment, deferred revenue, intangible assets and related deferred tax liabilities, useful lives of plant and equipment, and amortizable lives of acquired intangible assets. Any excess of the purchase consideration over the identified fair value of the assets and liabilities acquired is recognized as goodwill. The valuation of these tangible and identifiable intangible assets and liabilities is subject to further management review and may change materially between the preliminary allocation and end of the purchase price allocation period.


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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


Restructuring charges
Restructuring charges may consist of voluntary or involuntary severance-related charges, asset-related charges and other costs due to exit activities. We recognize voluntary termination benefits when an employee accepts the offered benefit arrangement. We recognize involuntary severance-related charges depending on whether the termination benefits are provided under an ongoing benefit arrangement or under a one-time benefit arrangement. If the former, we recognize the charges once they are probable and the amounts are estimable. If the latter, we recognize the charges once the benefits have been communicated to employees.
Recent Accounting Pronouncements
Restricted Cash
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). This update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. We adopted this ASU in the first quarter of 2018 on a retrospective basis. As of March 31, 2018 and September 30, 2017, restricted cash was $0.5 million. The adoption of this ASU did not have a material impact on our cash flows.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The new guidance requires the tax effects of intercompany transactions (other than transfers of inventory) to be recognized currently. The new guidance will be effective for public business entities in fiscal years beginning after December 15, 2017 (our fiscal 2019), including interim periods within those years, with an option to early adopt. The modified retrospective approach will be required for transition to the new guidance, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. We do not expect the adoption of this ASU itself to have a material impact on our financial statements. However, the ultimate impact of adopting this ASU will depend on the balance of intellectual property transferred between our subsidiaries as of the adoption date. We are currently evaluating the timing of the adoption of this ASU.
Stock Compensation
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. We adopted this ASU as of the beginning of the first quarter of 2018 and elected to account for forfeitures when they occur, on a modified retrospective basis. The adoption impact on the consolidated balance sheet as of March 31, 2018 was a cumulative adjustment of $1.4 million, decreasing the retained earnings and increasing capital surplus. We also recognized deferred tax assets of $5.4 million with a corresponding increase in retained earnings. The adoption did not have any other material impacts on our financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU specifies the modification accounting applicable to any entity which changes the terms or conditions of a share-based payment award. We elected to prospectively adopt this ASU as of the beginning of the first quarter of 2018. The adoption of this ASU did not have a material impact on our financial statements.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under current GAAP. This ASU will be effective for us beginning in our first quarter of fiscal 2020 and early adoption is permitted. The adoption of this ASU will result in an increase in our consolidated balance sheets for these right of use assets and corresponding liabilities. However, the ultimate impact of adopting this ASU will depend on the Company's lease portfolio as of the adoption date. We are currently evaluating the timing and other effects of the adoption of this ASU on our financial statements.
Financial Instruments
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. We adopted this ASU as of the beginning of the first quarter of 2018. The adoption of this ASU did not have a material impact on our financial statements.


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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU replaces the impairment methodology in current GAAP, which delays recognition of credit losses until it is probable a loss has been incurred, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU will be effective for us beginning in our first quarter of fiscal 2020. Early adoption is permitted beginning in our first quarter of 2019. We are currently evaluating the impact of the adoption of this ASU on our financial statements.
Derivatives and Hedging
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities (Topic 815). The new guidance expands and refines hedge accounting for both financial and non-financial risks. The new guidance also modifies disclosure requirements for hedging activities. The new guidance will be effective for us beginning in our first quarter of fiscal 2020, and early adoption is permitted in any interim period. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements as well as whether to adopt the new guidance early.
Business Combinations
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides a new framework for determining whether business development transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU will be effective for us beginning in our first quarter of 2019. Earlier application is permitted for acquisition or derecognition events that occurred prior to issuance date or effective date of the guidance only when the transaction has not been reported in financial statements that have been issued or made available for issuance. We have elected to prospectively adopt this ASU as of the beginning of the first quarter of 2018. The adoption of this ASU did not have a material impact on our financial statements.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. We have elected to prospectively adopt this ASU as of the beginning of the first quarter of 2018. The adoption of this ASU did not have a material impact on our financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers.
Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”); and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20” and collectively, the “new revenue standards”).
The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The new standard is effective for annual reporting periods beginning after December 15, 2017. The new standard permits companies to early adopt the new standard, but the Company will not early adopt the new standard and therefore the new standard will be effective for the Company in the first quarter of its fiscal 2019. We continue to review the impact of this guidance on revenue related activities, and are monitoring additional changes, modifications, clarifications or interpretations undertaken by the FASB. We do not expect the adoption of this ASU itself to have a material impact on our financial statements. However, the ultimate impact of adopting this ASU will depend on the Company's revenue portfolio as of the adoption date.


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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


NOTE 2: RESTATEMENT OF CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On May 10, 2018 and May 28, 2018, the Company’s Audit Committee, in consultation with the Board of Directors, concluded that the Company’s previously issued financial statements for the fiscal year ended September 30, 2017 and the three months ended December 30, 2017, respectively, could no longer be relied upon. This decision was reached after discussions with the Company’s senior management and outside advisers.
The above was a result of the Company’s determination that, i) the warranty expense and warranty accrual accounts had been misstated for the quarter ended December 30, 2017 as a result of inaccurate and unsupported journal entries recorded due to management override of controls, and ii) the cost of sales and account payable accounts were misstated for the quarter ended December 30, 2017 as a result of falsified accounting records due to management override of controls. The management overrides of controls were identified during an internal investigation, which was concluded in May 2018, related to an unauthorized disbursement by a senior finance employee that was discovered after the end of the second fiscal quarter of 2018.
With respect to the journal entries impacting warranty expense and warranty accrual accounts, we determined that the manual journal entries initiated by this employee were made to correct the Company's failure to properly include labor costs in our warranty accrual, described below, lacked supporting documentation and were accounted for incorrectly. As a result, the Company identified overstatements of specific warranty accruals of $2.8 million and $15.9 million for fiscal 2016 and fiscal 2017, respectively.
In addition, the Company also identified adjustments that were required to be made to retained earnings, warranty expense and accrual accounts to correct the inappropriate exclusion of the estimated labor costs related to warranty repairs from its historical warranty accounting. While the latter adjustments are not deemed material, the Company is adjusting retained earnings, warranty expense and warranty accrual accounts as part of the restatement. As a result, the Company identified an understatement of warranty accruals relating to fiscal 2014 and prior years of $10.1 million in the aggregate, as the actual labor costs had instead been expensed in the periods incurred.
In addition to the understatement of warranty accruals relating to fiscal 2014 and in prior years, the warranty expense had also been misstated from fiscal 2015 through fiscal 2017, resulting in a cumulative understatement of income from operations of approximately $17.6 million. Of this understatement, approximately $14.8 million, $1.4 million, and $1.4 million was related to the fiscal years ended September 30, 2017, October 1, 2016 and October 3, 2015, respectively. The labor costs relating to warranty expenses were also incorrectly reported in selling, general and administrative expense instead of cost of sales for the fiscal years ended September 30, 2017, October 1, 2016 and October 3, 2015. The Consolidated Balance Sheets were also misstated for the annual periods from 2015 through 2017.
The Company has also identified a misstatement in its previously reported consolidated condensed financial statements for the quarterly period ended December 30, 2017, relating to a reduction in the warranty accrual of $5.2 million. This reduction resulted in an understatement of cost of sales and provision for warranty. In addition, the labor costs relating to warranty expenses of $2.4 million were also incorrectly reported in selling, general and administrative expense instead of cost of sales.
In connection with the internal investigation, the Company identified an unauthorized payment that had been initiated by a senior finance employee to an unapproved vendor in the second fiscal quarter of fiscal 2018. The payment was made based on falsified accounting records where two manual journal entries totaling $5.8 million in the aggregate had been recorded in accounts payable and cost of sales. Management has determined this to be a misappropriation of the Company's assets. Accordingly, the previously reported consolidated condensed financial statements for the quarterly period ended December 30, 2017 were misstated, because accounts payable and cost of sales were each overstated by $5.8 million.
In addition, we have made related tax expense adjustments for the above matters.
This Quarterly Report on Form 10-Q includes the restated fiscal 2017 comparable prior quarter and year to date periods.





12


KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Unaudited
 
 
Three Months Ended
 
 
April 1, 2017
 
 
As Previously Reported
 
Effect of Restatement
 
As Restated
Cost of sales
 
109,322

 
(1,972
)
 
107,350

Gross profit
 
90,291

 
1,972

 
92,263

Selling, general and administrative
 
32,666

 
(1,926
)
 
30,740

Operating expenses
 
57,686

 
(1,926
)
 
55,760

Income from operations
 
32,605

 
3,898

 
36,503

Income from operations before income taxes
 
33,923

 
3,898

 
37,821

Income tax expense
 
4,882

 
269

 
5,151

Net income
 
$
29,041

 
$
3,629

 
$
32,670

 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 
Basic
 
$
0.41

 
$
0.05

 
$
0.46

Diluted
 
$
0.40

 
$
0.05

 
$
0.45


 
 
Six Months Ended
 
 
April 1, 2017
 
 
As Previously Reported
 
Effect of Restatement
 
As Restated
Cost of sales
 
190,643

 
(2,081
)
 
188,562

Gross profit
 
158,609

 
2,081

 
160,690

Selling, general and administrative
 
62,198

 
(3,595
)
 
58,603

Operating expenses
 
108,723

 
(3,595
)
 
105,128

Income from operations
 
49,886

 
5,676

 
55,562

Income from operations before income taxes
 
52,114

 
5,676

 
57,790

Income tax expense
 
7,490

 
234

 
7,724

Net income
 
$
44,624

 
$
5,442

 
$
50,066

 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 
Basic
 
$
0.63

 
$
0.08

 
$
0.71

Diluted
 
$
0.62

 
$
0.07

 
$
0.69




13


KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Unaudited

 
 
Three Months Ended
 
 
April 1, 2017
 
 
As Previously Reported
 
Effect of Restatement
 
As Restated
Net income
 
$
29,041

 
$
3,629

 
$
32,670

Comprehensive income
 
$
31,734

 
$
3,629

 
$
35,363


 
 
Six Months Ended
 
 
April 1, 2017
 
 
As Previously Reported
 
Effect of Restatement
 
As Restated
Net income
 
$
44,624

 
$
5,442

 
$
50,066

Comprehensive income
 
$
41,800

 
$
5,442

 
$
47,242




14


KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited


 
 
Six Months Ended
 
 
April 1, 2017
 
 
As Previously Reported
 
Effect of Restatement
 
As Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

 
 
Net income
 
$
44,624

 
$
5,442

 
50,066

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Deferred taxes
 
4,638

 
234

 
4,872

Accounts payable, accrued expenses and other current liabilities
 
41,007

 
(5,676
)
 
35,331

Net cash provided by operating activities
 
42,978

 

 
42,978




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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


NOTE 3: RESTRUCTURING
In fiscal 2016, the Company implemented a restructuring program to streamline its international operations and functions as well as to consolidate its organization structure to achieve our cost-reduction, productivity and efficiency initiatives. In fiscal 2017, the Company implemented a restructuring program to reallocate resources with respect to the EA/APMR ("Electronics Assembly/Hybrid") business unit.
The accrued cost as at March 31, 2018 of these restructuring programs is expected to be paid in fiscal 2018.
The following table is a summary of activity related to these restructuring programs for the three and six months ended March 31, 2018 and April 1, 2017:
 
Three months ended
 
Six months ended
 
March 31, 2018
 
March 31, 2018
(in thousands)
Beginning of period (1)
 
Expenses (2)
 
Payments
 
End of period (1) 
 
Beginning of period (1)
 
Expenses (2)
 
Payments
 
End of period (1) 
Accrued Severance and benefits
$
1,997

 
$

 
$
(1,700
)
 
$
297

 
$
2,892

 
$
(31
)
 
$
(2,564
)
 
$
297

Other exit costs
1,466

 
(160
)
 
(46
)
 
1,260

 
1,736

 
(159
)
 
(317
)
 
1,260

 
$
3,463

 
$
(160
)
 
$
(1,746
)
 
$
1,557

 
$
4,628

 
$
(190
)
 
$
(2,881
)
 
$
1,557

 
Three months ended
 
Six months ended
 
April 1, 2017
 
April 1, 2017
(in thousands)
Beginning of period (1)
 
Expenses (2)
 
Payments
 
End of period (1) 
 
Beginning of period (1)
 
Expenses (2)
 
Payments
 
End of period (1) 
Accrued Severance and benefits
$

 
$

 
$

 
$

 
$
37

 
$

 
$
(37
)
 
$

Other exit costs
$
3,633

 
$

 
$
(1,575
)
 
$
2,058

 
$
6,525

 
$

 
$
(4,467
)
 
$
2,058

 
$
3,633

 
$

 
$
(1,575
)
 
$
2,058

 
$
6,562

 
$

 
$
(4,504
)
 
$
2,058

(1)
Included within accrued expenses and other current liabilities on the Consolidated Condensed Balance Sheets.
(2)
Provision for severance and benefits and other exit costs are included within selling, general and administrative expenses on the Consolidated Condensed Statements of Operations.



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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


NOTE 4: BALANCE SHEET COMPONENTS
The following tables reflect the components of significant balance sheet accounts as of March 31, 2018 and September 30, 2017:
 
As of
(in thousands)
March 31, 2018
 
September 30, 2017
 
 
 
 
Short term investments, available-for-sale(1)
$
288,000

 
$
216,000

 
 
 
 
Inventories, net:
 

 
 

Raw materials and supplies
$
55,993

 
$
44,239

Work in process
47,460

 
40,827

Finished goods
40,646

 
61,596

 
144,099

 
146,662

Inventory reserves
(25,268
)
 
(24,639
)
 
$
118,831

 
$
122,023

Property, plant and equipment, net:
 

 
 

Land
$
2,182

 
$
2,182

Buildings and building improvements
51,160

 
50,910

Leasehold improvements
9,288

 
9,882

Data processing equipment and software
34,952

 
34,700

Machinery, equipment, furniture and fixtures
78,114

 
68,143

 
175,696

 
165,817

Accumulated depreciation
(100,077
)
 
(98,055
)
 
$
75,619

 
$
67,762

Accrued expenses and other current liabilities:
 

 
 

Wages and benefits
$
31,168

 
$
47,411

Accrued customer obligations (2)
30,968

 
52,460

Commissions and professional fees
7,536

 
8,555

Deferred rent
1,908

 
1,930

Severance (3)
1,217

 
3,828

Other
12,336

 
10,663

 
$
85,133

 
$
124,847

(1)
All short-term investments were classified as available-for-sale and were measured at fair value based on level one measurement, or quoted market prices, as defined by ASC 820. The Company did not recognize any realized gains or losses on the sale of investments during the three and six months ended March 31, 2018 and April 1, 2017.
(2)
Represents customer advance payments, customer credit program, accrued warranty expense and accrued retrofit obligations.
(3)
Includes the restructuring plan discussed in Note 3, severance payable in connection with the November 2017 departure of the Company's CFO of $0.7 million, and other severance payments.



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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


NOTE 5: BUSINESS COMBINATIONS
Acquisition of Liteq
On July 2, 2017, the Company, through a wholly owned subsidiary, acquired all of the outstanding equity interests of Liteq. Liteq is a lithography solutions provider for advanced packaging.
The purchase price consisted of EUR 25.0 million (approximately $28.6 million) cash paid at closing and additional potential earn-out payments based on Liteq's cumulative pre-tax earnings and cumulative engineering expenses for fiscal 2018 to 2022. The acquisition expands the Company's presence in the advanced packaging market.
The acquisition of Liteq was accounted for in accordance with ASC No. 805, Business Combinations, using the acquisition method. The Company has estimated the preliminary fair value of acquired assets and liabilities as of the date of acquisition based on information available. The valuation of these tangible and identifiable intangible assets and liabilities is subject to further management review and may change materially between the preliminary allocation and end of the purchase price allocation period of July 2, 2018. Any changes in these estimates may have a material impact on our Consolidated Condensed Statements of Operations or Consolidated Condensed Balance Sheets.
The following table summarizes the allocation of the assets acquired and liabilities assumed based on the fair values as of the acquisition date and related useful lives of the finite-lived intangible assets acquired:
(in thousands)
July 2, 2017
Prepaid expenses and other current assets
$
199

Property, plant and equipment
107

Intangibles
18,060

Goodwill
10,253

Accounts payable
(157
)
Accrued expenses and other current liabilities
(103
)
Deferred tax liabilities
(1,240
)
Total purchase price, net of cash acquired
$
27,119

Tangible net assets (liabilities) were valued at their respective carrying amounts, which the Company believes approximate their current fair values at the acquisition date.
The valuation of identifiable intangible assets acquired, representing developed technology, reflects management’s estimates based on, among other factors, use of established valuation methods. The developed technology was determined using the relief from royalty method, and is amortized over the period of estimated benefit using the straight-line method and the estimated useful lives of ten years. The straight-line method of amortization represents the Company’s best estimate of the distribution of the economic value of the identifiable intangible assets. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired and includes the value of expected future cash flows of Liteq from expected synergies with our other affiliates and other unidentifiable intangible assets. None of the goodwill recorded as part of the acquisition will be deductible for income tax purposes.
In connection with the acquisition of Liteq, the Company recorded deferred tax liabilities relating to the acquired intangible assets, which are partially offset by the net amount of acquired net operating losses. The net amount of acquired net operating losses is comprised of net operating losses less the tax reserves and valuation allowance.
Acquisition of Assembléon
In 2015, the Company, through a wholly owned subsidiary, acquired all of the outstanding equity interests of Assembléon. The cash purchase price of approximately $97.4 million (EUR 80 million) consisted of $72.5 million for 100% of the equity of Assembléon and $24.9 million which was used by Assembléon to settle intercompany loans with its parent company. On January 18, 2018, the Company released $5.0 million (EUR 4.2 million) previously held in escrow, after the conclusion of a legal proceeding for which the Company asserted indemnification rights under the share purchase agreement.


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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


NOTE 6: GOODWILL AND INTANGIBLE ASSETS
Goodwill
Intangible assets classified as goodwill are not amortized. The goodwill established in connection with our acquisitions represents the estimated future economic benefits arising from the assets we acquired that did not qualify to be identified and recognized individually. The goodwill also includes the value of expected future cash flows of the acquisitions, expected synergies with our other affiliates and other unidentifiable intangible assets. The Company performs an annual impairment test of its goodwill during the fourth quarter of each fiscal year, which coincides with the completion of its annual forecasting and refreshing of business outlook process.
The Company performed its annual impairment test in the fourth quarter of fiscal 2017 and concluded that no impairment charge was required. During the three and six months ended March 31, 2018, the Company reviewed qualitative factors to ascertain if a "triggering" event may have taken place that may have the effect of reducing the fair value of the reporting unit below its carrying value and concluded that no triggering event had occurred.

The following table summarizes the Company's recorded goodwill as of March 31, 2018 and September 30, 2017:
 
As of
(in thousands)
March 31, 2018
 
September 30, 2017
Capital Equipment
$
30,894

 
$
29,975

APS
26,584

 
26,343

 
$
57,478

 
$
56,318

Intangible Assets
Intangible assets with determinable lives are amortized over their estimated useful lives. The Company's intangible assets consist primarily of developed technology, customer relationships and trade and brand names.
The following table reflects net intangible assets as of March 31, 2018 and September 30, 2017
 
As of
 
Average estimated
(dollar amounts in thousands)
March 31, 2018
 
September 30, 2017
 
useful lives (in years)
Technology
$
94,031

 
$
92,140

 
7.0 to 15.0
Accumulated amortization
(43,622
)
 
(41,162
)
 
 
Net technology
$
50,409

 
$
50,978

 
 
 
 
 
 
 
 
Customer relationships
$
37,173

 
$
36,968

 
5.0 to 6.0
Accumulated amortization
(28,982
)
 
(27,398
)
 
 
Net customer relationships
$
8,191

 
$
9,570

 
 
 
 
 
 
 
 
Trade and brand names
$
7,549

 
$
7,515

 
7.0 to 8.0
Accumulated amortization
(5,969
)
 
(5,747
)
 
 
Net trade and brand name
$
1,580

 
$
1,768

 
 
 
 
 
 
 
 
Other intangible assets
$
2,500

 
$
2,500

 
1.9
Accumulated amortization
(2,500
)
 
(2,500
)
 
 
Net other intangible assets
$

 
$

 
 
 
 
 
 
 
 
Net intangible assets
$
60,180

 
$
62,316

 
 




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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


The following table reflects estimated annual amortization expense related to intangible assets as of March 31, 2018:
 
As of
(in thousands)
March 31, 2018
Remaining fiscal 2018
$
4,052

Fiscal 2019
8,105

Fiscal 2020
8,105

Fiscal 2021
5,871

Fiscal 2022 and onwards
34,047

Total amortization expense
$
60,180

 

NOTE 7: CASH, CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS
Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. In general, these investments are free of trading restrictions.
Cash, cash equivalents, restricted cash and short-term investments consisted of the following as of March 31, 2018:
(in thousands)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
54,378

 
$

 
$

 
$
54,378

Cash equivalents:
 
 
 
 
 
 
 
Money market funds (1)
210,809

 

 
(16
)
 
210,793

Time deposits (2)
55,009

 

 

 
55,009

Commercial paper (2)
19,971

 

 

 
19,971

Total cash and cash equivalents
$
340,167

 
$

 
$
(16
)
 
$
340,151

Restricted Cash (2)
535

 

 

 
535

Total cash, cash equivalents, and restricted cash
$
340,702

 
$

 
$
(16
)
 
$
340,686

Short-term investments (2):
 
 
 
 
 
 
 
Time deposits
192,000

 

 

 
192,000

Deposits (3)
96,000

 

 

 
96,000

Total short-term investments
$
288,000

 
$

 
$

 
$
288,000

Total cash, cash equivalents, restricted cash and short-term investments
$
628,702

 
$

 
$
(16
)
 
$
628,686

(1)
The fair value was determined using unadjusted prices in active, accessible markets for identical assets, and as such they were classified as Level 1 assets in the fair value hierarchy.
(2)
Fair value approximates cost basis.
(3)
Represents deposits that require a notice period of three months for withdrawal.



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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


Cash, cash equivalents, restricted cash and short-term investments consisted of the following as of September 30, 2017:
(in thousands)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
65,759

 
$

 
$

 
$
65,759

Cash equivalents (1):
 
 
 
 
 
 
 
Money market funds
232,069

 

 

 
232,069

Time deposits
89,087

 

 

 
89,087

Commercial paper
5,495

 

 

 
5,495

Total cash and cash equivalents
$
392,410

 
$

 
$

 
$
392,410

Restricted Cash (1)
530

 
 
 
 
 
530

Total cash, cash equivalents, and restricted cash
$
392,940

 
$

 
$

 
$
392,940

Short-term investments (1):
 
 
 
 
 
 
 
Time deposits
120,000

 

 

 
120,000

Deposits (2)
96,000

 

 

 
96,000

Total short-term investments
$
216,000

 
$

 
$

 
$
216,000

Total cash, cash equivalents, restricted cash and short-term investments
$
608,940

 
$

 
$

 
$
608,940

(1)
Fair value approximates cost basis.
(2)
Represents deposits that require a notice period of three months for withdrawal.

NOTE 8: EQUITY INVESTMENTS
Equity investments consisted of the following as of March 31, 2018 and September 30, 2017:
 
As of
(in thousands)
March 31, 2018
 
September 30, 2017
Equity method investment
$
1,479

 
$
1,502

The Company has an investment in one of our strategic suppliers which provides the Company with the ability to exercise significant influence over the investment vehicle, in which it lacks a controlling financial interest and is not a primary beneficiary. Our share of gains and losses in the equity method investment is recognized on a one-quarter lag, and is reflected as share of results of equity-method investee, net of tax, in the accompanying Consolidated Condensed Statements of Operations.

NOTE 9: FAIR VALUE MEASUREMENTS
Accounting standards establish three levels of inputs that may be used to measure fair value: quoted prices in active markets for identical assets or liabilities (referred to as Level 1), inputs other than Level 1 that are observable for the asset or liability either directly or indirectly (referred to as Level 2) and unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities (referred to as Level 3).
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis 
We measure certain financial assets and liabilities at fair value on a recurring basis. There were no transfers between fair value measurement levels during the three and six months ended March 31, 2018.
Fair Value Measurements on a Nonrecurring Basis
Our non-financial assets such as intangible assets and property, plant and equipment are carried at cost unless impairment is deemed to have occurred. Our equity method investments are recorded at fair value only if an impairment is recognized.


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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


Fair Value of Financial Instruments
Amounts reported as accounts receivables, prepaid expenses and other current assets, accounts payable and accrued expenses approximate fair value.

NOTE 10: DERIVATIVE FINANCIAL INSTRUMENTS
The Company’s international operations are exposed to changes in foreign exchange rates due to transactions denominated in currencies other than U.S. dollars. Most of the Company’s revenue and cost of materials are transacted in U.S. dollars. However, a significant amount of the Company’s operating expenses are denominated in local currencies, primarily in Singapore.
The foreign currency exposure of our operating expenses is generally hedged with foreign exchange forward contracts. The Company’s foreign exchange risk management programs include using foreign exchange forward contracts with cash flow hedge accounting designation to hedge exposures to the variability in the U.S. dollar equivalent of forecasted non-U.S. dollar-denominated operating expenses. These instruments generally mature within twelve months. For these derivatives, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss), and we reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings and in the same line item on the Consolidated Condensed Statements of Operations as the impact of the hedged transaction.
The fair value of derivative instruments on our Consolidated Condensed Balance Sheet as of March 31, 2018 and September 30, 2017 was as follows:
 
As of
(in thousands)
March 31, 2018
 
September 30, 2017
 
Notional Amount
 
Fair Value Asset Derivatives(1)
 
Notional Amount
 
Fair Value Asset Derivatives(1)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts (2)
$
39,927

 
$
842

 
$
36,404

 
$
1,353

Total derivatives
$
39,927

 
$
842

 
$
36,404

 
$
1,353

(1)
The fair value of derivative assets is measured using level 2 fair value inputs and is included in prepaid expenses and other current assets on our Consolidated Condensed Balance Sheet.
(2)
Hedged amounts expected to be recognized to income within the next twelve months.

The effects of derivative instruments designated as cash flow hedges in our Consolidated Condensed Statements of Comprehensive Income for the three and six months ended March 31, 2018 and April 1, 2017 are as follows:
(in thousands)
Three months ended
 
Six months ended
 
March 31, 2018
 
April 1, 2017
 
March 31, 2018
 
April 1, 2017
Foreign exchange forward contract in cash flow hedging relationships:
 
 
 
 
 
 
 
Net gain/(loss) recognized in OCI, net of tax(1)
$
540

 
$
1,120

 
$
1,029

 
$
(472
)
Net gain/(loss) reclassified from accumulated OCI into income, net of tax(2)
$
494

 
$
(477
)
 
$
1,540

 
$
(1,006
)
Net gain recognized in income(3)
$

 
$

 
$

 
$

(1)
Net change in the fair value of the effective portion classified in other comprehensive income (“OCI”).
(2)
Effective portion classified as selling, general and administrative expense.
(3)
Ineffective portion and amount excluded from effectiveness testing classified in selling, general and administrative expense.



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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


NOTE 11: DEBT AND OTHER OBLIGATIONS
Financing Obligation
On December 1, 2013, Kulicke & Soffa Pte Ltd. (“Pte”), the Company's wholly owned subsidiary, signed a lease with DBS Trustee Limited as trustee of Mapletree Industrial Trust (the “Landlord”) to lease from the Landlord approximately 198,000 square feet, representing approximately 70% of a building in Singapore as our corporate headquarters, as well as a manufacturing, technology, sales and service center (the “Building”). The lease has a 10-year non-cancellable term (the "Initial Term") and contains options to renew for 2 further 10-year terms. The annual rent and service charge for the Initial Term range from $4 million to $5 million Singapore dollars.
Pursuant to ASC No. 840, Leases ("ASC 840"), we have classified the Building on our balance sheet as property, plant and equipment, which we are depreciating over its estimated useful life of 25 years. We concluded that the term of the financing obligation is 10 years. This is equal to the non-cancellable term of our lease agreement with the Landlord. At the inception of the lease, the asset and financing obligation recorded on the balance sheet was $20.0 million, which was based on an interest rate of 6.3% over the Initial Term.  As of March 31, 2018, the financing obligation related to the Building is $17.0 million, which approximates fair value (Level 2). The financing obligation will be settled through a combination of periodic cash rental payments and the return of the leased property at the expiration of the lease. We do not report rent expense for the property, which is deemed owned for accounting purposes. Rather, rental payments required under the lease are considered debt service and applied to the deemed landlord financing obligation and interest expense. The Building and financing obligation are being amortized in a manner that will not generate a gain or loss upon lease termination.
Credit Facilities and Bank Guarantees
On November 22, 2013, the Company obtained a $5.0 million credit facility with Citibank in connection with the issuance of bank guarantees for operational purposes. As of March 31, 2018, the outstanding amount is $3.5 million. In addition, the Company has other bank guarantees for operational purposes which are secured with corresponding deposits placed with the issuer banks. These amounts are shown as restricted cash in the Consolidated Condensed Balance Sheets.
On March 21, 2016, the Company entered into an Uncommitted Revolving Credit Agreement with United Overseas Bank Limited, New York Agency ("UOB"), providing for a $25 million revolving credit facility (the "2016 Credit Facility"). The proceeds of the 2016 Credit Facility may be used for the Company's general corporate purposes. Upon expiration on March 20, 2018, the 2016 Credit Facility was not renewed.

NOTE 12: SHAREHOLDERS’ EQUITY AND EMPLOYEE BENEFIT PLANS
Common Stock and 401(k) Retirement Plan
The Company has a 401(k) retirement plan (the “Plan”) for eligible U.S. employees. The Plan allows for employee contributions and matching Company contributions from 4% to 6% based upon terms and conditions of the 401(k) Plan.
The following table reflects the Company’s contributions to the Plan during the three and six months ended March 31, 2018 and April 1, 2017:
 
Three months ended
 
Six months ended
(in thousands)
March 31, 2018
 
April 1, 2017
 
March 31, 2018
 
April 1, 2017
Cash
$
352

 
$
504

 
$
853

 
$
917

Stock Repurchase Program
On August 15, 2017, the Company’s Board of Directors authorized a program (the "Program") to repurchase up to $100 million of the Company’s common stock on or before August 1, 2020. The Company has entered into a written trading plan under Rule 10b5-1 of the Exchange Act to facilitate repurchases under the Program. The Program may be suspended or discontinued at any time and is funded using the Company's available cash, cash equivalents and short-term investments. Under the Program, shares may be repurchased through open market and/or privately negotiated transactions at prices deemed appropriate by management. The timing and amount of repurchase transactions under the Program depend on market conditions as well as corporate and regulatory considerations. During the three and six months ended March 31, 2018, the Company repurchased a total of 0.9 million and 1.0 million shares of common stock under the Program at a cost of $21.5 million and $24.8 million, respectively. The stock repurchases were recorded in the periods they were delivered and accounted for as treasury stock in the Company's Consolidated


23

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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


Condensed Balance Sheet. The Company records treasury stock purchases under the cost method using the first-in, first-out (FIFO) method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid-in capital. If the Company reissues treasury stock at an amount below its acquisition cost and additional paid-in capital associated with prior treasury stock transactions is insufficient to cover the difference between acquisition cost and the reissue price, this difference is recorded against retained earnings. As of March 31, 2018, our remaining stock repurchase authorization under the Program was approximately $64.0 million.
Accumulated Other Comprehensive Income
The following table reflects accumulated other comprehensive income reflected on the Consolidated Condensed Balance Sheets as of March 31, 2018 and September 30, 2017
 
As of
(in thousands)
March 31, 2018
 
September 30, 2017
Gain from foreign currency translation adjustments
$
10,014

 
$
2,422

Unrecognized actuarial loss on pension plan, net of tax
(1,761
)
 
(1,736
)
Unrealized gain on hedging
842

 
1,353

Accumulated other comprehensive income
$
9,095

 
$
2,039

Equity-Based Compensation
The Company has stockholder-approved equity-based employee compensation plans (the “Employee Plans”) and director compensation plans (the “Director Plans”) (collectively, the “Equity Plans”). As of March 31, 2018, 4.7 million shares of common stock are available for grant to its employees and directors under the 2017 Equity Plan, including previously registered shares that have been carried forward for issuance from the 2009 Equity Plan.
In general, stock options and time-based restricted stock awarded to employees vest annually over a three-year period provided the employee remains employed by the Company. The Company follows the non-substantive vesting method for stock options and recognizes compensation expense immediately for awards granted to retirement eligible employees, or over the period from the grant date to the date retirement eligibility is achieved.
Relative TSR Performance Restricted Stock ("Relative TSR PSU") entitles the employee to receive common shares of the Company on the award vesting date, if market performance objectives that measure relative total shareholder return (“TSR”) are attained. Relative TSR is calculated based upon the 90-calendar day average price of the Company's stock as compared to specific peer companies that comprise the GICS (45301020) Semiconductor Index. TSR is measured for the Company and each peer company over a performance period, which is generally three years. Vesting percentages range from 0% to 200% of awards granted. The provisions of the market-based performance restricted stock are reflected in the grant date fair value of the award; therefore, compensation expense is recognized regardless of whether the market condition is ultimately satisfied. Compensation expense is reversed if the award is forfeited prior to the vesting date.
Special/Growth Performance Restricted Stock (“Special/Growth PSU”) entitles the employee to receive common shares of the Company on the three-year anniversary of the grant date (if employed by the Company) if revenue growth targets set by the Management Development and Compensation Committee (“MDCC”) of the Board of Directors on the date of grant are met. If revenue growth targets are not met, the Special/Growth PSUs do not vest. Certain Special/Growth PSUs vest based on achievement of strategic goals over a certain time period or periods set by the MDCC. If the strategic goals are not achieved, the Special/Growth PSUs do not vest.
Equity-based compensation expense recognized in the Consolidated Condensed Statements of Operations for the three and six months ended March 31, 2018 and April 1, 2017 was based upon awards ultimately expected to vest. Following the early adoption of ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting in this quarter, forfeitures have been accounted for when they occur.
The following table reflects restricted stock and common stock granted during the three and six months ended March 31, 2018 and April 1, 2017:


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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


 
Three months ended
 
Six months ended
(shares in thousands)
March 31, 2018
 
April 1, 2017
 
March 31, 2018
 
April 1, 2017
Time-based restricted stock
19

 
8

 
449

 
704

Relative TSR PSU

 
8

 
153

 
381

Special/Growth PSU

 

 
59

 

Common stock
8

 
11

 
17

 
25

Equity-based compensation in shares
27

 
27

 
678

 
1,110

The following table reflects total equity-based compensation expense, which includes restricted stock, stock options and common stock, included in the Consolidated Condensed Statements of Operations during the three and six months ended March 31, 2018 and April 1, 2017
 
Three months ended
 
Six months ended
(in thousands)
March 31, 2018
 
April 1, 2017
 
March 31, 2018
 
April 1, 2017
Cost of sales
$
126

 
$
106

 
$
258

 
$
247

Selling, general and administrative
1,443

 
2,450

 
3,766

 
5,184

Research and development
653

 
522

 
1,307

 
1,249

Total equity-based compensation expense
$
2,222

 
$
3,078

 
$
5,331

 
$
6,680

The following table reflects equity-based compensation expense, by type of award, for the three and six months ended March 31, 2018 and April 1, 2017:  
 
Three months ended
 
Six months ended
(in thousands)
March 31, 2018
 
April 1, 2017
 
March 31, 2018
 
April 1, 2017
Time-based restricted stock
$
1,678

 
$
2,044

 
$
3,813

 
$
4,533

Relative TSR PSU
$
252

 
$
855

 
975

 
1,788

Special/Growth PSU
97

 

 
153

 

Common stock
195

 
179

 
390

 
359

Total equity-based compensation expense
$
2,222

 
$
3,078

 
$
5,331

 
$
6,680




25

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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


NOTE 13: EARNINGS PER SHARE
Basic income per share is calculated using the weighted average number of shares of common stock outstanding during the period. Stock options and restricted stock are included in the calculation of diluted earnings per share, except when their effect would be anti-dilutive. For the six months ended March 31, 2018, 1.0 million shares of stock options and restricted stock were excluded due to the Company's net loss.
The following tables reflect a reconciliation of the shares used in the basic and diluted net income per share computation for the three months ended March 31, 2018 and April 1, 2017
 
Three months ended
(in thousands, except per share data)
March 31, 2018
 
April 1, 2017
As Restated
 
Basic
 
Diluted
 
Basic
 
Diluted
NUMERATOR:
 

 
 

 
 

 
 

Net income
$
36,313

 
$
36,313

 
$
32,670

 
$
32,670

DENOMINATOR:
 

 
 

 
 

 
 

Weighted average shares outstanding - Basic
70,361

 
70,361

 
70,964

 
70,964

Stock options
 

 
1

 
 

 
19

Time-based restricted stock
 

 
634

 
 

 
612

Market-based restricted stock
 

 
429

 
 

 
675

Weighted average shares outstanding - Diluted
 

 
71,425

 
 

 
72,270

EPS:
 

 
 

 
 

 
 

Net income per share - Basic
$
0.52

 
$
0.52

 
$
0.46

 
$
0.46

Effect of dilutive shares
 

 
(0.01
)
 
 

 
(0.01
)
Net income per share - Diluted
 

 
$
0.51

 
 

 
$
0.45

  
 
Six months ended
(in thousands, except per share data)
March 31, 2018
 
April 1, 2017
As Restated
 
Basic
 
Diluted
 
Basic
 
Diluted
NUMERATOR:
 

 
 

 
 

 
 

Net (loss)/income
$
(33,215
)
 
$
(33,215
)
 
$
50,066

 
$
50,066

DENOMINATOR:
 

 
 

 
 

 
 

Weighted average shares outstanding - Basic
70,467

 
70,467

 
70,909

 
70,909

Stock options
 
 

 
 

 
23

Time-based restricted stock
 
 

 
 

 
510

Market-based restricted stock
 
 

 
 

 
597

Weighted average shares outstanding - Diluted
 

 
70,467

 
 

 
72,039

EPS:
 

 
 

 
 

 
 

Net (loss)/income per share - Basic
$
(0.47
)
 
$
(0.47
)
 
$
0.71

 
$
0.71

Effect of dilutive shares
 

 

 
 

 
(0.02
)
Net (loss)/income per share - Diluted
 

 
$
(0.47
)
 
 

 
$
0.69




26

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KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited (continued)


NOTE 14: INCOME TAXES
The following table reflects the provision for income taxes and the effective tax rate for the three and six months ended March 31, 2018 and April 1, 2017
 
Three months ended
 
Six months ended
(dollar amounts in thousands)
March 31, 2018
 
April 1, 2017
As Restated
 
March 31, 2018
 
April 1, 2017
As Restated
Income tax expense
4,800

 
5,151

 
115,212

 
7,724

Effective tax rate
11.6
%
 
13.6
%
 
140.5
%
 
13.4
%
For the six months ended March 31, 2018, the effective income tax rate differed from the federal statutory tax rate primarily due to tax expense related to the enactment of the Tax Cuts and Jobs Act (the “Act”), foreign withholding taxes, and tax liabilities from foreign operations, partially offset by tax benefits from profits generated in foreign operations subject to a lower statutory tax rate than the federal rate, tax benefits from domestic research expenditures, foreign tax credit, and the impact of tax holidays.
For the six months ended April 1, 2017, the effective income tax rate differed from the federal statutory tax rate primarily due to tax benefits from profits in foreign operations subject to a lower statutory tax rate than the federal rate, tax benefits from domestic research expenditures, and the impact of tax holidays, partially offset by an increase for deferred taxes on unremitted earnings, foreign withholding taxes, and an increase in valuation allowance against certain foreign deferred tax assets.
The decrease in tax expense for the three months ended March 31, 2018 of $4.8 million from the tax expense for the three months ended April 1, 2017 of $5.2 million was primarily due to a decrease in the federal statutory tax rate and tax benefits from electing to claim a foreign tax credit reflected in the quarter, partially offset by higher quarter-to-date profits. The increase in tax expense for the six months ended March 31, 2018 of $115.2 million from the tax expense for the six months ended April 1, 2017 of $7.7 million, of which $105.7 million was due to the enactment of the Act and the remaining amount primarily due to higher worldwide profits in the quarter, partially offset by a decrease in the federal statutory tax rate and tax benefits from electing to claim foreign tax credit reflected in the quarter.
The Company's future effective tax rate is affected by the enactment of the Act, by decrease in earnings in countries where it has lower statutory rates or increase in earnings in countries where it has higher statutory rates, by changes in the valuation of its deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof.
It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain unrecognized tax positions will increase or decrease during the next 12 months due to the expected lapse of statutes of limitation and / or settlements of tax examinations. The Company is under income tax examination by tax authorities in domestic and certain foreign jurisdictions.
In the first quarter of fiscal 2018, excess tax benefits from stock based compensation of $5.4 million, previously offset against deferred tax assets, were reflected in the consolidated balance sheets as a component of retained earnings as a result of the adoption of ASU 2016-09. Please refer to Note 12 for more details regarding the adoption of ASU 2016-09.
2017 Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into legislation. The Act, among other changes, reduces the U.S. federal corporate tax rate from 35% to 21%, implements a modified territorial tax system that includes a one-time transition tax on deemed repatriation of previously untaxed accumulated earnings and profits of certain foreign subsidiaries, and creates new taxes on certain foreign-sourced earnings.
At December 30, 2017, the Company has reflected the income tax effects of the Act for which the accounting under Accounting Standards Codification Topic 740, Income Taxes is complete. For those items for which the accounting is not yet complete, but for which a reasonable estimate could be made, we have recorded the provisional tax expense in the Consolidated Condensed Statement of Operations. As described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. We recognized an aggregate net discrete tax provision of $105.7 million, comprised primarily of approximately $2.6 million from the re-measurement of U.S. deferred tax assets and liabilities using the relevant tax rate at which we expect them to reverse in the future and approximately $103.2 million from the one-time transition tax on deemed repatriation of previously untaxed accumulated earnings and profits of certain foreign subsidiaries, net of deemed taxes paid. For the period ended March 31, 2018, there have been no other material changes to the provisional tax expense.
The discrete tax provision incorporates assumptions made based upon our current interpretation of the Act, existing laws and regulations, and information available through April 19, 2018. The final impact of the Act may differ significantly from this


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Unaudited (continued)


estimate, due to, among other things, changes in interpretations and assumptions made by the Company as a result of additional information, additional guidance that may be issued by the U.S. Department of the Treasury or any other relevant governing body. The accounting for the tax effects for the Act will be completed by December 22, 2018 in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”).
In addition, we will record the income tax effects of the global intangible low-taxed income (“GILTI”) as well as all other changes enacted by the Act as incurred for fiscal years beginning after 2018 (our fiscal 2019).
Provisional Amounts
Deferred tax assets and liabilities: We have re-measured our U.S. deferred tax assets and liabilities based on the relevant tax rates at which they are expected to reverse, which is estimated to be at either at the blended tax rate of 24.5% (applicable for fiscal 2018) or 21% (applicable for fiscal 2019 and later). Because we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances and change our estimated deferred tax amounts, we have recorded a provisional amount related to the re-measurement of our deferred tax balance of $2.6 million.
One-time transition tax: The one-time transition tax has been estimated based on our accumulated post-1986 deferred foreign income that has not previously been subject to U.S. income tax. Because we have not yet completed our calculation of the one-time transition tax, we have recorded a provisional income tax expense of $103.2 million related to the one-time transition tax of our foreign subsidiaries. No additional U.S. income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax or any additional outside basis difference inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations.



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Unaudited (continued)


NOTE 15: SEGMENT INFORMATION
Reportable segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and to assess performance. The Company's Chief Executive Officer is the Company's chief operating decision maker. The chief operating decision-maker does not review discrete asset information.
In the fourth quarter of fiscal 2017, we reorganized our reporting structure into two reportable segments consisting of: (i) Capital Equipment; and (ii) APS. As a result of this re-alignment, the Company has aggregated twelve operating segments as of March 31, 2018, with six operating segments within the Capital Equipment reportable segment and six operating segments in the APS reportable segment. Subsequently, we have recasted financial results for the three and six months ended April 1, 2017 based on the revised segment structure. The change in the segments was a result of changes to our organizational structure initiated during the fourth quarter of fiscal 2017 to streamline business operations to improve profitability and competitiveness and reflects a change in the manner in which our chief operating decision maker reviews information to assess our performance and make decisions about resource allocation. As part of these actions, we transitioned to a new internal management structure whereby the operating management responsible for tools used to assemble semiconductor devices, including integrated circuits (“ICs”), high and low powered discrete devices, light-emitting diodes (“LEDs”) and power modules, services, spares, maintenance, repair and upgrading operating segments was brought under common leadership in the APS segment. The restructuring actions were completed in fiscal year 2017. As a result of the reorganization, the Capital Equipment segment is comprised of the manufacturing and selling of ball bonders, wafer level bonders, wedge bonders, advanced packaging and electronic assembly solutions to semiconductor device manufacturers, IDMs, OSATs, other electronics manufacturers and automotive electronics suppliers.
The following table reflects operating information by segment for the three and six months ended March 31, 2018 and April 1, 2017
 
Three months ended
 
Six months ended
(in thousands)
March 31, 2018
 
April 1, 2017
As Restated
 
March 31, 2018
 
April 1, 2017
As Restated
Net revenue:
 

 
 

 
 

 
 

      Capital Equipment
$
177,132

 
$
161,443

 
$
348,735

 
$
275,717

      APS
44,640

 
38,170

 
86,728

 
73,535

              Net revenue
221,772

 
199,613

 
435,463

 
349,252

Income from operations:
 

 
 

 
 

 
 

      Capital Equipment
28,863

 
30,708

 
58,844

 
42,854

      APS
9,573

 
5,795

 
18,751

 
12,708

              Income from operations
$
38,436

 
$
36,503

 
$
77,595

 
$
55,562

The following tables reflect capital expenditures, depreciation expense and amortization expense for the three and six months ended March 31, 2018 and April 1, 2017.
 
Three months ended
 
Six months ended
(in thousands)
March 31, 2018
 
April 1, 2017
 
March 31, 2018
 
April 1, 2017
Capital expenditures:
 
 
 
 
 

 
 

      Capital Equipment
$
2,044

 
$
10,358

 
$
3,879

 
$
11,484

      APS
4,109

 
5,519

 
8,531

 
6,622

 
$
6,153

 
$
15,877

 
$
12,410

 
$
18,106



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Unaudited (continued)


 
Three months ended
 
Six months ended
(in thousands)
March 31, 2018
 
April 1, 2017
 
March 31, 2018
 
April 1, 2