Unassociated 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 April 3, 2010

                                                                        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.)

1005 VIRGINIA DRIVE, FORT WASHINGTON, PENNSYLVANIA 19034
(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 ¨   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
   
(Do not check if a smaller reporting company)
 

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 3, 2010, there were 70,121,905 shares of the Registrant's Common Stock, no par value, outstanding.
 
 

 
 
KULICKE AND SOFFA INDUSTRIES, INC.

FORM 10 – Q

April 3, 2010

Index
 
   
Page Number
     
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
FINANCIAL STATEMENTS (Unaudited)
 
     
 
Consolidated Balance Sheets as of October 3, 2009 and April 3, 2010
3
     
 
Consolidated Statements of Operations for the three and six months ended March 28, 2009 and April 3, 2010
4
     
 
Consolidated Statements of Cash Flows for the six months ended March 28, 2009 and April 3, 2010
5
     
 
Notes to the Consolidated Financial Statements
6
     
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
27
     
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
47
     
Item 4.
CONTROLS AND PROCEDURES
47
     
PART II.
OTHER INFORMATION
 
     
Item 1A.
RISK FACTORS
48
     
Item 6.
EXHIBITS
48
     
 
SIGNATURES
49

 
2

 

PART I. - FINANCIAL INFORMATION
Item 1. – Financial Statements

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
 
   
As of
 
   
October 3, 2009 *
   
April 3, 2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 144,560     $ 184,081  
Restricted cash
    281       216  
Accounts and notes receivable, net of allowance for doubtful accounts of $1,378 and $999, respectively
    95,779       108,015  
Inventories, net
    41,489       57,100  
Prepaid expenses and other current assets
    11,566       13,090  
Deferred income taxes
    1,786       1,798  
Total current assets
    295,461       364,300  
                 
Property, plant and equipment, net
    36,046       30,385  
Goodwill
    26,698       26,698  
Intangible assets
    48,656       43,884  
Other assets
    5,774       7,130  
Total assets
  $ 412,635     $ 472,397  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Current portion of long-term debt
  $ 48,964     $ 48,964  
Accounts payable
    39,908       58,602  
Accrued expenses and other current liabilities
    32,576       31,737  
Income taxes payable
    1,612       630  
Total current liabilities
    123,060       139,933  
                 
Long-term debt
    92,217       95,287  
Deferred income taxes
    16,282       16,742  
Other liabilities
    10,273       9,673  
Total liabilities
    241,832       261,635  
                 
Commitments and contingencies (Note 12)
               
                 
Shareholders' equity:
               
Preferred stock, no par value:
               
Authorized 5,000 shares; issued - none
    -       -  
Common stock, no par value:
               
Authorized 200,000 shares; issued 74,370 and 74,814 respectively; outstanding 69,415 and 69,860 shares, respectively
    413,092       416,699  
Treasury stock, at cost, 4,954 shares
    (46,356 )     (46,356 )
Accumulated deficit
    (197,812 )     (160,814 )
Accumulated other comprehensive income
    1,879       1,233  
Total shareholders' equity
    170,803       210,762  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 412,635     $ 472,397  

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.

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

 
3

 

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

   
Three months ended
   
Six months ended
 
   
March 28,
   
April 3,
   
March 28,
   
April 3,
 
   
2009 *
   
2010
   
2009 *
   
2010
 
Net revenue
  $ 25,232     $ 153,838     $ 62,648     $ 282,253  
                                 
Cost of sales
    17,187       86,066       40,675       158,108  
                                 
Gross profit
    8,045       67,772       21,973       124,145  
                                 
Selling, general and administrative
    27,836       30,470       57,688       55,696  
Research and development
    13,258       13,980       28,658       27,141  
Impairment of goodwill
    2,709       -       2,709       -  
Total operating expenses
    43,803       44,450       89,055       82,837  
                                 
Income (loss) from operations
    (35,758 )     23,322       (67,082 )     41,308  
Interest income
    193       89       947       186  
Interest expense
    (2,024 )     (2,105 )     (4,103 )     (4,188 )
Gain on extinguishment of debt
    2,786       -       3,965       -  
Income (loss) from continuing operations before tax
    (34,803 )     21,306       (66,273 )     37,306  
Provision (benefit) for income taxes from continuing operations
    (276 )     148       (12,158 )     308  
Income (loss) from continuing operations, net of tax
    (34,527 )     21,158       (54,115 )     36,998  
Income from discontinued operations, net of tax
    -       -       22,727       -  
Net income (loss)
  $ (34,527 )   $ 21,158     $ (31,388 )   $ 36,998  
                                 
Income (loss) per share from continuing operations:
                               
    Basic
  $ (0.57 )   $ 0.30     $ (0.89 )   $ 0.52  
    Diluted
  $ (0.57 )   $ 0.28     $ (0.89 )   $ 0.50  
                                 
Income per share from discontinued operations:
                               
    Basic
  $ 0.00     $ 0.00     $ 0.37     $ 0.00  
    Diluted
  $ 0.00     $ 0.00     $ 0.37     $ 0.00  
                                 
Net income (loss) per share:
                               
    Basic
  $ (0.57 )   $ 0.30     $ (0.52 )   $ 0.52  
    Diluted
  $ (0.57 )   $ 0.28     $ (0.52 )   $ 0.50  
                                 
Weighted average shares outstanding:
                               
    Basic
    61,054       69,806       60,752       69,745  
    Diluted
    61,054       74,371       60,752       74,143  

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.

 
The accompanying notes are an integral part of these consolidated financial statements.
 
4

 
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
     
 
Six months ended
 
   
March 28, 2009 *
   
April 3, 2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ (31,388 )   $ 36,998  
Less: Income from discontinued operations
    22,727       -  
Income (loss) from continuing operations
    (54,115 )     36,998  
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    10,755       8,919  
Amortization of debt discount and debt issuance costs
    3,247       3,458  
Amortization of gain on sale of building
    -       (54 )
Equity-based compensation and employee benefits
    478       3,411  
Provision for doubtful accounts
    984       15  
Provision for inventory valuation
    5,365       169  
Deferred taxes
    (6,099 )     8  
Impairment of goodwill
    2,709          
Gain on extinguishment of debt
    (3,965 )     -  
Changes in operating assets and liabilities, net of businesses acquired or sold:
               
Accounts and notes receivable
    46,608       (12,557 )
Inventory
    (1,630 )     (15,787 )
Prepaid expenses and other current assets
    6,655       (1,661 )
Accounts payable and accrued expenses
    (20,687 )     20,371  
Income taxes payable
    (20,771 )     (984 )
Other, net
    633       (1,987 )
Net cash provided by (used in) continuing operations
    (29,833 )     40,319  
Net cash used in discontinued operations
    (1,218 )     (906 )
Net cash provided by (used in) operating activities
    (31,051 )     39,413  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property, plant and equipment
    (3,346 )     (2,106 )
Proceeds from sale of property, plant and equipment
    -       3,958  
Proceeds from sales of investments classified as available-for-sale
    3,779       -  
Purchase of Orthodyne
    (87,039 )     -  
Changes in restricted cash, net
    34,717       65  
Net cash provided by (used in) continuing operations
    (51,889 )     1,917  
Net cash provided by (used in) discontinued operations
    149,857       (1,838 )
Net cash provided by investing activities
    97,968       79  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net costs from sale of common stock
    -       (29 )
Proceeds from exercise of common stock options
    3       212  
Payments on borrowings
    (84,358 )     -  
Net cash provided by (used in) financing activities
    (84,355 )     183  
Effect of exchange rate changes on cash and cash equivalents
    113       (154 )
Changes in cash and cash equivalents
    (17,325 )     39,521  
Cash and cash equivalents at beginning of period
    144,932       144,560  
Cash and cash equivalents at end of period
  $ 127,607     $ 184,081  
                 
CASH PAID FOR:
               
Interest
  $ 981     $ 726  
Income taxes
  $ 3,466     $ 1,725  

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.

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

 
5

 

KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 1 – BASIS OF PRESENTATION

Basis of Consolidation

These consolidated financial statements include the accounts of Kulicke and Soffa Industries, Inc. and its subsidiaries (the “Company”), with appropriate elimination of intercompany balances and transactions.

As of October 4, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 470.20, Debt, Debt With Conversion Options (“ASC 470.20”), which requires issuers of convertible debt instruments that may be settled in cash upon conversion to initially record the liability and equity components of the convertible debt separately. The Company adopted the provisions of ASC 470.20 on a retrospective basis for all prior periods presented (see Note 7).
 
On September 29, 2008, the Company completed the sale of its Wire business for net proceeds of $149.9 million to W.C. Heraeus GmbH (“Heraeus”). The financial results of the Wire business have been included in discontinued operations in the consolidated financial statements for all periods presented (see Note 2).
 
Fiscal Year
 
Each of the Company’s first three fiscal quarters ends 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 th. The fiscal 2009 quarters ended on December 27, 2008, March 28, 2009, June 27, 2009 and October 3, 2009. The fiscal 2010 quarters end on January 2, 2010, April 3, 2010, July 3, 2010 and October 2, 2010. In fiscal years consisting of 53 weeks, the fourth quarter will consist of 14 weeks.

Nature of Business

The Company designs, manufactures and sells capital equipment and expendable 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 manufacturers and subcontract assemblers 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 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, expendable tools such as those sold by the Company. These downturns and slowdowns have 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.
 
Basis of Presentation 

The preparation of the interim consolidated financial statements requires management to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the interim consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, management evaluates these estimates. Authoritative pronouncements, historical experience and assumptions are used as the basis for making estimates. Actual results could differ from those estimates. The interim consolidated financial statements are unaudited and, in management’s opinion, include all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of results for these interim periods. The interim consolidated 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 Annual Report on Form 10-K for the year ended October 3, 2009, filed with the Securities and Exchange Commission, which includes Consolidated Balance Sheets as of September 27, 2008 and October 3, 2009, and the related Consolidated Statements of Operations, Cash Flows, and Changes in Shareholders’ Equity for each of the years in the three-year period ended October 3, 2009. 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.

 
6

 
 
Vulnerability to Certain Concentrations

Financial instruments which may subject the Company to concentrations of credit risk as of October 3, 2009 and April 3, 2010 consisted mainly of trade receivables. 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; however, the Company closely 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.
 
The Company is also exposed to foreign currency fluctuations that impact the remeasurement of the net monetary assets of those operations whose functional currencies differ from their respective local currencies, most notably in Israel, Malaysia, Singapore and Switzerland. In addition, operations in these countries and in China have exposure related to the translation of their financial statements from their respective functional currencies to the U.S. dollar.
 
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 collectibility of certain receivables. If global 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 Company’s 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 market value. The Company generally provides reserves for obsolete inventory and for inventory considered to be in excess of demand. In addition, the Company typically records as accrued expense inventory purchase commitments in excess of demand. Demand is generally defined as eighteen months forecasted consumption for non-Wedge bonder equipment, twenty-four months consumption for Wedge bonder equipment and all spare parts, and twelve months consumption for expendable tools. The forecasted demand 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 demand 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 market value, based upon assumptions about future demand, market conditions and cyclical market changes. If actual market conditions are less favorable than projections, additional inventory reserves may be required.
 
Foreign Currency Translation

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 (loss), 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 if 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 (loss).
 
 
7

 

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 collectibility is reasonably assured, and it has completed its equipment installation obligations and received customer acceptance, when applicable, or is otherwise released from its installation or customer acceptance obligations. In the event 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. The Company’s standard terms are Ex Works (the Company’s factory), with title transferring to its customer at the Company’s loading dock or upon embarkation. The Company has a small percentage of sales with other terms, and revenue is recognized in accordance with the terms of the related customer purchase order. Revenue related to services is recognized upon performance of the services requested by a customer order. Revenue for extended maintenance service contracts with a term more than one month is recognized on a prorated straight-line basis over the term of the contract.
 
Shipping and handling costs billed to customers are recognized in net revenue. Shipping and handling costs are included in cost of sales.
 
Income Taxes
 
Deferred income taxes are determined using the liability method in accordance with ASC No. 740, Income Taxes (“ASC 740”). 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 such determination was 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 such determination was made.
 
In accordance with ASC No. 740 Topic 10, Income Taxes, General (“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 audit, including resolution of related appeals or litigation processes, if any. 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.
 
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 subordinated convertible notes outstanding during the period, when such instruments are dilutive.
 
In accordance with ASC No. 260.10.55, Earnings per Share - Implementation & Guidance (“ASC 260.10.55”), 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 earnings per share must be applied. The Company adopted ASC 260.10.55 on October 4, 2009 and, if necessary, will retrospectively adjust prior period earnings per share (see Note 11).
 
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 equity-based compensation in net income. The fair value of the Company’s stock option awards are estimated using a Black-Scholes option valuation model. Compensation expense associated with market-based restricted stock is determined using a Monte-Carlo valuation model, and compensation expense associated with time-based and performance-based restricted stock is determined based on the number of shares granted and the fair value on the date of grant. In addition, the calculation of equity-based compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. 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.

 
8

 
 
Recent Accounting Pronouncements

Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities

In December 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”). ASU 2009-17 clarifies the application of consolidation guidance for variable interest entities (“VIEs”) in which the party with the controlling financial interest might not be solely identified through voting rights. ASU 2009-17 amends the guidance for determining the accounting model of VIEs from a quantitative analysis to a qualitative analysis. The amended guidance was effective in December of 2009. ASU 2009-17 will not impact the Company’s consolidated results of operations and financial position.

NOTE 2 – DISCONTINUED OPERATIONS
 
On September 29, 2008, the Company completed the sale of certain assets and liabilities associated with its Wire business. The Company recognized net proceeds of $149.9 million and a net gain of $22.7 million, net of tax, during the six months ended March 28, 2009. The Company did not recognize any income or loss from discontinued operations for the three months ended March 28, 2009, or the three and six months ended April 3, 2010.
 
The following table reflects operating results of the Wire business discontinued operations for the six months ended March 28, 2009:

   
Six months ended
 
(in thousands)
 
March 28, 2009
 
       
Net revenue
  $ -  
         
Loss before tax
  $ (319 )
Gain on sale of Wire business before tax
    23,524  
Income from discontinued operations before tax
    23,205  
Income tax expense
    (478 )
Income from discontinued operations, net of tax
  $ 22,727  
 
 
9

 

As of April 3, 2010, the Company has settled all working capital adjustments with Heraeus. The following table reflects cash flows associated with the Company’s discontinued operations for the six months ended March 28, 2009 and April 3, 2010:
 
   
Six months ended
 
(in thousands)
 
March 28, 2009
   
April 3, 2010
 
             
Cash flows provided by (used in):
           
Operating activities: Wire business
  $ (319 )   $ -  
Operating activities: Test business (sold in fiscal 2006) (1)
    (899 )     (906 )
Investing activities: Wire business  (2)
    149,857       (1,838 )
                 
Net cash provided by (used in) discontinued operations
  $ 148,639     $ (2,744 )

 
(1)
Represents facility-related costs associated with the Company’s former Test operations.
 
(2)
Fiscal 2010 amount represents final settlement of working capital adjustments with Heraeus.
 
NOTE 3 – COST REDUCTION PLAN
 
On February 15, 2010, the Company committed to a plan to reduce its Irvine, California workforce by approximately 56 employees over a period of approximately 26 months. As part of this workforce reduction plan, substantially all of the Company's California-based wedge bonder manufacturing will be transferred to the Company's manufacturing facilities in Kuala Lumpur, Malaysia and Singapore. Certain administrative functions will also be transferred to Malaysia and Singapore. Management determined that it was in the best interests of the Company to reduce costs by migrating production and certain administrative functions from California to Asia.
 
With respect to the California-based wedge bonder transfer to Asia, the Company anticipates $2.0 million of additional pre-tax expense, consisting of $1.4 million of severance and $0.6 million of retention costs. The Company expects substantially all of this expense to be incurred by the end of the second fiscal quarter of 2011, with corresponding cash payments to be incurred beginning in the first fiscal quarter of 2011 and ending in the first fiscal quarter of 2013.
 
During fiscal 2009, the Company committed to a plan to reduce its Israel-based workforce by approximately 170 employees by the end of fiscal 2010. As part of this workforce reduction plan, substantially all of the Company’s Israel-based manufacturing has been transferred to the Company’s manufacturing facilities in Suzhou, China. The Company expects to incur approximately $0.4 million in additional severance costs and the amounts accrued are expected to be paid out over the next 6 months related to these cost reduction efforts. As part of the Israel-based manufacturing transition to China, during the three months ended April 3, 2010, the Company sold its facility in Israel and simultaneously entered into an agreement to leaseback a portion of the building for five years with an option to extend the lease. The Company realized a $0.7 million gain on the sale which will be recognized over the five year lease term.
 
Separately during fiscal 2009 due to the global economic downturn, the Company reduced its global workforce by approximately 20% of total employees which minimized cash usage and reduced employee compensation costs.
 
 
10

 

The following table reflects severance activity for all plans during the three and six months ended March 28, 2009 and April 3, 2010:

   
Three months ended
   
Six months ended
 
(in thousands)
 
March 28, 2009
   
April 3, 2010
   
March 28, 2009
   
April 3, 2010
 
                         
Accrual for estimated severance and benefits, beginning of period
  $ 1,223     $ 2,193     $ -     $ 2,413  
Provision for severance and benefits: Equipment segment  (1)
    3,039       202       4,638       168  
Provision for severance and benefits: Expendable Tools segment (1)
    1,124       124       2,110       357  
Payment of severance and benefits
    (2,966 )     (446 )     (4,328 )     (865 )
Accrual for estimated severance and benefits, end of period  (2)
  $ 2,420     $ 2,073     $ 2,420     $ 2,073  
 
(1) Provision for severance and benefits is the total amount expected to be incurred and is included within selling, general and administrative expenses on the Consolidated Statements of Operations.
(2) Accrual for estimated severance as of March 28, 2009 and April 3, 2010 was included within accrued expenses and other current liabilities and other liabilities on the Consolidated Balance Sheet.

As business recovered during the first half of fiscal 2010 and demand for the Companys products increased, the Company increased its number of employees primarily related to manufacturing. The Company expects to continue to consolidate certain of its operations from the United States and other areas to Asia. As these consolidation efforts are finalized in the future, the Company will incur significant severance costs; however, it expects to realize future benefits from these consolidation plans.
 
NOTE 4 – GOODWILL AND INTANGIBLE ASSETS
 
Goodwill
 
Intangible assets classified as goodwill are not amortized. An annual impairment test of the Company’s goodwill is performed during the fourth quarter of each fiscal year, which coincides with the completion of its annual forecasting process. The Company performed its annual impairment test in the fourth quarter of fiscal 2009 and no impairment charge was required. In addition, the Company tests for impairment between annual tests if a “triggering” event occurs that may have the effect of reducing the fair value of a reporting unit below its respective carrying value.
 
The following table reflects goodwill as of October 3, 2009 and April 3, 2010:

(in thousands)
 
Equipment segment
   
Expendable Tools
segment
   
Total
 
As of October 3, 2009 and April 3, 2010:
                 
Beginning of period, Goodwill, gross
  $ 22,999     $ 6,408     $ 29,407  
Accumulated impairment losses (1)
    (2,709 )     -       (2,709 )
End of period, Goodwill, net
  $ 20,290     $ 6,408     $ 26,698  

 
(1)
During the three months ended March 28, 2009, the Company recorded a $2.7 million impairment charge related to its die bonder goodwill.
 
 
11

 

Intangible Assets

Intangible assets with determinable lives are amortized over their estimated useful lives. The Company’s intangible assets consist primarily of wedge bonder developed technology and customer relationships.
 
The following table reflects the intangible asset balances as of October 3, 2009 and April 3, 2010:

   
As of
   
Average
 
(in thousands)
 
October 3, 2009
   
April 3, 2010
   
estimated useful
lives (in years)
 
Wedge bonder developed technology
  $ 33,200     $ 33,200       7.0  
Accumulated amortization
    (4,742 )     (7,114 )        
Net wedge bonder developed technology
    28,458       26,086          
                         
Wedge bonder customer relationships
    19,300       19,300       5.0  
Accumulated amortization
    (3,860 )     (5,790 )        
Net wedge bonder customer relationships
    15,440       13,510          
                         
Wedge bonder trade name
    4,600       4,600       8.0  
Accumulated amortization
    (575 )     (863 )        
Net wedge bonder trade name
    4,025       3,737          
                         
Wedge bonder other intangible assets
    2,500       2,500       1.9  
Accumulated amortization
    (1,767 )     (1,949 )        
Net wedge bonder other intangible assets
    733       551          
Net intangible assets
  $ 48,656     $ 43,884          
 
The following table reflects estimated annual amortization expense related to intangible assets as of April 3, 2010:
 
(in thousands)
     
Fiscal 2010 (remaining fiscal year)
  $ 4,773  
Fiscal 2011
    9,544  
Fiscal 2012
    9,178  
Fiscal 2013
    9,178  
Fiscal 2014-2016
    11,211  
         
    $ 43,884  
 
 
12

 

NOTE 5 – COMPREHENSIVE INCOME (LOSS)

The following table reflects the components of comprehensive income (loss) for the three and six months ended March 28, 2009 and April 3, 2010:

   
Three months ended
   
Six months ended
 
(in thousands)
 
March 28, 2009 *
   
April 3, 2010
   
March 28, 2009 *
   
April 3, 2010
 
Net income (loss)    (1)
  $ (34,527 )   $ 21,158     $ (31,388 )   $ 36,998  
Loss from foreign currency translation adjustments
    (143 )     (2 )     (1,438 )     (655 )
Unrealized gain on investments, net of taxes
    3       -       3       -  
Unrecognized actuarial net gain (loss), Switzerland pension plan, net of tax
    (119 )     (29 )     166       9  
Other comprehensive loss
  $ (259 )   $ (31 )   $ (1,269 )   $ (646 )
Comprehensive income (loss)
  $ (34,786 )   $ 21,127     $ (32,657 )   $ 36,352  

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.

(1)  Net income (loss) includes continuing and discontinued operations.

The following table reflects accumulated other comprehensive income reflected on the Consolidated Balance Sheets as of October 3, 2009 and April 3, 2010:

   
As of
 
(in thousands)
 
October 3, 2009
   
April 3, 2010
 
Gain from foreign currency translation adjustments
  $ 746     $ 91  
Unrecognized actuarial net gain, Switzerland pension plan, net of taxes
    1,133       1,142  
Accumulated other comprehensive income
  $ 1,879     $ 1,233  
 
 
13

 

NOTE 6 – BALANCE SHEET ACCOUNTS

The following tables reflect significant balance sheet accounts as of October 3, 2009 and April 3, 2010:

   
As of
 
(in thousands)
 
October 3, 2009
   
April 3, 2010
 
Inventories, net:
           
Raw materials and supplies
  $ 30,048     $ 33,250  
Work in process
    10,788       17,907  
Finished goods
    13,170       15,614  
      54,006       66,771  
Inventory reserves
    (12,517 )     (9,671 )
    $ 41,489     $ 57,100  
Property, plant and equipment, net:
               
Land  (1)
  $ 2,735     $ 2,618  
Buildings and building improvements  (1)
    14,351       11,601  
Leasehold improvements
    11,695       9,219  
Data processing and hardware equipment and software
    21,822       22,162  
Machinery and equipment
    40,600       39,493  
      91,203       85,093  
Accumulated depreciation
    (55,157 )     (54,708 )
    $ 36,046     $ 30,385  
                 
Accrued expenses and other current liabilities:
               
Wages and benefits
  $ 10,423     $ 11,641  
Accrued customer obligations (2)
    4,438       6,482  
Severance  (3)
    3,264       2,806  
Short-term facility accrual related to discontinued operations (Test)
    1,839       1,819  
Payable to Heraeus (4)
    1,857       -  
Other
    10,755       8,989  
    $ 32,576     $ 31,737  

(1) During the three months ended April 3, 2010, the Company sold its facility in Yokneam, Israel for $4.5 million. Net proceeds of $4.0 million were received and $0.5 million is held in escrow for taxes. Simultaneous with the sale, the Company entered into an agreement to leaseback a portion of the building for five years with an option to extend the lease. The Company realized a $0.7 million gain on the sale which will be recognized over the five year lease term.
(2)  Represents customer advance payments, customer credit program, accrued warranty expense and accrued retrofit costs.
(3)  Total severance payable within the next twelve months includes the severance plans discussed in Note 3, and approximately $0.7 million of other severance obligations which were not part of the Company’s cost reduction plans.
(4) Fiscal 2009 amount related to certain open working capital adjustments with Heraeus, which were settled in fiscal 2010.
 
 
14

 

NOTE 7 – DEBT OBLIGATIONS

The following table reflects debt consisting of Convertible Subordinated Notes as of October 3, 2009 and April 3, 2010:

               
(in thousands)
 
               
As of
 
   
Payment Dates
 
Conversion
 
Maturity
           
Rate
 
of each year
 
Price
 
Date
 
October 3, 2009 *
   
April 3, 2010
 
1.000%
 
June 30 and December 30
  $ 12.84  
June 30, 2010
  $ 48,964     $ 48,964  
0.875%
 
June 1 and December 1
  $ 14.36  
June 1, 2012
    110,000       110,000  
Debt discount on 0.875% Convertible Subordinated Notes due June 2012
    (17,783 )     (14,713 )
                  $ 141,181     $ 144,251  

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.

1.0% Convertible Subordinated Notes

The Company’s 1.0% Notes are general obligations and are subordinated to all senior debt. The 1.0% Notes rank equally with the Company’s other Convertible Subordinated Notes. There are no financial covenants associated with the 1.0% Notes and there are no restrictions on incurring additional debt or issuing or repurchasing the securities.

0.875% Convertible Subordinated Notes

Holders of the 0.875% Convertible Subordinated Notes may convert their notes based on an initial conversion rate of approximately 69.6621 shares per $1,000 principal amount of notes (equal to an initial conversion price of approximately $14.355 per share) only under specific circumstances. The initial conversion rate will be adjusted for certain events. The Company presently intends to satisfy any conversion of the 0.875% Convertible Subordinated Notes with cash up to the principal amount of the 0.875% Convertible Subordinated Notes and, with respect to any excess conversion value, with shares of its common stock. The Company has the option to elect to satisfy the conversion obligations in cash, common stock or a combination thereof.

The 0.875% Convertible Subordinated Notes will not be redeemable at the Company’s option. Holders of the 0.875% Convertible Subordinated Notes will not have the right to require us to repurchase their 0.875% Convertible Subordinated Notes prior to maturity except in connection with the occurrence of certain fundamental change transactions. The 0.875% Convertible Subordinated Notes may be accelerated upon an event of default as described in the Indenture and will be accelerated upon bankruptcy, insolvency, appointment of a receiver and similar events with respect to the Company.
 
As of October 4, 2009, the Company adopted ASC 470.20, which requires that issuers of convertible debt that may be settled in cash upon conversion record the liability and equity components of the convertible debt separately. The Company estimated the liability component of its 0.875% Convertible Subordinated Notes by assessing the fair value of debt instruments without an associated equity component issued by companies with similar credit ratings and terms at the time the Company’s 0.875% Convertible Subordinated Notes were issued. The effective interest rate for non-convertible debt with similar credit ratings and terms was assumed to be 7.85%. The Company determined the fair value of the equity component of the embedded conversion option by deducting the fair value of the liability component from the initial proceeds of the convertible debt instrument. The debt discount will be amortized under the effective interest method from the original issue date. The Company determined the portion of issuance costs associated with the equity component of the 0.875% Convertible Subordinated Notes was $1.0 million. The issuance costs are amortized under the effective interest method from the original issue date.
 
The liability component of the Company’s 0.875% Convertible Subordinated Notes will continue to be classified as long-term debt and the equity component of the 0.875% Convertible Subordinated Notes is classified as common stock on the Company’s Consolidated Balance Sheets.
 
 
15

 

The following tables reflect the effect of the change due to ASC 470.20 on the Consolidated Statements of Operations for the three and six months ended March 28, 2009:
 
   
Three months ended
       
(in thousands)
 
March 28, 2009, as
reported
   
March 28, 2009 as
adjusted
   
Effect of
change
 
Interest expense
  $ 640     $ 2,024     $ 1,384  
Loss from continuing operations before taxes
    (33,419 )     (34,803 )     (1,384 )
Benefit for income taxes
    (276 )     (276 )     -  
Loss from continuing operations
  $ (33,143 )   $ (34,527 )   $ (1,384 )
                         
Diluted loss per share from continuing operations
  $ (0.54 )   $ (0.57 )   $ (0.03 )
 
   
Six months ended
       
   
March 28, 2009, as
   
March 28, 2009 as
   
Effect of
 
(in thousands)
 
reported
   
adjusted
   
change
 
Interest expense
  $ 1,374     $ 4,103     $ 2,729  
Loss from continuing operations before taxes
    (63,544 )     (66,273 )     (2,729 )
Benefit for income taxes
    (12,158 )     (12,158 )     -  
Loss from continuing operations
  $ (51,386 )   $ (54,115 )   $ (2,729 )
                         
Diluted loss per share from continuing operations
  $ (0.85 )   $ (0.89 )   $ (0.04 )
 
The following table reflects the effect of the change due to ASC 470.20 on the Consolidated Balance Sheet as of October 3, 2009:
 
   
As of
       
(in thousands)
 
October 3, 2009, as
reported
   
October 3, 2009, as
adjusted
   
Effect of
change
 
Other assets (debt issuance costs)
  $ 6,215     $ 5,774     $ (441 )
Total assets
    413,076       412,635       (441 )
Long-term debt
    110,000       92,217       (17,783 )
Total liabilities
    259,615       241,832       (17,783 )
Common stock
    383,417       413,092       29,675  
Accumulated deficit
    (185,479 )     (197,812 )     (12,333 )
Total shareholders' equity
    153,461       170,803       17,342  
Total liabilities and shareholders' equity
    413,076       412,635       (441 )
 
 
16

 
 
The following table reflects the effect of the change due to ASC 470.20 on the Consolidated Statement of Cash Flows for the six months ended March 28, 2009:
 
   
For the six months ended
       
(in thousands)
 
March 28, 2009, as
reported
   
March 28, 2009, as
adjusted
   
Effect of
change
 
Net loss
  $ (28,659 )   $ (31,388 )   $ (2,729 )
Loss from continuing operations
    (51,386 )     (54,115 )     (2,729 )
Amortization of debt discount and debt issuance costs
    518       3,247       2,729  
Net cash used in continuing operations
    (29,833 )     (29,833 )     -  

 
The following table reflects amortization expense related to issue costs from the Company’s Convertible Subordinated Notes for the three and six months ended March 28, 2009 and April 3, 2010:

   
Three months ended
   
Six months ended
 
(in thousands)
 
March 28, 2009 *
   
April 3, 2010
   
March 28, 2009 *
   
April 3, 2010
 
Amortization expense related to issue costs
  $ 181     $ 192     $ 414     $ 388  

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.

The following table reflects the Company’s open market purchases of its Convertible Subordinated Notes for the three and six months ended March 28, 2009:

   
Three Months Ended
   
Six Months Ended
 
(in thousands)
 
March 28, 2009
   
March 28, 2009
 
0.5% Convertible Subordinated Notes (1):
           
Face value purchased
  $ -     $ 43,050  
Net cash
    -       42,839  
Deferred financing costs
    -       18  
Recognized gain, net of deferred financing costs
    -       193  
                 
1.0% Convertible Subordinated Notes:  (2)
               
Face value purchased
  $ 13,036     $ 16,036  
Net cash
    10,168       12,158  
Deferred financing costs
    82       106  
Recognized gain, net of deferred financing costs
    2,786       3,772  
Gain on early extinguishment of debt
  $ 2,786     $ 3,965  

(1)  Repurchase transactions occurred prior to redemption on November 30, 2008.
(2)  Activity during the three months ended March 28, 2009 reflects repurchases pursuant to a tender offer.
 
 
17

 

NOTE 8 – SHAREHOLDERS’ EQUITY AND EMPLOYEE BENEFIT PLAN
 
Common Stock
 
As of October 4, 2009, the Company adopted ASC 470.20 and accordingly common stock includes the equity component of the Company’s 0.875% Convertible Subordinated Notes (see Note 7).
 
In August 2009, the Company sold 8.0 million shares of its common stock in an underwritten public offering for net proceeds of $38.7 million.
 
On October 3, 2008, the Company completed the acquisition of substantially all of the assets and assumption of certain liabilities of Orthodyne Electronics Corporation (“Orthodyne”). In connection with the Orthodyne acquisition, the Company issued 7.1 million common shares with an estimated value on that date of $46.2 million and paid $87.0 million in cash including capitalized acquisition costs.

Equity-Based Compensation

As of April 3, 2010, the Company had eight equity-based employee compensation plans (the “Employee Plans”) and three director compensation plans (the “Director Plans”) (collectively, the “Plans”). Under these Plans, stock options, performance-based share awards (collectively, “performance-based restricted stock”), time-based share awards (collectively, “time-based restricted stock”), market-based share awards (collectively, “market-based restricted stock”) or common stock have been granted at 100% of the market price of the Company’s common stock on the date of grant.

 
·
In general, stock options and time-based restricted stock awarded to employees vest annually over a three year period provided the employee remains employed. 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.

 
·
Performance-based restricted stock 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 return on invested capital and revenue growth targets set by the Management Development and Compensation Committee of the Board of Directors on the date of grant are met. If return on invested capital and revenue growth targets are not met, performance-based restricted stock does not vest.

 
·
Market-based restricted stock entitles the employee to receive common shares of the Company on the award vesting date, if market performance objectives which 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 Philadelphia 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 restricted stock are reflected in the grant date fair value of the award; therefore, compensation expense is recognized regardless of whether or not the market condition is ultimately satisfied. Compensation expense is reversed if the award forfeits prior to the vesting date.

Equity-based compensation expense recognized in the Consolidated Statements of Operations for the three and six months ended March 28, 2009 and April 3, 2010 was based upon awards ultimately expected to vest. In accordance with ASC 718, forfeitures have been estimated at the time of grant and were based upon historical experience. The Company reviews the forfeiture rates periodically and makes adjustments as necessary.
 
 
18

 

The following table reflects stock options, restricted stock and common stock granted during the three and six months ended March 28, 2009 and April 3, 2010:

   
Three months ended
   
Six months ended
 
(number of shares in thousands)
 
March 28, 2009
   
April 3, 2010
   
March 28, 2009
   
April 3, 2010
 
Market-based restricted stock
    -       -       -       398  
Performance-based restricted stock
    2       -       403       -  
Time-based restricted stock
    45       -       825       784  
Stock options
    15       26       154       26  
Common stock
    65       33       106       65  
Equity-based compensation in shares
    127       59       1,488       1,273  

The following table summarizes equity-based compensation expense (reversal of expense), by type of award, included in the Consolidated Statements of Operations during the three and six months ended March 28, 2009 and April 3, 2010:

   
Three months ended
   
Six months ended
 
(in thousands)
 
March 28, 2009
   
April 3, 2010
   
March 28, 2009
   
April 3, 2010
 
Market-based restricted stock
  $ -     $ 273     $ -     $ 388  
Performance-based restricted stock
    25       682       (1,537 )     738  
Time-based restricted stock
    179       467       380       1,057  
Stock options
    334       107       843       270  
Common stock
    120       180       300       360  
Equity-based compensation expense
  $ 658     $ 1,709     $ (14 )   $ 2,813  
 
As the global economy improved during the three months ended April 3, 2010, the Company determined performance objectives for the performance-based restricted stock issued in fiscal 2007 and 2008 would improve. Accordingly, estimated attainment percentages increased and total compensation expense for the performance-based restricted stock also increased for the three months ended April 3, 2010. During the prior year in connection with the global economic decline during the six months ended March 28, 2009, the Company determined performance objectives for the performance-based restricted stock issued in fiscal 2007 and 2008 would not be attained at the previous estimated levels. In accordance with ASC 718, by lowering estimated attainment percentages, total compensation expense for the performance-based restricted stock decreased and previously recorded compensation expense was reversed during fiscal 2009.
 
The following table reflects total equity-based compensation expense (reversal of expense), which includes stock options, restricted stock and common stock, included in the Consolidated Statements of Operations during the three and six months ended March 28, 2009 and April 3, 2010:

   
Three months ended
   
Six months ended
 
(in thousands)
 
March 28, 2009
   
April 3, 2010
   
March 28, 2009
   
April 3, 2010
 
Cost of sales
  $ 28     $ 50     $ (1 )   $ 96  
Selling, general and administrative
    416       1,273       (251 )     1,987  
Research and development
    214       386       238       730  
Equity-based compensation expense
  $ 658     $ 1,709     $ (14 )   $ 2,813  
 
 
19

 

The following table summarizes the unrecognized equity-based compensation expense, by type of award, as of March 28, 2009 and April 3, 2010:
 
   
As of
   
 Average remaining
 
(dollar amounts in thousands)
 
March 28, 2009
   
April 3, 2010
   
contractual life in years
 
Market-based restricted stock
  $ -     $ 2,310       1.9  
Performance-based restricted stock
    438       1,179       1.0  
Time-based restricted stock
    1,931       5,005       2.2  
Stock options
    1,775       585       1.4  
Unrecognized equity-based compensation expense
  $ 4,144     $ 9,079          

401(k) Retirement Income Plan

The Company has a 401(k) retirement income plan for its employees. During fiscal 2009 and prior years, the Plan allowed for employee contributions and matching Company contributions in varying percentages, ranging from 50% to 175% up to 6% of the employee’s contributed amount based upon employee age and years of service. During the first quarter of fiscal 2010, the Plan was modified to allow for employee contributions and matching Company contributions up to 4% or 6% of the employee’s contributed amount based upon years of service.

The following table reflects the Company’s matching contributions to the 401(k) retirement income plan which were made in the form of issued and contributed shares of Company common stock during the three and six months ended March 28, 2009 and April 3, 2010:

   
Three months ended
   
Six months ended
 
(in thousands)
 
March 28, 2009
   
April 3, 2010
   
March 28, 2009
   
April 3, 2010
 
Number of common shares
    177       50       273       100  
Fair value based upon market price at date of distribution
  $ 288     $ 308     $ 492     $ 598  
 
 
20

 

NOTE 9 – INCOME TAXES

The following table reflects the provision (benefit) for income taxes and the effective tax rate from continuing operations for the six months ended March 29, 2009 and April 3, 2010:

   
Six months ended
 
(dollar amounts in thousands)
 
March 28, 2009 *
   
April 3, 2010
 
Income (loss) from continuing operations before taxes
  $ (66,273 )   $ 37,306  
Provision (benefit) for income taxes
    (12,158 )     308  
                 
Income (loss) from continuing operations
  $ (54,115 )   $ 36,998  
                 
Effective tax rate
    18.3 %     0.8 %

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.

For the six months ended April 3, 2010, the effective income tax rate related to continuing operations differed from the federal statutory rate primarily due to: decreases in the valuation allowance, Federal alternative minimum taxes, state income taxes, tax from foreign operations, impact of tax holidays, an increase in deferred taxes for un-remitted earnings and other U.S. current and deferred taxes.

For the six months ended March 28, 2009, the effective income tax rate related to continuing operations differed from the federal statutory rate primarily due to: increases in the valuation allowance, state income taxes, tax from foreign operations, impact of tax holidays, decreases in deferred taxes for un-remitted earnings, and decreases in tax reserves.

In October 2007, the tax authority in Israel issued the Company a preliminary assessment of income tax, withholding tax and interest of $34.3 million (after adjusting for the impact of foreign currency fluctuations) for fiscal 2002 through 2004. The Company provided a non-current income tax liability for uncertain tax positions on its Consolidated Balance Sheet as of September 27, 2008 related to this assessment for fiscal years 2002 through 2007, as required under ASC 740. On December 24, 2008, the Company, through its Israel subsidiaries, entered into an agreement with the tax authority in Israel settling the tax dispute for approximately $12.5 million, which represented withholding taxes, income taxes, and interest related to fiscal 2002 through 2004. The settlement of $12.5 million was made net of a $4.5 million reimbursement resulting in a net cash payment of $7.8 million during the second quarter of fiscal 2009. Following the payment and settlement of the audit for fiscal 2002 through 2004, the tax authorities in Israel examined the fiscal years 2005 and 2006. In addition during fiscal 2009, the Company made a payment of approximately $1.9 million related to income taxes and interest to settle the fiscal September 30, 2005 and 2006 assessment. As a result of the Israel tax settlements, the Company recognized a $12.5 million benefit from income taxes for fiscal 2009. The $12.5 million benefit was a result of reversing the liability for unrecognized tax benefits on the Consolidated Balance Sheet as of September 27, 2008 that was in excess of the $14.4 million for which the matter was settled. The entire amount of the reversal impacted the Company’s effective tax rate as indicated above.

The U.S. Internal Revenue Service (“IRS”) audited the Company for the period ended September 30, 2006. The Company responded to various information requests from the IRS and the audit was closed with no significant adjustments.
 
 
21

 

NOTE 10 - SEGMENT INFORMATION

The Company operates two segments: Equipment and Expendable Tools. The Equipment segment manufactures and markets a line of ball bonders, wedge bonders and die bonders. The Expendable Tools segment designs, manufactures, and markets consumable packaging materials for use on the Company’s equipment as well as on competitors’ equipment.
 
The following table reflects operating results by segment for the three and six months ended March 28, 2009 and April 3, 2010:
 
     
 
Three months ending
   
Six months ending
 
(in thousands)
 
March 28, 2009
   
April 3, 2010
   
March 28, 2009
   
April 3, 2010
 
Net revenue
                       
Equipment
  $ 16,977     $ 136,353     $ 40,636     $ 247,950  
Expendable Tools
    8,255       17,485       22,012       34,303  
Net revenue
    25,232       153,838       62,648       282,253  
Cost of sales
                               
Equipment
    12,564       79,466       29,221       144,611  
Expendable Tools
    4,623       6,600       11,454       13,497  
Cost of sales
    17,187       86,066       40,675       158,108  
Gross profit
                               
Equipment
    4,413       56,887       11,415       103,339  
Expendable Tools
    3,632       10,885       10,558       20,806  
Gross profit
    8,045       67,772       21,973       124,145  
Operating Expenses
                               
Equipment
    34,981       36,693       73,714       68,298  
Expendable Tools
    6,113       7,757       12,632       14,539  
Operating expenses
    41,094       44,450       86,346       82,837  
Impairment of goodwill
                               
Equipment
    2,709       -       2,709       -  
Income (loss) from operations
                               
Equipment
    (33,277 )     20,194       (65,008 )     35,041  
Expendable Tools
    (2,481 )     3,128       (2,074 )     6,267  
Income (loss) from operations
  $ (35,758 )   $ 23,322     $ (67,082 )   $ 41,308  

The following table reflects assets by segment as of October 3, 2009 and April 3, 2010:

   
 
As of
 
(in thousands)
 
October 3, 2009 *
   
April 3, 2010
 
Equipment
  $ 303,835     $ 386,891  
Expendable Tools
    108,800       85,506  
Segment assets
  $ 412,635     $ 472,397  

* As adjusted for ASC No. 470.20, Debt, Debt With Conversion Options.
 
 
22

 
 
NOTE 11 - EARNINGS PER SHARE

Basic income (loss) per share is calculated using the weighted average number of shares of common stock outstanding during the period. In addition, net income applicable to participating securities and the related participating securities are excluded from the computation of basic income per share.

Diluted income per share is calculated using the weighted average number of shares of common stock outstanding during the period and, if there is net income during the period, the dilutive impact of common stock equivalents outstanding during the period. In computing diluted income per share, if convertible debt is assumed to be converted to common shares, the after-tax amount of interest expense recognized in the period associated with the convertible debt is added back to net income.
 
The Company’s 0.875% Convertible Subordinated Notes would not result in the issuance of any dilutive shares, since the Notes are not convertible and the conversion option was not “in the money” as of March 28, 2009 or April 3, 2010. Accordingly, diluted EPS excludes the effect of the conversion of the 0.875% Convertible Subordinated Notes.

 
The following tables reflect reconciliations of the shares used in the basic and diluted net income (loss) per share computation for the three and six months ended March 28, 2009 and April 3, 2010:

   
Three months ended
 
 
 
March 28, 2009 *
   
April 3, 2010
 
(in thousands, except per share data)
 
Basic
   
Diluted
   
Basic
   
Diluted
 
 NUMERATOR:                                
Income (loss) from continuing operations
  $ (34,527 )   $ (34,527 )   $ 21,158     $ 21,158  
                                 
Less: Income applicable to participating securities
    -       - (1)     (227 )     (227 )
After-tax interest expense
    -       - (1)     -       122  
                                 
Income (loss) applicable to common shareholders
  $ (34,527 )   $ (34,527 )   $ 20,931     $ 21,053  
                                 
DENOMINATOR:
                               
Weighted average shares outstanding - Basic (3)
    61,054       61,054       69,806       69,806  
Stock options
            - (1)