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 July 2, 2016
 
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, 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 x
Accelerated filer [ ] 
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 August 1, 2016, there were 70,401,751 shares of the Registrant's Common Stock, no par value, outstanding.


Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
 
FORM 10 – Q
 
July 2, 2016
 Index
 
 
 
Page Number
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
Item 1.
FINANCIAL STATEMENTS (Unaudited)
 
 
 
 
 
Consolidated Balance Sheets as of July 2, 2016 and October 3, 2015
 
 
 
 
Consolidated Statements of Operations for the three and nine months ended July 2, 2016 and June 27, 2015
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and nine months ended July 2, 2016 and June 27, 2015
 
 
 
 
Consolidated Statements of Cash Flows for the nine months ended July 2, 2016 and June 27, 2015
 
 
 
 
Notes to Consolidated 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 6.
EXHIBITS
 
 
 
 
SIGNATURES




Table of Contents

PART I. - FINANCIAL INFORMATION
Item 1. – FINANCIAL STATEMENTS
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
 
 
As of
 
 
July 2, 2016
 
October 3, 2015
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
516,128

 
$
498,614

Accounts and other receivable, net of allowance for doubtful accounts of $488 and $621 respectively
 
171,809

 
108,596

Inventories, net
 
89,556

 
79,096

Prepaid expenses and other current assets
 
17,830

 
16,937

Deferred income taxes
 

 
4,126

Total current assets
 
795,323

 
707,369

 
 
 
 


Property, plant and equipment, net
 
50,195

 
53,234

Goodwill
 
81,272

 
81,272

Intangible assets
 
52,475

 
57,471

Other assets
 
7,442

 
5,120

TOTAL ASSETS
 
$
986,707

 
$
904,466

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
71,116

 
$
25,521

Accrued expenses and other current liabilities
 
53,809

 
45,971

Income taxes payable
 
6,945

 
2,442

Total current liabilities
 
131,870

 
73,934

 
 
 
 
 
Financing obligation
 
17,084

 
16,483

Deferred income taxes
 
30,908

 
33,958

Other liabilities
 
11,173

 
10,842

TOTAL LIABILITIES
 
$
191,035

 
$
135,217

 
 
 
 
 
Commitments and contingent liabilities (Note 15)
 


 


 
 
 
 
 
SHAREHOLDERS' EQUITY:
 
 

 
 

Preferred stock, without par value:
 
 

 
 

Authorized 5,000 shares; issued - none
 
$

 
$

Common stock, no par value:
 
 

 
 

Authorized 200,000 shares; issued 83,208 and 82,643, respectively; outstanding 70,397 and 71,240 shares, respectively
 
495,961

 
492,339

Treasury stock, at cost, 12,811 and 11,403 shares, respectively
 
(139,407
)
 
(124,856
)
Retained earnings
 
439,646

 
402,863

Accumulated other comprehensive loss
 
(528
)
 
(1,097
)
TOTAL SHAREHOLDERS' EQUITY
 
$
795,672

 
$
769,249

 
 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
986,707

 
$
904,466

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


1

Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Unaudited
 
 
Three months ended
 
Nine months ended
 
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
Net revenue
 
$
216,414

 
$
164,634

 
$
481,348

 
$
417,299

Cost of sales
 
116,374

 
87,063

 
261,240

 
216,424

Gross profit
 
100,040

 
77,571

 
220,108

 
200,875

Selling, general and administrative
 
38,458

 
36,105

 
101,889

 
97,139

Research and development
 
22,960

 
25,380

 
69,593

 
68,133

Operating expenses
 
61,418

 
61,485

 
171,482

 
165,272

Income from operations
 
38,622

 
16,086

 
48,626

 
35,603

Interest income
 
972

 
469

 
2,295

 
1,184

Interest expense
 
(290
)
 
(291
)
 
(839
)
 
(910
)
Income from operations before income taxes
 
39,304

 
16,264

 
50,082

 
35,877

Income tax expense / (benefit)
 
7,519

 
(8,775
)
 
13,299

 
(4,935
)
Net income
 
$
31,785

 
$
25,039

 
$
36,783

 
$
40,812

 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.45

 
$
0.33

 
$
0.52

 
$
0.53

Diluted
 
$
0.45

 
$
0.33

 
$
0.52

 
$
0.53

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
70,379

 
75,420

 
70,502

 
76,376

Diluted
 
70,843

 
75,891

 
70,802

 
76,778

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














 



2

Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Unaudited
 
Three months ended
 
Nine months ended
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
Net income
$
31,785

 
$
25,039

 
$
36,783

 
$
40,812

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(1,013
)
 
46

 
527

 
(1,200
)
Unrecognized actuarial gain, Switzerland pension plan, net of tax
15

 

 
1

 

 
(998
)
 
46

 
528

 
(1,200
)
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Unrealized gain / (loss) on derivative instruments, net of tax
41

 
(5
)
 
(92
)
 
(778
)
Reclassification adjustment for (gain) / loss on derivative instruments recognized, net of tax
(1
)
 
17

 
132

 
790

Net decrease from derivatives designated as hedging instruments, net of tax
40

 
12

 
40

 
12

 
 
 
 
 
 
 
 
Total other comprehensive (loss) / income
(958
)
 
58

 
568

 
(1,188
)
 
 
 
 
 
 
 
 
Comprehensive income
$
30,827

 
$
25,097

 
$
37,351

 
$
39,624

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













3

Table of Contents

KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
 
 
Nine months ended
 
 
July 2, 2016
 
June 27, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income
 
$
36,783

 
$
40,812

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
12,221

 
13,978

Equity-based compensation and employee benefits
 
3,936

 
8,536

Excess tax benefits from stock-based compensation arrangements
 
(540
)
 

Adjustment for doubtful accounts
 
(133
)
 
(143
)
Adjustment for inventory valuation
 
3,999

 
1,648

Deferred income taxes
 
(1,318
)
 
(5,907
)
Gain on disposal of property, plant and equipment
 
(56
)
 

Unrealized loss / (gain) foreign currency transactions
 
1,166

 
(2,170
)
Changes in operating assets and liabilities, net of assets and liabilities assumed in business combinations:
 
 

 
 

Accounts and other receivable
 
(63,566
)
 
8,747

Inventory
 
(15,426
)
 
(11,061
)
Prepaid expenses and other current assets
 
(964
)
 
1,066

Accounts payable, accrued expenses and other current liabilities
 
53,828

 
(6,741
)
Income taxes payable
 
4,623

 
(3,761
)
Other, net
 
(95
)
 
3,342

Net cash provided by operating activities
 
34,458

 
48,346

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Acquisition of business, net of cash acquired
 

 
(93,153
)
Purchases of property, plant and equipment
 
(4,692
)
 
(6,899
)
Proceeds from sales of property, plant and equipment
 
1,053

 

Purchase of short-term investments
 

 
(1,630
)
Maturity of short-term investments
 

 
10,763

Net cash used in investing activities
 
(3,639
)
 
(90,919
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Payment on debts
 
(399
)
 
(10,693
)
Proceeds from short-term loans
 

 
837

Proceeds from exercise of common stock options
 
215

 
694

Repurchase of common stock
 
(14,551
)
 
(60,675
)
Excess tax benefits from stock-based compensation arrangements
 
540

 

Net cash used in financing activities
 
(14,195
)
 
(69,837
)
Effect of exchange rate changes on cash and cash equivalents
 
890

 
354

Changes in cash and cash equivalents
 
17,514

 
(112,056
)
Cash and cash equivalents at beginning of period
 
498,614

 
587,981

Cash and cash equivalents at end of period
 
$
516,128

 
$
475,925

 
 
 
 
 
CASH PAID FOR:
 
 

 
 

Interest
 
$
839

 
$
910

Income taxes
 
$
9,038

 
$
4,006

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


4

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



NOTE 1: BASIS OF PRESENTATION
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.
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 Company's Annual Report on Form 10-K for the fiscal year ended October 3, 2015, filed with the Securities and Exchange Commission, which includes Consolidated Balance Sheets as of October 3, 2015 and September 27, 2014, 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 October 3, 2015. 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 2016 quarters end on January 2, 2016, April 2, 2016, July 2, 2016 and October 1, 2016. In fiscal years consisting of 53 weeks, the fourth quarter will consist of 14 weeks. Fiscal 2015 quarters ended on December 27, 2014, March 28, 2015, June 27, 2015 and October 3, 2015.
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 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, expendable 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 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 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 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 July 2, 2016 and October 3, 2015 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 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 six months, are recorded at fair value and are included in prepaid expenses and other current assets, or other 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 statement of income as the impact of the hedged transaction. Derivatives that we designate as cash flow hedges are classified in the consolidated 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.


6

Table of Contents
KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED 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. As of July 2, 2016 and October 3, 2015, fair value approximated the cost basis for cash equivalents.
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.
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 expendable 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 and equipment 3 to 10 years; 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.
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 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.


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


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 nine months ended July 2, 2016, no "triggering" events occurred.
Accounting for Impairment of Goodwill
The Company operates two reportable segments: Equipment and Expendable Tools. Goodwill was recorded for the acquisitions of Orthodyne Electronics Corporation ("Orthodyne") and Assembléon B.V. ("Assembléon") in 2009 and 2015, respectively.
In accordance with ASC No. 350, Intangibles-Goodwill and Other ("ASC 350"). 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. 
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. During the three and nine months ended July 2, 2016, no triggering events occurred.  
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. 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.
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 liability 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


8

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


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 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.
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 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. The fair value of the Company's stock option awards are estimated using a Black-Scholes option valuation model. 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.
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 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.
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.


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


Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition. The new standard provides for a single five-step model to be applied to all revenue contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. There is no option for early adoption. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606)- Deferral of the Effective Date, which defers the effective date of the new revenue standard by one year and permits early adoption as early as the original effective date of ASU 2014-09. Accordingly, the Company may adopt the standard in either our first quarter of 2018 or 2019. We are currently evaluating the impact of the adoption of this ASU on our financial statements.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), to clarify the implementation guidance on principal versus agent considerations in Topic 606. The amendments are intended to improve the operability and lead to more consistent application of the implementation guidance. The effective date is the same as the effective date of ASU 2014-09. ASU 2015-14 defers the effective date by one year and permits early adoption as early as the original effective date of ASU 2014-09. Accordingly, the Company may adopt the standard in either our first quarter of 2018 or 2019. We are currently evaluating the impact of the adoption of this ASU on our financial statements.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, to clarify the implementation guidance of Topic 606. The amendments do not change the guidance in Topic 606. The Company may adopt the standard in either our first quarter of 2018 or 2019. We are currently evaluating the impact of the adoption of this ASU on our financial statements.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, to clarify the guidance on assessing collectability, presenting sales taxes, measuring noncash consideration, and certain transition matters. The amendments are expected to reduce the degree of judgment necessary to comply with Topic 606. The Company may adopt the standard in either our first quarter of 2018 or 2019. We are currently evaluating the impact of the adoption of this ASU on our financial statements.
In February 2015, the FASB issued ASU 2015-02 – Amendments to the Consolidation Analysis, which amends the consolidation requirements in ASC 810 Consolidation. ASU 2015-02 makes targeted amendments to the current consolidation guidance for VIEs, which could change consolidation conclusions. This ASU will be effective for us beginning in our first quarter of 2017 and early adoption is permitted. We are currently evaluating the impact of the adoption of this ASU on our financial statements.
In April 2015, the FASB issued ASU 2015-05, which provides additional guidance to customers about whether a cloud computing arrangement includes a software license. Under ASU 2015-05, if a software cloud computing arrangement contains a software license, customers should account for the license element of the arrangement in a manner consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, customers should account for the arrangement as a service contract. ASU 2015-05 also removes the requirement to analogize to ASC 840-10 – Leases to determine the asset acquired in a software licensing arrangement. This ASU will be effective for us beginning in our first quarter of 2017 and early adoption is permitted. We are currently evaluating the impact of the adoption of this ASU on our financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), to simplify the presentation of deferred income taxes. Under the new standard, both deferred tax liabilities and assets are required to be classified as noncurrent in a classified balance sheet. ASU 2015-17 will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016 (our fiscal 2018), with early adoption allowed. As of October 3, 2015, we had deferred taxes that were classified as current and noncurrent. During the first quarter of fiscal 2016, we elected to prospectively adopt ASU 2015-17, thus reclassifying current deferred taxes to noncurrent on the accompanying consolidated balance sheet. The prior reporting period was not retrospectively adjusted. The adoption of this ASU had no impact on our consolidated results of income and comprehensive income. As of January 2, 2016, $1.3 million and $2.8 million of the net current deferred tax assets have been classified as long-term deferred tax assets and as an offset against long-term deferred tax liabilities, respectively.
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 lease classified as operating leases under current GAAP. This ASU will be effective for us beginning in our first quarter of 2019 and early adoption is permitted. We are currently evaluating the impact of the adoption of this ASU on our financial statements.


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


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. This ASU will be effective for us beginning in our first quarter of 2018 and early adoption is permitted. We are currently evaluating the impact of the adoption of this ASU on our financial statements.
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 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.



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


NOTE 2: REVISION OF PREVIOUSLY REPORTED INCOME TAXES AND DEFERRED TAX LIABILITIES
In the first quarter of fiscal 2016, the Company identified an error related to the income tax expense and related deferred income tax liabilities accounts that impacted the Company’s previously issued interim and annual consolidated financial statements. The adjustment relates to the local taxes in a foreign jurisdiction that resulted in an increased provision for income taxes expense and deferred income tax liabilities that should have been recorded prior to fiscal 2014.
The Company determined that this error was not material to any of the Company’s prior annual and interim period consolidated financial statements and therefore, amendments of previously filed reports were not required. However, the Company determined that the impact of the correction may be considered material to the estimated income for fiscal 2016. As such, a revision for the correction is reflected in the financial information of the applicable prior periods in this Form 10-Q filing and disclosure of the revised amount on other prior periods will be reflected in future filings covering the applicable period. The error resulted in a cumulative correction to beginning retained earnings and deferred tax liabilities of $2.6 million on the Consolidated Balance Sheet as of October 3, 2015. Since the error relates to financial periods prior to fiscal 2014, there was no impact to the Consolidated Statements of Operations, the Consolidated Statements of Comprehensive Income or the Consolidated Statements of Cash Flows for the three and nine months ended July 2, 2016 and June 27, 2015.
The impact of this revision for the period presented within this quarterly report on Form 10-Q is shown in the table below:
CONSOLIDATED BALANCE SHEET
 
 
As of October 3, 2015
 
 
As previously reported
 
Adjustment
 
As Revised
Deferred income taxes
 
31,316

 
2,642

 
33,958

TOTAL LIABILITIES
 
$
132,575

 
$
2,642

 
$
135,217

 
 
 
 
 
 
 
Retained earnings
 
405,505

 
(2,642
)
 
402,863

TOTAL SHAREHOLDERS' EQUITY
 
$
771,891

 
$
(2,642
)
 
$
769,249

 
NOTE 3: RESTRUCTURING
On September 29, 2015, the Company implemented a plan to streamline its global operations and functions. As part of this plan, our workforce was reduced by 45 employees.
The following table reflects severance activity during the three and nine months ended July 2, 2016:
 
 
Three months ended
 
Nine months ended
(in thousands)
 
July 2, 2016
 
July 2, 2016
Accrual for estimated severance and benefits, beginning of period (1)
 
$
166

 
$
1,538

Provision for severance and benefits (2)
 

 
661

Payment of severance and benefits
 
(88
)
 
(2,121
)
Accrual for estimated severance and benefits, end of period (1)
 
$
78

 
$
78

(1)
Included within accrued expenses and other current liabilities on the Consolidated Balance Sheets.
(2)
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.



12

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


NOTE 4: BALANCE SHEET COMPONENTS
The following tables reflect the components of significant balance sheet accounts as of July 2, 2016 and October 3, 2015:
 
 
As of
(in thousands)
 
July 2, 2016
 
October 3, 2015
Inventories, net:
 
 

 
 

Raw materials and supplies
 
$
21,184

 
$
23,541

Work in process
 
30,729

 
24,110

Finished goods
 
58,130

 
50,518

 
 
110,043

 
98,169

Inventory reserves
 
(20,487
)
 
(19,073
)
 
 
$
89,556

 
$
79,096

Property, plant and equipment, net:
 
 

 
 

Buildings and building improvements
 
$
34,447

 
$
33,760

Leasehold improvements
 
19,968

 
19,512

Data processing equipment and software
 
28,723

 
28,861

Machinery, equipment, furniture and fixtures
 
53,580

 
52,106

 
 
136,718

 
134,239

Accumulated depreciation
 
(86,523
)
 
(81,005
)
 
 
$
50,195

 
$
53,234

Accrued expenses and other current liabilities:
 
 

 
 

Wages and benefits
 
$
22,233

 
$
19,166

Accrued customer obligations (1)
 
13,355

 
9,215

Commissions and professional fees
 
5,200

 
3,880

Deferred rent
 
2,944

 
2,450

Severance (2)
 
1,131

 
1,645

Other
 
8,946

 
9,615

 
 
$
53,809

 
$
45,971

(1)
Represents customer advance payments, customer credit program, accrued warranty expense and accrued retrofit obligations.
(2)
Includes the restructuring plan discussed in Note 3, $1.0 million of severance payable in connection with the October 2015 retirement of the Company's CEO, and other severance payments which are not part of the Company's plan to streamline its global operations and functions.

NOTE 5: BUSINESS COMBINATIONS
On January 9, 2015, Kulicke & Soffa Holdings B.V. (“KSH”), the Company's 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.
The acquisition of Assembléon was accounted for in accordance with ASC No. 805, Business Combinations, using the acquisition method. On January 9, 2016, the Company finalized the valuation of the tangible and identifiable intangible assets and liabilities in connection with the acquisition of Assembléon and no further adjustment was recorded.
As of July 2, 2016, $12.8 million (EUR 11.5 million) was held in escrow for a period of eighteen months from the acquisition date as security pending the completion of Assembléon Holding B.V.'s obligations as seller under the Agreement.


13

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


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)
January 9, 2015
Accounts receivable
$
9,941

Inventories
19,861

Prepaid expenses and other current assets
2,322

Deferred tax asset
157

Property, plant and equipment
531

Intangibles
61,463

Goodwill
39,726

Deferred income taxes
638

Accounts payable
(14,386
)
Borrowings financial institutions
(9,491
)
Accrued expenses and other current liabilities
(10,561
)
Income taxes payable
(1,933
)
Deferred tax liabilities
(5,115
)
Total purchase price, net of cash acquired
$
93,153

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 reflects management’s estimates based on, among other factors, use of established valuation methods. The technology/software and product brand name was determined using the relief from royalty method. Customer relationships were valued by using multi-period excess earnings method. Identifiable intangible assets with definite lives are amortized over the period of estimated benefit using the straight-line method and the estimated useful lives of six to fifteen 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. None of the goodwill recorded as part of the acquisition will be deductible for income tax purposes.
In connection with the acquisition of Assembléon, the Company recorded deferred tax liabilities relating to the acquired intangible assets, which is 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. The Company has recorded long-term income tax payable due to uncertain tax positions with respect to certain Assembléon entities.
For the nine months ended June 27, 2015, the acquired business contributed revenue of $38.0 million and net loss of $4.5 million.
During the three and nine months ended June 27, 2015, the Company incurred $0.1 million and $0.9 million of expenses related to the acquisition, respectively, included within selling, general and administrative expense in the consolidated statements of income.
The following unaudited pro forma information presents the combined results of operations as if the acquisition had been completed on September 29, 2013, the beginning of the comparable prior annual reporting period. The unaudited pro forma results include: (i) amortization associated with preliminary estimates for the acquired intangible assets; (ii) recognition of the post-acquisition share-based compensation and other compensation expense; and (iii) the associated tax impact on these unaudited pro forma adjustments.
The unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies or the effect of the incremental costs incurred in integrating the two companies. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the periods presented, nor are they indicative of future results of operations:


14

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


 
 
Nine months ended
(in thousands, except per share)
 
June 27, 2015
Revenue
 
$
443,582

Net income
 
35,476

Basic income per common share
 
0.46

Diluted income per common share
 
0.46


NOTE 6: GOODWILL AND INTANGIBLE ASSETS
Goodwill
Intangible assets classified as goodwill are not amortized. 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 2015 and concluded that no impairment charge was required. During the nine months ended July 2, 2016, 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.
In 2009, the Company recorded goodwill when it acquired Orthodyne and added wedge bonder products to its business.
On January 9, 2015, KSH, the Company's wholly owned subsidiary, acquired all of the outstanding equity interests of Assembléon, in an all cash transaction for approximately $97.4 million (EUR 80 million). Assembléon, together with its subsidiaries, offers assembly equipment, processes and services for the automotive, industrial, and advanced packaging markets. The acquisition expanded the Company's presence in automotive, industrial and advanced packaging markets.
The following table summarizes the Company's recorded goodwill as of July 2, 2016 and October 3, 2015:
 
 
As of
(in thousands)
 
July 2, 2016
 
October 3, 2015
Goodwill
 
$
81,272

 
$
81,272

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.



15

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


The following table reflects net intangible assets as of July 2, 2016 and October 3, 2015
 
 
As of
 
Average estimated
(dollar amounts in thousands)
 
July 2, 2016
 
October 3, 2015
 
useful lives (in years)
Developed technology
 
$
74,080

 
$
74,080

 
7.0 to 15.0
Accumulated amortization
 
(37,288
)
 
(35,244
)
 
 
Net developed technology
 
$
36,792

 
$
38,836

 
 
 
 
 
 
 
 
 
Customer relationships
 
$
36,968

 
$
36,968

 
5.0 to 6.0
Accumulated amortization
 
(23,717
)
 
(21,509
)
 
 
Net customer relationships
 
$
13,251

 
$
15,459

 
 
 
 
 
 
 
 
 
Trade and brand names
 
$
7,515

 
$
7,515

 
7.0 to 8.0
Accumulated amortization
 
(5,083
)
 
(4,339
)
 
 
Net trade and brand name
 
$
2,432

 
$
3,176

 
 
 
 
 
 
 
 
 
Other intangible assets
 
$
2,500

 
$
2,500

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

 
$

 
 
 
 
 
 
 
 
 
Net intangible assets
 
$
52,475

 
$
57,471

 
 
The following table reflects estimated annual amortization expense related to intangible assets as of July 2, 2016:
 
As of
(in thousands)
July 2, 2016
Remaining fiscal 2016
$
1,664

Fiscal 2017
6,086

Fiscal 2018
6,086

Fiscal 2019
6,086

Fiscal 2020 and onwards
32,553

Total amortization expense
$
52,475

 

NOTE 7: CASH, CASH EQUIVALENTS 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. We carry these investments at fair value, based on quoted market prices or other readily available market information.
Cash and cash equivalents consisted of the following as of July 2, 2016:
(in thousands)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
172,919

 
$

 
$

 
$
172,919

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
85,582

 

 

 
85,582

Time deposits
257,627

 

 

 
257,627

Total cash and cash equivalents
$
516,128

 
$

 
$

 
$
516,128



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


Cash and cash equivalents consisted of the following as of October 3, 2015:
(in thousands)
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
105,617

 
$

 
$

 
$
105,617

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
155,715

 

 

 
155,715

Time deposits
237,282

 

 

 
237,282

Total cash and cash equivalents
$
498,614

 
$

 
$

 
$
498,614


NOTE 8: 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 nine months ended July 2, 2016.
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.
Fair Value of Financial Instruments
Amounts reported as cash and equivalents, short-term investments, accounts receivables, prepaid expenses and other current assets, accounts payable and accrued expenses approximate fair value.

NOTE 9: 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 6 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 statements of income as the impact of the hedged transaction.


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


There were no outstanding derivative instruments as of October 3, 2015. The fair value of derivative instruments on our Consolidated Balance Sheet as of July 2, 2016 was as follows:
 
As of
(in thousands)
July 2, 2016
 
Notional Amount
 
Fair Value Asset Derivatives(1)
Derivatives designated as hedging instruments:
 
 
 
Foreign exchange forward contracts (2)
$
9,271

 
40

Total derivatives
$
9,271

 
40

(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 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 Statements of Comprehensive Income for the three and nine months ended July 2, 2016 and June 27, 2015 are as follows:
(in thousands)
 
Three months ended
 
Nine months ended
 
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
Foreign exchange forward contract in cash flow hedging relationships:
 
 
 
 
 
 
 
 
Net gain/(loss) recognized in OCI, net of tax(1)
 
$
41

 
$
(5
)
 
$
(92
)
 
$
(778
)
Net gain/(loss) reclassified from accumulated OCI into income, net of tax(2)
 
$
1

 
$
(17
)
 
$
(132
)
 
$
(790
)
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.

NOTE 10: 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 July 2, 2016, we recorded a financing obligation related to the Building of $17.1 million. 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.


18

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


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 July 2, 2016, the outstanding amount is $3.1 million.
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 2016 Credit Facility is an unsecured revolving credit facility of $25 million with a term of one year. The proceeds of the 2016 Credit Facility may be used for the Company's general corporate purposes. As of July 2, 2016, there was no outstanding amount under the 2016 Credit Facility.

NOTE 11: SHAREHOLDERS’ EQUITY AND EMPLOYEE BENEFIT PLANS
Common Stock and 401(k) Retirement Income Plan
The Company has 401(k) retirement income plans (the “Plans”) for eligible U.S. employees. The Plans allow for employee contributions and Company contributions from 4% to 8% based upon terms and conditions of the 401(k) Plans that they participate in.
The following table reflects the Company’s contributions to the Plans during the three and nine months ended July 2, 2016 and June 27, 2015:
 
 
Three months ended
 
Nine months ended
(in thousands)
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
Cash
 
$
376

 
$
460

 
$
1,194

 
$
1,255

Stock Repurchase Program
On August 14, 2014, 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 14, 2017. 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. 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 months ended July 2, 2016, there were no stock repurchases under the Program. During the nine months ended July 2, 2016, the Company repurchased a total of 1.4 million shares of common stock at a cost of $14.6 million. The stock repurchases were recorded in the periods they were delivered, and the payment of $14.6 million was accounted for as treasury stock in the Company’s Consolidated 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


19

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


transactions is insufficient to cover the difference between acquisition cost and the reissue price, this difference is recorded against retained earnings.
Accumulated Other Comprehensive Loss
The following table reflects accumulated other comprehensive income reflected in the Consolidated Balance Sheets as of July 2, 2016 and October 3, 2015
 
 
As of
(in thousands)
 
July 2, 2016
 
October 3, 2015
Gain / (loss) from foreign currency translation adjustments
 
$
366

 
$
(161
)
Unrecognized actuarial loss Switzerland pension plan, net of tax
 
(588
)
 
(590
)
Switzerland pension plan curtailment
 
(346
)
 
(346
)
Unrealized gain on hedging
 
40

 

Accumulated other comprehensive loss
 
$
(528
)
 
$
(1,097
)


20

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


Equity-Based Compensation
As of July 2, 2016, the Company had seven equity-based employee compensation plans (the “Employee Plans”) and three director compensation plans (the “Director Plans”) (collectively, the “Equity Plans”). Under these Equity Plans, market-based share awards (collectively, “market-based restricted stock”), time-based share awards (collectively, “time-based restricted stock”), performance-based share awards (collectively, “performance-based restricted stock”), stock options, or common stock have been granted at 100% of the market price of the Company's common stock on the date of grant. As of July 2, 2016, the Company’s one active plan, the 2009 Equity Plan, had 3.0 million shares of common stock available for grant to its employees and directors.
Market-based restricted stock 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 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.
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.
In general, performance-based restricted stock (“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 return on invested capital and 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 return on invested capital and revenue growth targets are not met, performance-based restricted stock does not vest. Certain 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 PSUs do not vest.
Equity-based compensation expense recognized in the Consolidated Statements of Operations for the three and nine months ended July 2, 2016 and June 27, 2015 was based upon awards ultimately expected to vest. In accordance with ASC No. 718, Stock Based Compensation, 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.
The following table reflects restricted stock and common stock granted during the three and nine months ended July 2, 2016 and June 27, 2015:
 
 
Three months ended
 
Nine months ended
(shares in thousands)
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
Market-based restricted stock
 
6

 

 
172

 
232

Time-based restricted stock
 
16

 

 
597

 
484

Common stock
 
15

 
11

 
47

 
35

Equity-based compensation in shares
 
37

 
11

 
816

 
751









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


The following table reflects total equity-based compensation expense, which includes restricted stock, stock options and common stock, included in the Consolidated Statements of Operations during the three and nine months ended July 2, 2016 and June 27, 2015
 
 
Three months ended
 
Nine months ended
(in thousands)
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
Cost of sales
 
$
98

 
$
88

 
$
323

 
$
304

Selling, general and administrative (1)
 
1,331

 
1,914

 
2,021

 
6,389

Research and development
 
472

 
518

 
1,592

 
1,843

Total equity-based compensation expense
 
$
1,901

 
$
2,520

 
$
3,936

 
$
8,536

(1) The selling, general and administrative expense for the nine months ended July 2, 2016, includes the reversal of a $2.0 million expense due to the forfeiture of stock awards in connection with the October 2015 retirement of the Company's CEO.
The following table reflects equity-based compensation expense, by type of award, for the three and nine months ended July 2, 2016 and June 27, 2015:  
 
 
Three months ended
 
Nine months ended
(in thousands)
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
Market-based restricted stock 
 
$
475

 
$
986

 
$
(518
)
 
$
3,330

Time-based restricted stock
 
1,246

 
1,321

 
3,958

 
4,565

Performance-based restricted stock 
 

 
33

 
(43
)
 
98

Stock options
 

 

 

 
3

Common stock
 
180

 
180

 
539

 
540

Total equity-based compensation expense (1)
 
$
1,901

 
$
2,520

 
$
3,936

 
$
8,536

(1) The equity-based compensation expense for the nine months ended July 2, 2016, includes the reversal of a $2.0 million expense due to the forfeiture of stock awards in connection with the October 2015 retirement of the Company's CEO.

NOTE 12: 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.
The following tables reflect a reconciliation of the shares used in the basic and diluted net income per share computation for the three and nine months ended July 2, 2016 and June 27, 2015
 
 
Three months ended
(in thousands, except per share)
 
July 2, 2016
 
June 27, 2015
 
 
Basic
 
Diluted
 
Basic
 
Diluted
NUMERATOR:
 
 
 
 
 
 
 
 
Net income
 
$
31,785

 
$
31,785

 
$
25,039

 
$
25,039

DENOMINATOR:
 
 
 
 
 
 
 
 
Weighted average shares outstanding - Basic
 
70,379

 
70,379

 
75,420

 
75,420

Stock options
 
 
 
32

 
 
 
67

Time-based restricted stock
 
 
 
331

 
 
 
336

Market-based restricted stock
 
 
 
101

 
 
 
68

Weighted average shares outstanding - Diluted
 
 
 
70,843

 
 
 
75,891

EPS:
 
 
 
 
 
 
 
 
Net income per share - Basic
 
$
0.45

 
$
0.45

 
$
0.33

 
$
0.33

Effect of dilutive shares
 
 
 

 
 
 

Net income per share - Diluted
 
 
 
$
0.45

 
 
 
$
0.33

 
 
Nine months ended
(in thousands, except per share data)
 
July 2, 2016
 
June 27, 2015
 
 
Basic
 
Diluted
 
Basic
 
Diluted
NUMERATOR:
 
 

 
 

 
 

 
 

Net income
 
$
36,783

 
$
36,783

 
$
40,812

 
$
40,812

DENOMINATOR:
 
 

 
 

 
 

 
 

Weighted average shares outstanding - Basic
 
70,502

 
70,502

 
76,376

 
76,376

Stock options
 
 
 
30

 
 

 
84

Time-based restricted stock
 
 
 
196

 
 

 
269

Market-based restricted stock
 
 
 
74

 
 

 
49

Weighted average shares outstanding - Diluted
 
 

 
70,802

 
 

 
76,778

EPS:
 
 

 
 

 
 

 
 

Net income per share - Basic
 
$
0.52

 
$
0.52

 
$
0.53

 
$
0.53

Effect of dilutive shares
 
 

 

 
 

 

Net income per share - Diluted
 
 

 
$
0.52

 
 

 
$
0.53

  



22

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


NOTE 13: INCOME TAXES
The following table reflects the provision for income taxes and the effective tax rate for the nine months ended July 2, 2016 and June 27, 2015
 
Nine months ended
(dollar amounts in thousands)
July 2, 2016
 
June 27, 2015
Income from operations before income taxes
$
50,082

 
$
35,877

Income tax expense / (benefit)
13,299

 
(4,935
)
Net income
$
36,783

 
$
40,812

 
 
 
 
Effective tax rate
26.6
%
 
(13.8
)%
For the nine months ended July 2, 2016, 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 a tax liability arising from a settlement with a foreign tax authority, an increase for deferred taxes on unremitted earnings, foreign withholding taxes, and an increase in valuation allowance against certain foreign deferred tax assets.
For the nine months ended June 27, 2015, the effective income tax rate differed from the federal statutory tax rate primarily due to tax benefits from research and development expenditures, profits from foreign operations subject to a lower statutory tax rate than the federal rate, and the impact of tax holidays, offset by an increase in valuation allowance against certain foreign deferred tax assets, foreign earnings not permanently reinvested, and foreign withholding taxes. In addition, a tax benefit of $13.7 million was recorded primarily related to the reduction in the deferred tax liabilities as a result of the change in permanent reinvestment assertion for the nine months ended June 27, 2015 due to a business structure reorganization.
The effective tax rate for the three months ended July 2, 2016 of 19.1% increased from the effective tax rate for the three months ended June 27, 2015 of (54.0)% primarily due to a tax benefit of $13.7 million recorded in 2015 that mainly relates to the reduction in deferred tax liabilities as a result of the change in permanent reinvestment assertion due to a business structure reorganization.
The effective tax rate for the nine months ended July 2, 2016 of 26.6% increased from the effective tax rate for the nine months ended June 27, 2015 of (13.8)% and the year ended October 3, 2015 of (34.3)% primarily due to a tax benefit of $13.7 million recorded in 2015 that mainly relates to the reduction in deferred tax liabilities as a result of the change in permanent reinvestment assertion and a one-time tax liability of $4.4 million recorded in 2016 arising from a settlement reached with a foreign tax authority.
The Company's future effective tax rate would be affected if earnings were lower than anticipated in countries where it has lower statutory rates and higher than anticipated 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. In addition, changes in assertion for foreign earnings permanently or non-permanently reinvested as a result of changes in facts and circumstances could significantly impact the effective tax rate.  The Company regularly assesses the effects resulting from these factors to determine the adequacy of its provision for income taxes.
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 currently under income tax examination by tax authorities in certain foreign jurisdictions.

NOTE 14: SEGMENT INFORMATION
The Company operates two reportable segments: Equipment and Expendable Tools. The Equipment segment manufactures and sells a line of ball bonders, wedge bonders, advanced packaging and surface mount technology solutions. The Company also services, maintains, repairs and upgrades its equipment. The Expendable Tools segment manufactures and sells a variety of expendable tools for a broad range of semiconductor packaging applications.
The following table reflects operating information by segment for the three and nine months ended July 2, 2016 and June 27, 2015


23

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


 
 
Three months ended
 
Nine months ended
(in thousands)
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
Net revenue:
 
 

 
 

 
 

 
 

       Equipment
 
$
200,128

 
$
148,987

 
$
434,164

 
$
369,759

       Expendable Tools
 
16,286

 
15,647

 
47,184

 
47,540

              Net revenue
 
216,414

 
164,634

 
481,348

 
417,299

Income from operations:
 
 

 
 

 
 

 
 

        Equipment
 
34,676

 
12,849

 
35,966

 
24,602

        Expendable Tools
 
3,946

 
3,237

 
12,660

 
11,001

              Income from operations
 
$
38,622

 
$
16,086

 
$
48,626

 
$
35,603

The following table reflects assets by segment as of July 2, 2016 and October 3, 2015:
 
 
As of
(in thousands)
 
July 2, 2016
 
October 3, 2015
Segment assets:
 
 

 
 

Equipment
 
$
907,628

 
$
828,471

Expendable Tools
 
79,079

 
75,995

Total assets
 
$
986,707

 
$
904,466

The following tables reflect capital expenditures for the nine months ended July 2, 2016 and June 27, 2015, and depreciation expense for the three and nine months ended July 2, 2016 and June 27, 2015:
 
 
Nine months ended
(in thousands)
 
July 2, 2016
 
June 27, 2015
Capital expenditures:
 
 

 
 

Equipment
 
$
3,137

 
$
4,274

Expendable Tools
 
1,259

 
1,435

Capital expenditures
 
$
4,396

 
$
5,709

 
 
Three months ended
 
Nine months ended
(in thousands)
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
Depreciation expense:
 
 

 
 

 
 

 
 

Equipment
 
$
1,800

 
$
1,859

 
$
5,531

 
$
5,106

Expendable Tools
 
554

 
599

 
1,694

 
1,840

Depreciation expense
 
$
2,354

 
$
2,458

 
$
7,225

 
$
6,946


NOTE 15: COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Warranty Expense
The Company's equipment is generally shipped with a one-year warranty against manufacturing defects. The Company establishes reserves for estimated warranty expense when revenue for the related equipment is recognized. The reserve for estimated warranty expense is based upon historical experience and management's estimate of future warranty costs.


24

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


The following table reflects the reserve for product warranty activity for the three and nine months ended July 2, 2016 and June 27, 2015
 
 
Three months ended
 
Nine months ended
(in thousands)
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
Reserve for product warranty, beginning of period
 
$
1,871

 
$
1,849

 
$
1,856

 
$
1,542

Addition from business combination
 

 

 

 
547

Provision for product warranty
 
2,882

 
828

 
4,240

 
2,065

Product warranty costs paid
 
(649
)
 
(705
)
 
(1,992
)
 
(2,182
)
Reserve for product warranty, end of period
 
$
4,104

 
$
1,972

 
$
4,104

 
$
1,972

Other Commitments and Contingencies
The following table reflects obligations not reflected on the Consolidated Balance Sheet as of July 2, 2016:
 
 
 
 

 
Payments due by fiscal year
(in thousands)
 
Total
 
2016
 
2017
 
2018
 
2019
 
thereafter
Inventory purchase obligation (1)
 
$
108,103

 
$
108,103

 
$

 
$

 
$

 
$

Operating lease obligations (2)
 
27,318

 
1,243

 
4,652

 
3,635

 
3,050

 
14,738

Total
 
$
135,421

 
$
109,346

 
$
4,652

 
$
3,635

 
$
3,050

 
$
14,738


(1)
The Company orders inventory components in the normal course of its business. A portion of these orders are non-cancelable and a portion may have varying penalties and charges in the event of cancellation.
(2)
The Company has minimum rental commitments under various leases (excluding taxes, insurance, maintenance and repairs, which are also paid by the Company) primarily for various facility and equipment leases, which expire periodically through 2018 (not including lease extension options, if applicable).
Pursuant to ASC No. 840, Leases, for lessee's involvement in asset construction, the Company was considered the owner of the Building during the construction phase. The Building was completed on December 1, 2013 and Pte signed an agreement with the Landlord to lease from the Landlord approximately 198,000 square feet, representing approximately 70% of the Building. Following the completion of construction, we performed a sale-leaseback analysis pursuant to ASC 840-40 and determined that because of our continuing involvement, ASC 840-40 precluded us from derecognizing the asset and associated financing obligation. As such, we reclassified the asset from construction in progress to Property, Plant and Equipment and began to depreciate the building 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. As of July 2, 2016, we recorded a financing obligation related to the Building of $17.1 million (see Note 10 above). The financing obligation is not reflected in the table above.
Concentrations
The following table reflects significant customer concentrations as a percentage of net revenue for the nine months ended July 2, 2016 and June 27, 2015.
 
 
As of
 
 
July 2, 2016
 
June 27, 2015
Haoseng Industrial Company Limited (1)
 
14.1
%
 
*
(1) Distributor of the Company's products.
* Represented less than 10% of total net revenue


25

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


The following table reflects significant customer concentrations as a percentage of total accounts receivable as of July 2, 2016 and June 27, 2015:
 
 
As of
 
 
July 2, 2016
 
June 27, 2015
Haoseng Industrial Company Limited (1)
 
25.7
%
 
14.8
%
Siliconware Precision Industries Co. Limited
 
11.8
%
 
*

(1) Distributor of the Company's products.
* Represented less than 10% of total accounts receivable



26

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Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements
In addition to historical information, this filing contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the safe harbor provisions created by statute. Such forward-looking statements include, but are not limited to, our future revenue, sustained, increasing, continuing or strengthening, or decreasing or weakening, demand for our products, the continuing transition from gold to copper wire bonding, replacement demand, our research and development efforts, our ability to identify and realize new growth opportunities, our ability to control costs and our operational flexibility as a result of (among other factors):
projected growth rates in the overall semiconductor industry, the semiconductor assembly equipment market, and the market for semiconductor packaging materials; and
projected demand for ball, wedge bonder, advanced packaging and surface mount technology equipment and for expendable tools.
Generally, words such as “may,” “will,” “should,” “could,” “anticipate,” “expect,” “intend,” “estimate,” “plan,” “continue,” “goal” and “believe,” or the negative of or other variations on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this filing. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.
Forward-looking statements are based on current expectations and involve risks and uncertainties. Our future results could differ significantly from those expressed or implied by our forward-looking statements. These risks and uncertainties include, without limitation, those described below and under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 3, 2015 (the “Annual Report”) and our other reports and registration statements filed from time to time with the Securities and Exchange Commission. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in this report, as well as our audited financial statements included in the Annual Report.
We operate in a rapidly changing and competitive environment. New risks emerge from time to time and it is not possible for us to predict all risks that may affect us. Future events and actual results, performance and achievements could differ materially from those set forth in, contemplated by or underlying the forward-looking statements, which speak only as of the date on which they were made. Except as required by law, we assume no obligation to update or revise any forward-looking statement to reflect actual results or changes in, or additions to, the factors affecting such forward-looking statements. Given those risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictions of actual results.
OVERVIEW
Kulicke and Soffa Industries, Inc. (the "Company" or "K&S") designs, manufactures and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits (“ICs”), high and low powered discrete devices, light-emitting diodes (“LEDs”), and power modules. We also service, maintain, repair and upgrade our equipment. Our customers primarily consist of semiconductor device manufacturers, outsourced semiconductor assembly and test providers (“OSATs”), other electronics manufacturers and automotive electronics suppliers.
We operate two main business segments, Equipment and Expendable Tools. Our goal is to be the technology leader and the most competitive supplier in terms of cost and performance in each of our major product lines. Accordingly, we invest in research and engineering projects intended to enhance our position at the leading edge of semiconductor assembly technology. We also remain focused on our cost structure through continuing improvement and optimization of operations. Cost reduction efforts remain an important part of our normal ongoing operations and are expected to generate savings without compromising overall product quality and service levels.
Business Environment
The semiconductor business environment is highly volatile, driven by internal dynamics, both cyclical and seasonal, in addition to macroeconomic forces. Over the long term, semiconductor consumption has historically grown, and is forecasted to continue to grow. This growth is driven, in part, by regular advances in device performance and by price declines that result from improvements in manufacturing technology. In order to exploit these trends, semiconductor manufacturers, both integrated device manufacturers (“IDMs”) and OSATs, periodically invest aggressively in latest generation capital equipment. This buying pattern often leads to periods of excess supply and reduced capital spending—the so-called semiconductor cycle. Within this broad


27

Table of Contents

semiconductor cycle there are also, generally weaker, seasonal effects that are specifically tied to annual, end-consumer purchasing patterns. Typically, semiconductor manufacturers prepare for heightened demand by adding or replacing equipment capacity by the end of the September quarter. Occasionally, this results in subsequent reductions in the December quarter. This annual seasonality can occasionally be overshadowed by effects of the broader semiconductor cycle. Macroeconomic factors also affect the industry, primarily through their effect on business and consumer demand for electronic devices, as well as other products that have significant electronic content such as automobiles, white goods, and telecommunication equipment.
Our Equipment segment is primarily affected by the industry's internal cyclical and seasonal dynamics in addition to broader macroeconomic factors that can positively or negatively affect our financial performance. The sales mix of IDM and OSAT customers in any period also impacts financial performance, as changes in this mix can affect our products' average selling prices and gross margins due to differences in volume purchases and machine configurations required by each customer type.
Our Expendable Tools segment has historically been less volatile than our Equipment segment. Expendable Tools sales are more directly tied to semiconductor unit consumption rather than capacity requirements and production capability improvements. 
We continue to position our business to leverage our research and development leadership and innovation and to focus our efforts on mitigating volatility, improving profitability and ensuring longer-term growth. We remain focused on operational excellence, expanding our product offerings and managing our business efficiently throughout the business cycles. Our visibility into future demand is generally limited, forecasting is difficult, and we generally experience typical industry seasonality.
To limit potential adverse cyclical, seasonal and macroeconomic effects on our financial position, we have continued our efforts to maintain a strong balance sheet. As of July 2, 2016, our total cash and cash equivalents were $516.1 million, a $17.5 million increase from the prior fiscal year end. We believe this strong cash position will allow us to continue to invest in product development and pursue non-organic opportunities.
On August 14, 2014, 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 14, 2017. 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. 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 months ended July 2, 2016, there were no stock repurchases under the Program. During the nine months ended July 2, 2016, the Company repurchased a total of 1.4 million shares of common stock at a cost of $14.6 million, under the Program. As of July 2, 2016, our remaining stock repurchase authorization under the Program was approximately $7.0 million.
On January 9, 2015, Kulicke & Soffa Holdings B.V. (“KSH”), the Company's wholly owned subsidiary, acquired all of the outstanding equity interests of Assembléon B.V. (“Assembléon”), a subsidiary of Assembléon Holding B.V. 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.
Assembléon is a leading technology solutions provider that, together with its subsidiaries, offers assembly equipment, processes and services for the automotive, industrial, and advanced packaging markets. The acquisition expands the Company's presence in automotive, industrial and advanced packaging markets.
Technology Leadership
We compete largely by offering our customers among the most advanced equipment and expendable tools available for the interconnect processes. Our equipment is typically the most productive and has the highest levels of process capability, and as a result, we believe it has a lower cost of ownership compared to other equipment in its market. Our expendable tools are designed to optimize the performance of the equipment in which they are used. We believe our technology leadership contributes to the strong market positions of our ball bonder, wedge bonder and expendable tools products. To maintain our competitive advantage, we invest in product development activities designed to produce a stream of improvements to existing products and to deliver next-generation products. These investments often focus as much on improvements in the semiconductor assembly process as on specific pieces of assembly equipment or expendable tools. In order to generate these improvements, we often work in close collaboration with customers, end users, and other industry members. In addition to producing technical advances, these collaborative development efforts strengthen customer relationships and enhance our reputation as a technology leader and solutions provider.
In addition to gold, silver alloy wire and aluminum wire, our leadership in the industry's use of copper wire for the bonding process is an example of the benefits of our collaborative efforts. By working with customers, material suppliers, and other equipment


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suppliers, we have developed a series of robust, high-yielding production processes, which have made copper wire widely accepted and significantly reduced the cost of assembling an integrated circuit.
Our leadership also has allowed us to maintain a competitive position in the latest generations of gold and copper ball bonders, which enables our customers to handle the leading technologies in terms of bond pad pitch, silicon with the latest node and complex wire bonding requirement. We continue to see demand for our extended large bondable area (“ELA”) configured machines. This ELA option is now available on all of our Power Series (PS) models and allows our customers to gain added efficiencies and to reduce the cost of packaging.
We also leverage the technology leadership of our equipment by optimizing our bonder platforms, and we deliver variants of our products to serve emerging high-growth markets. For example, we have developed extensions of our main ball bonding platforms to address opportunities in memory assembly, in particular for NAND Flash storage. We expect the growth in the memory market to be in the solid-state drive.  
Our leading technology for wedge bonder equipment uses ribbon or heavy wire for different applications such as power electronics, automotive and semiconductor applications. The advanced interconnect capabilities of PowerFusionPS improve the processing of high-density power packages, due to an expanded bondable area, wider leadframe capability, superior indexing accuracy and teach mode. We have also completed the design and development of our next generation hybrid wedge bonder, Asterion. In all cases, we are making a concerted effort to develop commonality of subsystems and design practices, in order to improve performance and design efficiencies. We believe this will benefit us in maintaining our leadership position in the wedge bonding market and increase synergies between the various engineering product groups. Furthermore, we continually research adjacent market segments where our technologies could be used. Many of these initiatives are in the early stages of development and some have yielded results.
Another example of our developing equipment for high-growth niche markets is our AT Premier PLUS. This machine utilizes a modified wire bonding process to mechanically place bumps on devices in a wafer format, for variants of the flip chip assembly process. Typical applications include complementary metal-oxide semiconductor (“CMOS”) image sensors, surface acoustical wave (“SAW”) filters and high brightness LEDs. These applications are commonly used in most, if not all, smartphones available today in the market. We also have expanded the use of AT Premier PLUS for wafer level wire bonding for micro-electro-mechanical systems (“MEMS”) and other sensors.
Our technology leadership and bonding process know-how have enabled us to develop highly function-specific equipment with best-in-class throughput and accuracy. This forms the foundation for our advanced packaging equipment development. We established a dedicated team to develop and manufacture advanced packaging bonders for the emerging 2.5 dimensional integrated circuit (“2.5D IC”) and 3 dimensional integrated circuit (“3D IC”) markets. By reducing the interconnect dimensions, 2.5D ICs and 3D ICs are expected to provide form factor, performance and power efficiency enhancements over traditional flip-chip packages in production today. High-performance processing and memory applications, in addition to mobile devices such as smartphones and tablets, are anticipated to be earlier adopters of this new packaging technology.
With the acquisition of Assembléon, we broadened our advanced packaging solutions for mass reflow ("APMR") to include flip chip, wafer level packaging ("WLP"), fan-out wafer level packaging ("FOWLP"), advanced package-on-package, embedded die, and System-in-Package ("SiP"). The acquisition also enables us to diversify our business into the automotive, medical and industrial markets with advanced surface-mount technology ("SMT") pick and place solutions.
We bring the same technology focus to our expendable tools business, driving tool design and manufacturing technology to optimize the performance and process capability of the equipment in which our tools are used. For all our equipment products, expendable tools are an integral part of their process capability. We believe our unique ability to simultaneously develop both equipment and tools is a core strength supporting our products' technological differentiation.


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Products and Services
We supply a range of bonding equipment and expendable tools. The following tables reflect net revenue by business segment for the three and nine months ended July 2, 2016 and June 27, 2015, respectively:
 
 
Three months ended
 
 
July 2, 2016
 
June 27, 2015
(dollar amounts in thousands)
 
Net revenues
 
% of total net
revenue
 
Net revenues
 
% of total net
revenue
Equipment
 
$
200,128

 
92.5
%
 
$
148,987

 
90.5
%
Expendable Tools
 
16,286

 
7.5
%
 
15,647

 
9.5
%
 
 
$
216,414

 
100.0
%
 
$
164,634

 
100.0
%
 
 
Nine months ended
 
 
July 2, 2016
 
June 27, 2015
(dollar amounts in thousands)
 
Net revenues
 
% of total net revenue
 
Net revenues
 
% of total net revenue
Equipment
 
$
434,164

 
90.2
%
 
$
369,759

 
88.6
%
Expendable Tools
 
47,184

 
9.8
%
 
47,540

 
11.4
%
 
 
$
481,348

 
100.0
%
 
$
417,299

 
100.0
%
 
Equipment Segment
We manufacture and sell a line of ball bonders, wafer level bonders, wedge bonders, advanced packaging and surface mount technology equipment that are sold to semiconductor device manufacturers, OSATs, other electronics manufacturers and automotive electronics suppliers. Ball bonders are used to connect very fine wires, typically made of gold or copper, between the bond pads of the semiconductor device, or die, and the leads on its package. Wafer level bonders mechanically apply bumps to die, typically while still in the wafer format, for some variants of the flip chip assembly process. Wedge bonders use either aluminum wire or ribbon to perform the same function in packages that cannot use gold or copper wire because of either high electrical current requirements or other package reliability issues. We believe our equipment offers competitive advantages by providing customers with high productivity/throughput, superior package quality/process control, and, as a result, a lower cost of ownership.



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Our principal Equipment segment products include:
Business Line
 
Product Name (1)
 
Typical Served Market
 
 
 
 
 
Ball bonders
 
IConnPS PLUS series (2) (3) (4)
 
Advanced and ultra fine pitch applications
 
 
 
 
 
 
 
IConnPS ProCu PLUS series (2) (3) (4)
 
High-end copper wire applications demanding advanced process capability and high productivity
 
 
 
 
 
 
 
IConnPS MEM PLUS series (2) (3) (4)
 
Memory applications
 
 
 
 
 
 
 
ConnXPS PLUS series (2) (3) (4)
 
High productivity bonder for low-to-medium pin count applications
 
 
 
 
 
 
 
ConnXPS LED PLUS
 
LED applications
 
 
 
 
 
 
 
AT Premier PLUS
 
Advanced wafer level bonding application
 
 
 
 
 
Wedge bonders
 
3600PLUS
 
Power hybrid and automotive modules using either heavy aluminum wire or PowerRibbon®
 
 
 
 
 
 
 
3700PLUS
 
Hybrid and automotive modules using thin aluminum wire
 
 
 
 
 
 
 
7200PLUS
 
Power semiconductors using either aluminum wire or PowerRibbon®
 
 
 
 
 
 
 
7200HD
 
Smaller power packages using either aluminum wire or PowerRibbon®
 
 
 
 
 
 
 
PowerFusionPS  TL
 
Power semiconductors using either aluminum wire or PowerRibbon®
 
 
 
 
 
 
 
PowerFusionPS  HL
 
Smaller power packages using either aluminum wire or PowerRibbon®
 
 
 
 
 
 
 
AsterionTM
 
Power hybrid and automotive modules with extended area using heavy and thin aluminum

(1) Power Series (PS)
(2) Standard version
(3) Large area version
(4) Extended large area version



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Business Line
 
Product Name (1)
 
Typical Served Market
 
 
 
 
 
Advanced Packaging and Surface Mount Technology
 
APAMA C2S (APLR)
 
Thermo-compression for chip-to-substrate, chip-to-chip and high accuracy flip chip ("HA FC") bonding applications
 
 
 
 
 
 
 
APAMA C2W (APLR)
 
Thermo-compression for chip-to-wafer, HA FC and high density fan-out wafer level packaging ("HD FOWLP") bonding applications
 
 
 
 
 
 
 
Hybrid Series (APMR)
 
Advanced packages assembly applications requiring high throughput such as flip chip, WLP, FOWLP, embedded die, SiP, package-on-package ("POP"), and modules