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 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 and die bonder 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
September 28, 2013(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 consolidating our manufacturing facilities. 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 forecast 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 semiconductor cycle there are also, generally weaker, seasonal effects that are specifically tied to annual, end-consumer purchasing patterns. Typically, 21
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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 positively or negatively affect our financial performance. The sales mix of IDM and OSAT customers in any period also impacts financial performance, as 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 is 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 may experience typical industry seasonality. To limit potential adverse cyclical, seasonal and macroeconomic effects on our financial position, we have de-leveraged and strengthened our balance sheet. As of
December 28, 2013, our total cash, cash equivalents and investments was $550.6 million, a $28.8 millionincrease from the prior fiscal year end. We believe this strong cash position will allow us to continue to invest in organic product development and non-organic opportunities. Technology Leadership We compete largely by offering our customers among the most advanced equipment and expendable tools available for the wire and wedge bonding processes. Our equipment is typically the most productive and has the highest levels of process capability, and as a result, 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 leading market share positions of our various wire 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 suppliers, we have developed a series of robust, high-yielding production processes, which have made copper wire widely accepted and significantly reducing the cost of assembling an integrated circuit. Based on our industry leading copper bonding processes and the continued high price of gold, we believe the demand for copper configured wire bonders is likely to remain solid. Our leadership has allowed us to maintain a competitive position in the latest generations of gold and copper ball bonders, which enable 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 large bondable area ("LA") configured machines. This LA 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 LED assembly, in particular for general lighting. We expect the next wave of growth in the LED market to be high brightness LED for general lighting. We also believe there is an opportunity for growth in wire bonding sales at wafer level using our ATPremier Plus. Furthermore, we gain synergies by leveraging technologies between our unique platforms. Our leading technology for wedge bonder equipment uses aluminum ribbon or heavy wire as opposed to fine gold and fine copper wire used in ball bonders. In 2013, we launched a new line of high performance wedge bonder products, PowerFusionPS. 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 also intend to initiate design of our next power module wedge bonder. 22
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In both 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 may become business opportunities in the future. Another example of our developing equipment for high-growth niche markets is our ATPremier 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 expanded the use of ATPremier Plus for wafer level wire bonding for micro-electro-mechanical systems ("MEMS") and other sensors. Our technology leadership and bonding process know-how are enabling 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 have established a dedicated team to develop advanced packaging bonders for the emerging three-dimensional integrated circuit ("3DIC") market, and in
November 2013, we shipped the first C2S (Chip-to-Substrate) alpha machine to a strategic customer. 3DIC saves space and reduces form factor by stacking separate chips in a single package. It also improves performance while reducing power consumption. Mobile devices such as smartphones and tablets are the main drivers of this market. 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. 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 months ended December 28, 2013and December 29, 2012, respectively: Three months ended December 28, 2013 December 29, 2012% of total net % of total net
(dollar amounts in thousands) Net revenues revenue Net revenues revenue Equipment
$ 63,14579.8 % $ 99,90287.6 % Expendable Tools 15,968 20.2 % 14,137 12.4 % $ 79,113100.0 % $ 114,039100.0 % Equipment Segment We manufacture and sell a line of ball bonders, heavy wire wedge bonders and wafer level bonders 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. Heavy wire 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. Wafer level bonders mechanically apply bumps to die, typically while still in the wafer format, for some variants of the flip chip assembly process. 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. 23
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Our principal Equipment segment products include: Business Unit Product Name (1) Typical Served Market Ball bonders IConnPS Advanced and ultra fine pitch applications IConnPS ProCu High-end copper wire applications demanding advanced process capability and
IConnPS ProCu Plus High-end copper wire applications demanding advanced process capability and high productivity Large area substrate and matrix applications for IConnPS ProCu LA copper wire Large area substrate and matrix
IConnPS ProCu Plus LA copper wire IConnPS LA Large area substrate and matrix applications High productivity bonder for
ConnXPS Plus count applications ConnXPS LED LED applications ConnXPS VLED Vertical LED applications Cost performance large area
substrate and matrix
ConnXPS Plus LA applications AT Premier Plus Advanced wafer level bonding application Wedge bonders 3600Plus Power hybrid and automotive modules using either heavy aluminum wire or PowerRibbon® Hybrid and automotive modules using thin aluminum 3700Plus wire Power semiconductors using either aluminum wire or 7200Plus PowerRibbon® Smaller power packages using either aluminum wire 7200HD or PowerRibbon® Power semiconductors using either aluminum wire or
PowerFusionPS TL PowerRibbon® Smaller power packages using either aluminum wire PowerFusionPS HL or PowerRibbon® (1) Power Series ("PS") 24
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Ball Bonders Automatic ball bonders represent the largest portion of our semiconductor equipment business. Our main product platform for ball bonding is the Power Series - a family of assembly equipment that is setting new standards for performance, productivity, upgradeability, and ease of use. Our Power Series consists of our IConnPS high-performance ball bonders and our ConnXPS cost-performance ball bonders, both of which can be configured for either gold or copper wire. Our ConnXPS LED and our ConnXPS VLED are targeted specifically at the fast growing LED market. Our IConnPS LA and ConnXPS LA are targeted for large bondable area applications. In 2013, we introduced our next generation IConnPS ProCu Plus and IConnPS ProCu Plus LA, which further improved wire bonding production capability for advanced wafer nodes at 28 nanometer and below. • Our Power Series products are setting new standards in wire bonding.
• Our ball bonders are capable of bonding advanced devices with very fine
pitch, creating complex loop shapes needed in the assembly of advanced
semiconductor packages as well as bonding on the latest 28 nanometer silicon node.
• Our installed base of gold wire ball bonders can also be retrofitted for
copper wire applications with kits which we sell separately.
• Our AT Premier Plus machine utilizes a modified wire bonding process to
mechanically place bumps on devices, while still in a wafer format for
variants of the flip chip assembly process. Typical applications include
CMOS image sensors, SAW filters, MEMS and high brightness LEDs. These
applications are commonly used in most, if not all, smartphones available
today in the market. Heavy Wire Bonders We are the leaders in the design and manufacture of heavy wire wedge bonders for the power semiconductor and automotive power module markets. Heavy wire wedge bonders may use either aluminum wire or aluminum ribbon to connect semiconductor chips in power packages, power hybrids and automotive modules for products such as motor control modules or inverters for hybrid cars. In addition, we see some potential use for our wedge bonder products in select solar applications. Our portfolio of wedge bonding products includes: • The 3600Plus: high speed, high accuracy wire bonders designed for power modules, automotive packages and other heavy wire multi-chip module applications.
• The 3700Plus: wire bonders designed for hybrid and automotive modules using
thin aluminum wire.
• The 7200Plus: dual head wedge bonders designed specifically for power
• The 7200HD: heavy wire wedge bonders designed for smaller power packages
using either aluminum wire or ribbon.
• The PowerFusionPS Semiconductor Wedge Bonders - Configurable in single,
dual and multi-head configurations using aluminum wire and PowerRibbonTM:
• The PowerFusionPS TL: designed for low-cost, high volume power semiconductor applications.
• The PowerFusionPS HL: designed for advanced power semiconductor applications.
While wedge bonding traditionally utilizes aluminum wire, all of our heavy wire wedge bonders are also available to be modified to bond aluminum ribbon using our proprietary PowerRibbon® process. Aluminum ribbon offers device makers performance advantages over traditional round wire and is being increasingly used for high current packages and automotive applications. In 2013, we introduced PowerFusionPS, which is driven by new powerful direct-drive motion systems and expanded pattern recognition capabilities. The advanced interconnect capabilities of PowerFusionPS improves the processing of high-density power packages, due to an expanded bondable area, wider leadframe capability and superior indexing accuracy and teach mode. Other Equipment Products and Services We also sell manual wire bonders, and we offer spare parts, equipment repair, maintenance and servicing, training services, and upgrades for our equipment through our Support Services business unit. In 2013, we introduced K&S Care, a new professional service, designed to help customers operate their machines at an optimum level under the care our trained specialists. K&S Care includes a range of programs, offering different levels of service depending on customer needs. 25
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Expendable Tools Segment We manufacture and sell a variety of expendable tools for a broad range of semiconductor packaging applications. Our principal Expendable Tools segment products include: • Capillaries: expendable tools used in ball bonders. Made of ceramic and
other elements, a capillary guides the wire during the ball bonding
process. Its features help control the bonding process. We design and build
capillaries suitable for a broad range of applications, including for use
on our competitors' equipment. In addition to capillaries used for gold
wire bonding, we have developed capillaries for use with copper wire to
achieve optimal performance in copper wire bonding.
• Bonding wedges: expendable tools used in heavy wire wedge bonders. Like
capillaries, their features are tailored to specific applications. We
design and build bonding wedges for use both in our own equipment and in
our competitors' equipment.
• Dicing blades: expendable tools used by semiconductor manufacturers to cut
silicon wafers into individual semiconductor die and to cut semiconductor
devices that have been moulded in a matrix configuration into individual
In 2013, we introduced the Optoceramic and OptoPCB package singulation blades for the LED market. The blades enable an improvement on package singulation quality, precision and productivity by providing a significantly longer life blade, and improved stability. We also introduced ACS Pro Capillary, which is a new generation of copper capillary for advanced copper wire bonding applications. RESULTS OF OPERATIONS The following table reflects our income from operations for the three months ended
December 28, 2013and December 29, 2012: Three months ended (dollar amounts in thousands) December 28, 2013 December 29, 2012 $ Change % Change Net revenue $ 79,113 $ 114,039 $ (34,926 )(30.6 )% Cost of sales 40,748 62,514 (21,766 ) (34.8 )% Gross profit 38,365 51,525 (13,160 ) (25.5 )% Selling, general and administrative 23,102 29,067 (5,965 ) (20.5 )% Research and development 17,471 18,253 (782 ) (4.3 )% Operating expenses 40,573 47,320 (6,747 ) (14.3 )% (Loss) Income from operations $ (2,208 ) $ 4,205 $ (6,413 )(152.5 )%
Our net revenues for the three months ended
Customer demand for our products could continue to remain weak and lead to a decline in our net revenues. If there is a significant slowdown of transition from gold to copper wire bonding by our customers, then our net revenues may continue to decline. Net Revenue Approximately 94.1% and 97.1% of our net revenue for the three months ended
December 28, 2013and December 29, 2012, respectively, was for shipments to customer locations outside of the U.S., primarily in the Asia/Pacificregion. We expect sales outside of the U.S. to continue to represent a substantial majority of our future revenue. The following tables reflect net revenue by business segment for the three months ended December 28, 2013and December 29, 2012: Three months ended
(dollar amounts in thousands)
$ Change % Change Equipment $ 63,145 $ 99,902
$ (36,757 )(36.8 )% Expendable Tools 15,968 14,137 1,831 13.0 % Total net revenue $ 79,113 $ 114,039 $ (34,926 )(30.6 )% 26
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The following table reflects the components of Equipment net revenue change between the three months ended
December 28, 2013 vs. December 29, 2012 Three months ended (in thousands) Price Volume $ Change
For the three months ended
December 28, 2013, the lower equipment net revenue as compared to the prior year period was primarily due to the lower sales volume of our ball bonders. The sales volume reduction in ball bonders was mainly attributable to the lower equipment utilization rate, therefore lower demand from our customer. In addition to sales volume, pricing on our ball bonders was lower due to customer mix change. Expendable Tools The following table reflects the components of Expendable Tools net revenue change between the three months ended December 28, 2013and December 29, 2012: December 28, 2013 vs. December 29, 2012 Three months ended (in thousands) Price Volume $ Change Expendable Tools $ 433 $ 1,398 $ 1,831For the three months ended December 28, 2013, the Expendable Tools net revenue increased 13.0% as compared to the prior year period was primarily due to the sales volume increase in wedge bonder tools. In addition to sales volume increase, we experienced a more favorable product mix. Gross Profit The following table reflects gross profit by business segment for the three months ended December 28, 2013and December 29, 2012: Three months ended (dollar amounts in thousands) December 28, 2013 December 29, 2012 $ Change % Change Equipment $ 28,672 $ 43,470 $ (14,798 )(34.0 )% Expendable Tools 9,693 8,055 1,638 20.3 % Total gross profit $ 38,365 $ 51,525 $ (13,160 )(25.5 )% The following table reflects gross profit as a percentage of net revenue by business segment for the three months ended December 28, 2013and December 29, 2012: Three months ended Basis Point December 28, 2013 December 29, 2012 Change Equipment 45.4 % 43.5 % 190 Expendable Tools 60.7 % 57.0 % 370 Total gross margin 48.5 % 45.2 % 330 27
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The following table reflects the components of Equipment gross profit change between the three months ended
December 28, 2013 vs. December 29, 2012 Three months ended (in thousands) Price Cost Volume $ Change Equipment
$ (807 ) $ 490 $ (14,481 ) $ (14,798 )For the three months ended December 28, 2013, the lower Equipment gross profit as compared to the prior year period was primarily due to the lower sales volume from our ball bonders. The sales volume reduction in ball bonders was mainly attributable to the lower equipment utilization rate, therefore lower demand from our customer. In addition to lower sales volume, pricing on our ball bonders was lower due to customer mix change. The gross margin was higher due to product mix change. Expendable Tools The following table reflects the components of Expendable Tools gross profit change between the three months ended December 28, 2013and December 29, 2012: December 28, 2013 vs. December 29, 2012 Three months ended (in thousands) Price Cost Volume $ Change Expendable Tools $ 433 $ 407 $ 798 $ 1,638For the three months ended December 28, 2013, Expendable Tools gross profit increased 20.3% as compared to the prior year period, primarily due to sales volume increase in wedge bonder tools. The higher sales volume resulted in decreased manufacturing costs due to higher absorption of the fixed manufacturing costs. In addition to sales volume increase, we experienced a more favorable product mix. Operating Expenses The following table reflects operating expenses as a percentage of net revenue for the three months ended December 28, 2013and December 29, 2012: Three months ended Basis point December 28, 2013 December 29, 2012 change Selling, general & administrative 29.2 % 25.5 % 370 Research & development 22.1 % 16.0 % 610 Total 51.3 % 41.5 % 980 Selling, General and Administrative ("SG&A") SG&A decreased $6.0 millionduring the three months ended December 28, 2013as compared to the three months ended December 29, 2012, due to decrease in incentive compensation of $2.4 millionas a result of the current fiscal quarter loss, decrease in amortization expenses of $1.0 milliondue to the intangible assets relating to the Orthodyne customer relationships being fully amortized, net favorable variance of $1.3 millionin foreign exchange rates due to the strengthening of the U.S dollar against the foreign currency denominated liabilities which have increased in the current period, decrease in severance expenses of $0.7 million, lower staff costs of $0.6 milliondue to lower headcount, decrease in depreciation expense of $0.4 millionas a result of accelerated depreciation being recorded in FY 2013 relating to the move of the new corporate headquarters in Singapore and lower legal fees of $0.3 million. This is offset by $0.8 millionprovision of input tax receivables. Research and Development ("R&D") R&D expense decreased $0.8 millionfor the three months ended December 28, 2013as compared to the same period a year ago, in which we recorded a provision of a Research Incentive Scheme for Companies grant receivable of $2.3 million. This is offset by an increase of $1.6 millionof prototype materials for new product development. Income from Operations For the three months months ended December 28, 2013, total income from operations was lower by $6.4 million. This was primarily due to lower revenue and margin for equipment sales as explained above. 28
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Interest Income and Expense The following table reflects interest income and interest expense for the three months ended
December 28, 2013and December 29, 2012: Three months ended
(dollar amounts in thousands)
$ Change % Change Interest income $ 279 $ 174
$ 10560.3 % Interest expense (119 ) $ - $ (119 )100.0 % Interest income for the three months ended December 28, 2013was higher as compared to the three months ended December 29, 2012due to higher interest income derived from short term investments and a larger cash balance. Interest expense for the three months ended December 28, 2013was attributable to the interest on financing obligation relating to the new building. (Refer to Note 6 of Item 1) Provision for Income Taxes The following table reflects the provision for income taxes and the effective tax rate for the three months ended December 28, 2013and December 29, 2012: Three months ended (in thousands) December 28, 2013
4,379 (Benefit) Provision for income taxes (91 ) 775 Net (loss) income $ (1,957 ) $ 3,604 Effective tax rate 4.4 % 17.7 % For the three months ended
December 28, 2013and December 29, 2012, the effective income tax rate differed from the federal statutory rate primarily due to tax from foreign operations at a lower effective tax rate than the U.S. statutory rate, and the impact of tax holidays, offset by an increase for deferred taxes on unremitted earnings, other U.S. deferred taxes and additional foreign expenses or benefits related to returns filed in the current period. The effective tax rate for the three months ended December 28, 2013of 4.4% decreased from the effective rate for the fiscal period ended September 28, 2013of 11.0% primarily due to certain immaterial changes in estimates that were recorded upon filing tax returns in foreign jurisdictions offset by the withholding tax expense recognized in a foreign jurisdiction. 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. The Company regularly assesses the effects resulting from these factors to determine the adequacy of its provision for income taxes. LIQUIDITY AND CAPITAL RESOURCES The following table reflects total cash and investments as of December 28, 2013and September 28, 2013: As of (dollar amounts in thousands) December 28, 2013 September 28, 2013 Change Cash and cash equivalents $ 550,598 $ 521,788 $ 28,810Percentage of total assets 65.5 % 60.5 % 29
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The following table reflects summary Consolidated Statement of
Cash Flowinformation for the three months ended December 28, 2013and December 29, 2012: Three months ended (in thousands) December 28, 2013 December 29, 2012 Net cash provided by operating activities $ 37,249 $ 58,494 Net cash used in investing activities (8,729 ) (4,516 ) Net cash provided by financing activities 258 159 Effect of exchange rate changes on cash and cash equivalents 32 (211 ) Changes in cash and cash equivalents $ 28,810 $ 53,926 Cash and cash equivalents, beginning of period 521,788 440,244 Cash and cash equivalents, end of period $ 550,598 $ 494,170 Three months ended December 28, 2013Continuing Operations The decrease in net cash provided by operating activities was primarily the result of working capital changes, which provided $31.8 milliondriven by decreases in accounts receivables of $49.2 milliondue to cash collections and a lower level of sales, a reduction in prepaid expenses and other current assets of $7.2 million, a reduction in inventories of $1.0 million, and a increase of income tax payable of $0.5 million, partially offset by a decrease in accounts payable and accrued expenses of $26.0 million. In addition, the non-cash adjustments of $7.4 million, partially offset by net loss of $2.0 million, also contributed to the decrease in net cash provided by operating activities. The decrease in accounts receivables is in line with lower sales in the first quarter of fiscal 2014 compared to the fourth quarter of fiscal 2013 due to variations in the timing of our customer orders within the seasonal cycle, as customers tend to add or replace equipment capacity by the end of the September quarter. The reduction in prepaid expenses and other current assets is due to refunds of $2.2 millionof income taxes and $2.4 millionof goods and services tax and the refund of cash deposit of $2.7 millionin relation to the Agreement to Develop and Lease (the "ADL") following the execution of the Lease Agreement. The decrease in accounts payable and accrued expenses is due to lower purchases and the Company's shutdown of certain operations in selective locations in the first quarter of 2014. Net cash used by investing activities was primarily due to capital expenditure of $5.4 millionand increase in short term investments of $3.3 million. Net cash provided by financing activities relates primarily to proceeds from the exercise of stock options. Three months ended December 29, 2012Continuing Operations Net cash provided by operating activities was primarily the result of working capital changes, which provided $44.1 milliondriven by decreases in accounts receivables of $90.0 milliondue to cash collections in line with higher sales in the fourth quarter of 2012, due to variations in the timing of our customer orders within the seasonal cycle who tend to add or replace equipment capacity by the end of the September quarter, prepaid expenses and other current assets reduced by $5.6 millionand a reduction in inventories of $2.6 millionpartially offset by a decrease in accounts payable of $54.1 milliondue to an annual global shutdown in the first quarter of 2013 coupled with lower sales. In addition, net income of $3.6 millionplus non-cash adjustments of $10.8 millioncontributed to net cash provided by operating activities. Net cash used in investing activities was due to the capital expenditures of $1.6 millionand cash collateral for a bank guarantee issued for $2.9 millionwhich was issued in October 2012. Fiscal 2014 Liquidity and Capital Resource Outlook We expect our fiscal 2014 capital expenditures to be between $17.0to $18.0 million, of which approximately $6.4 millionis expected to relate to leasehold improvements for our Singapore facility under the ADL. Other expenditures are anticipated to be used for R&D projects, enhancements to our manufacturing operations in Asiaand improvements to our information technology infrastructure. We also consider strategic business opportunities from time to time which could require substantial capital outlays, including possible acquisitions, joint ventures, alliances or other business arrangements. 30
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We believe that our existing cash and investments and anticipated cash flows from operations will be sufficient to meet our liquidity and capital requirements for at least the next twelve months. Our liquidity is affected by many factors, some based on normal operations of our business and others related to global economic conditions and industry uncertainties, which we cannot predict. We also cannot predict economic conditions and industry downturns or the timing, strength or duration of recoveries. We intend to continue to use our cash for working capital needs and for general corporate purposes. We may seek, as we believe appropriate, additional debt or equity financing which would provide capital for corporate purposes, working capital funding, additional liquidity needs or to fund future growth opportunities. The timing and amount of potential capital requirements cannot be determined at this time and will depend on a number of factors, including our actual and projected demand for our products, semiconductor and semiconductor capital equipment industry conditions, competitive factors, and the condition of financial markets. Other Obligations and Contingent Payments Agreement to Develop and Lease and Lease Agreement On
May 7, 2012, Kulicke & Soffa Pte Ltd.("Pte"), the Company's wholly owned subsidiary, entered into the ADL with DBS Trustee Limitedas trustee of Mapletree Industrial Trust (the "Landlord"). Pursuant to the ADL, the Landlord agreed to develop a building at 23A Serangoon North Avenue5, #01-01 K&S Corporate Headquarters, Singapore 554369 (the "Building"). The lease has a ten year non-cancellable term and contains options to renew for a further two ten-year terms. The annual rent and service charge for the Initial Term range between approximately $4 millionto approximately $5 millionSingapore dollars. The Tenant has a right of first refusal for all space that becomes available in the Building and the Landlord has agreed to make available a certain amount of additional space for rental by the Tenant at the Tenant's option which may be exercised at certain points during the second half of the Initial Term. Subject to the Tenant renting a minimum amount of space for a certain period, the Tenant has partial surrender rights. In addition, the Tenant has termination rights after renting the Initial Premises for a certain period of time. The Building was completed on December 1, 2013and Pte signed a Lease Agreement with the Landlord to lease from the Landlord approximately 198,000 square feet (the "Initial Premises"), representing approximately 70% of the Building. In accordance with ASC No. 840, Leases ("ASC 840"), the Company was considered to be the owner of the Building during the construction phase due to its involvement in the asset construction. Once construction was complete we are required to perform a sale-leaseback analysis pursuant to ASC 840-40 to determine if we can remove the Landlord's asset and associated financing obligation from the consolidated balance sheet. Our lease contained collateral, considered a prohibited form of continuing involvement under ASC 840-40 and therefore involvement that 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 twenty five years. We concluded that the term of the financing obligation is 10 years (the "Initial Term"). 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 using an interest rate of 6.33% over the initial term. 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 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. Other Obligations and Contingent Payments In accordance with U.S. generally accepted accounting principles, certain obligations and commitments are not required to be included in the Consolidated Balance Sheets and Statements of Operations. These obligations and commitments, while entered into in the normal course of business, may have a material impact on our liquidity. Certain of the following commitments as of December 28, 2013are appropriately not included in the Consolidated Balance Sheets and Statements of Operations included in this Form 10-Q; however, they have been disclosed in the table below for additional information. 31
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The following table reflects obligations and contingent payments under various arrangements as of
Payments due by fiscal period (in thousands) Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years Current and long-term liabilities: Pension plan obligations
$ 1,970$ - $ - $ - $ 1,970 Severance (1) 3,358 973 774 - 1,611 Operating lease retirement obligations 2,506 1,167 294 - 1,045 Long-term income taxes payable 2,695 - - - 2,695 Total Obligations and Contingent Payments reflected on the Consolidated Financial Statements $ 10,529$ 2,140 $ 1,068$ - $ 7,321 Contractual Obligations: Inventory purchase obligations (2) 56,832 56,832 - - - Operating lease obligations (3) 29,733 2,888 6,606 5,189 15,050 Total Obligations and Contingent Payments not reflected on the Consolidated Financial Statements $ 86,565$ 59,720 $ 6,606 $ 5,189$ 15,050
(1) In accordance with regulations governing some of our foreign subsidiaries,
we are required to provide for severance obligations that are payable when
an employee leaves the Company. (2) We order inventory components in the normal course of our business. A
portion of these orders are non-cancellable and a portion may have varying
penalties and charges in the event of cancellation.
(3) We have minimum rental commitments under various leases (excluding taxes,
insurance, maintenance and repairs, which are also paid by us) primarily
for various facility and equipment leases, which expire periodically
through 2026 (not including lease extension options, if applicable).
May 7, 2012, Kulicke & Soffa Pte Ltd.("Pte"), the Company's wholly owned subsidiary, entered into the ADL with DBS Trustee Limitedas trustee of Mapletree Industrial Trust (the "Landlord"). Pursuant to the ADL, the Landlord agreed to develop a building at 23A Serangoon North Avenue5, #01-01 K&S Corporate Headquarters, Singapore (the "Building"). The Building was completed on December 1, 2013and Pte signed a Lease Agreement with the Landlord to lease from the Landlord approximately 198,000 square feet (the "Initial Premises"), representing approximately 70% of the Building. The term for the rental of the Initial Premises is 10 years (the "Initial Term"). The Tenant has the option to renew for two additional ten-year terms. The annual rent and service charge for the Initial Term range between approximately $4 millionto approximately $5 millionSingapore dollars. The Tenant has a right of first refusal for all space that becomes available in the Building and the Landlord has agreed to make available a certain amount of additional space for rental by the Tenant at the Tenant's option which may be exercised at certain points during the second half of the Initial Term. Subject to the Tenant renting a minimum amount of space for a certain period, the Tenant has partial surrender rights. In addition, the Tenant has termination rights after renting the Initial Premises for a certain period of time. In accordance with ASC No. 840, Leases ("ASC 840"), the Company was considered to be the owner of the Building during the construction phase due to its involvement in the asset construction. As a result of the Company's continued involvement during the lease term, the Company did not fulfill the criteria to apply sale-leaseback accounting under ASC 840. Therefore, at completion, the building remained on the Consolidated Balance Sheet, and the corresponding financing obligation was reclassified to long-term liability. As of December 28, 2013, we recorded a financing obligation of $19.8 million. The financing obligation is not reflected in the table above. Off-Balance Sheet Arrangements Bank Guarantee On May 7, 2012, Pte obtained a bank guarantee from DBS Bank Ltd., which was furnished to the Landlord and expired on May 9, 2013, at which time Pte replaced the bank guarantee with a cash deposit of an equivalent amount. The cash deposit was refunded on December 6, 2013. 32
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Credit facility On
November 22, 2013, the Company obtained a $5.0 millioncredit facility with Citibank in connection with the issuance of a bank guarantee of $3.4 millionSingapore dollars to the Landlord in connection with the Lease Agreement. The bank guarantee is effective from December 1, 2013. We currently do not have any other off-balance sheet arrangements, such as derivatives, contingent interests or obligations associated with variable interest entities.