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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 2000
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 (IRS Employer
of incorporation) Identification No.)
2101 BLAIR MILL ROAD, WILLOW GROVE, PENNSYLVANIA 19090
- ------------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
(215) 784-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of May 1, 2000, there were 24,122,863 shares of the Registrant's Common
Stock, Without Par Value outstanding.
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<PAGE>
KULICKE AND SOFFA INDUSTRIES, INC.
FORM 10 - Q MARCH 31, 2000
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -
September 30, 1999 and March 31, 2000 ..................... 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended March 31, 1999
and 2000 .................................................. 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended March 31, 1999 and 2000 .................. 5
Notes to Condensed Consolidated Financial
Statements ................................................ 6 - 11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ....................... 11 - 27
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ............................................... 27
PART II. OTHER INFORMATION:
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........ 28
Item 6. EXHIBITS AND REPORTS ON FORM 8 - K. ........................ 28
Signatures. .......................................................... 29
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
KULICKE AND SOFFA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, March 31,
1999 2000
(unaudited)
ASSETS -------- ---------
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 37,155 $159,378
Short-term investments ......................... 2,190 62,666
Accounts and notes receivable, net ............. 136,047 188,847
Inventories .................................... 61,782 80,236
Deferred income taxes .......................... 11,071 5,683
Prepaid expenses and other current assets ...... 9,906 10,190
Refundable income taxes ........................ 2,934 1,016
-------- --------
TOTAL CURRENT ASSETS ........................ 261,085 508,016
Property, plant and equipment, net ............. 67,485 79,580
Intangible assets, primarily goodwill, net ..... 44,637 43,268
Investments in and loans to joint venture ...... 2,940 3,691
Other assets ................................... 1,998 8,013
-------- --------
TOTAL ASSETS ................................ $378,145 $642,568
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion
of long-term debt ............................. $ 1,178 $ 1,230
Accounts payable ............................... 61,962 91,235
Accrued expenses ............................... 27,210 36,314
Income taxes payable ........................... 3,604 10,769
-------- --------
TOTAL CURRENT LIABILITIES .................... 93,954 139,548
Other liabilities .............................. 4,373 4,536
Long term debt ................................. -- 175,000
Minority interest .............................. 5,042 4,813
-------- --------
TOTAL LIABILITIES ............................ 103,369 323,897
-------- --------
Commitments and contingencies .................. -- --
SHAREHOLDERS' EQUITY:
Common stock, without par value ................ 160,108 169,670
Retained earnings .............................. 117,018 151,841
Accumulated other comprehensive loss ........... (2,350) (2,840)
-------- --------
TOTAL SHAREHOLDERS' EQUITY ................... 274,776 318,671
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ... $378,145 $642,568
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
KULICKE AND SOFFA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three months ended Six months ended
March 31, March 31,
---------------------- ----------------------
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ............................... $ 73,561 $ 222,153 $ 134,736 $ 402,002
Cost of goods sold ...................... 52,536 146,553 97,535 266,490
--------- --------- --------- ---------
Gross profit ............................ 21,025 75,600 37,201 135,512
--------- --------- --------- ---------
Selling, general and
administrative ......................... 19,829 33,412 37,076 64,105
Research and development, net ........... 8,827 12,354 17,641 24,457
Resizing costs .......................... 5,521 -- 5,918 --
Purchased in-process research
and development ........................ 3,935 -- 3,935 --
--------- --------- --------- ---------
Income (loss) from operations ........... (17,087) 29,834 (27,369) 46,950
Interest income ......................... 810 3,285 1,967 4,375
Interest expense ........................ (60) (2,339) (97) (2,853)
Equity in loss of joint ventures ........ (4,772) (363) (8,273) (709)
--------- --------- --------- ---------
Income (loss) before income
taxes .................................. (21,109) 30,417 (33,772) 47,763
Income tax provision (benefit) .......... (6,333) 8,564 (10,133) 13,542
--------- --------- --------- ---------
Income (loss) before minority
interest ............................... (14,776) 21,853 (23,639) 34,221
Minority interest in net loss of
subsidiary ............................. -- 169 -- 602
--------- --------- --------- ---------
Net income (loss) ....................... $ (14,776) $ 22,022 $ (23,639) $ 34,823
========= ========= ========= =========
Net income (loss) per share:
Basic ................................. $ (0.63) $ 0.93 $ (1.01) $ 1.47
========= ========= ========= =========
Diluted ............................... $ (0.63) $ 0.80 $ (1.01) $ 1.33
========= ========= ========= =========
Weighted average common shares
outstanding:
Basic ................................ 23,421 23,793 23,397 23,670
Diluted .............................. 23,421 29,223 23,397 27,359
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
KULICKE AND SOFFA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended
March 31,
------------------------
1999 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) ................................ $ (23,639) $ 34,823
Adjustments to reconcile net income(loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization ................... 6,991 11,670
Equity in loss of joint ventures ................ 8,273 709
Purchased in-process R&D ........................ 3,935 --
Minority interest in net loss of subsidiary ..... -- (602)
Deferred taxes .................................. (13,414) 4,994
Changes in components of working
capital, net ................................... 1,161 (27,953)
Collection of refundable income taxes ........... 2,500 1,918
Other, net ...................................... 1,649 3,392
--------- ---------
Net cash provided by (used in)operating
activities ..................................... (12,544) 28,951
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments classified as
available for sale ............................. (29,375) (68,441)
Sale/maturities of investments classified
as available for sale .......................... 22,098 7,837
Purchases of property, plant and equipment ...... (2,307) (22,056)
Purchase of XLAM technology ..................... (8,000) --
Investments in and loans to joint ventures ...... (12,994) (1,460)
--------- ---------
Net cash used in investing activities ........... (30,578) (84,120)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from debt offering ................. -- 169,122
Proceeds from issuance of common stock .......... 167 8,270
Payments on capital leases ...................... (187) --
--------- ---------
Net cash provided by (used in)
financing activities ........................... (20) 177,392
--------- ---------
Changes in cash and cash equivalents ............ (43,142) 122,223
Cash and cash equivalents at beginning
of period ...................................... 76,478 37,155
--------- ---------
Cash and cash equivalents at end of period ...... $ 33,336 $ 159,378
========= =========
CASH PAID DURING THE PERIOD FOR:
Interest ........................................ $ 44 $ 64
Income Taxes .................................... $ 2,957 $ 1,022
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE>
KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share and employee data)
(unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The condensed consolidated financial statement information for fiscal year 2000
in this report is unaudited. However, we believe it contains all adjustments
necessary to present fairly the Company's financial position as of March 31,
2000, and the results of its operations for the three month and six month
periods ended March 31, 1999 and 2000 and its cash flows for the six month
periods ended March 31, 1999 and 2000. These financial statements should be read
in conjunction with the audited financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1999.
NOTE 2 - INVENTORIES:
Inventories consist of the following:
September 30, March 31,
1999 2000
-------- --------
Raw materials and supplies ......... $ 35,981 $ 44,962
Work in process .................... 24,033 35,594
Finished goods ..................... 16,696 16,048
-------- --------
76,710 96,604
Inventory reserves ................. (14,928) (16,368)
-------- --------
$ 61,782 $ 80,236
======== ========
NOTE 3 - EARNINGS PER SHARE:
Basic net income (loss) per share ("EPS") is calculated using the weighted
average number of shares of common stock outstanding during the period. The
calculation of diluted net income per share assumes the exercise of employee
stock options and the conversion of the convertible subordinated notes to common
shares. In addition, in computing diluted net income per share the after-tax
amount of interest expense recognized in the period associated with the
convertible subordinated notes is added back to net income. For the three month
and six month periods ended March 31, 2000, the after-tax interest associated
with the convertible subordinated notes that was added back to net income in
order to calculate diluted EPS was $1,351 and $1,632, respectively.
6
<PAGE>
A reconciliation of weighted average shares outstanding-basic to the weighted
average shares outstanding-diluted appears below:
Three months ended Six months ended
March 31, March 31,
--------------- ---------------
1999 2000 1999 2000
------ ------ ------ ------
Weighted average shares outstanding -
Basic ..................................... 23,421 23,793 23,397 23,670
Potentially dilutive securities:
Employee stock options ................... * 1,609 * 1,407
Convertible subordinated notes ........... N/A 3,821 N/A 2,282
------ ------ ------ ------
Weighted average shares outstanding -
Diluted ................................... 23,421 29,223 23,397 27,359
====== ====== ====== ======
- ----------
* Due to the Company's net loss for the three month and six month periods
ended March 31, 1999, all potentially dilutive securities are deemed to be
antidilutive. The weighted average number of shares for potentially
dilutive securities (employee and director stock options) for the three and
six month periods ended March 31, 1999 was 765 and 611, respectively.
NOTE 4 - OPERATING RESULTS BY BUSINESS SEGMENT:
Operating results by business segment for the three and six month periods ended
March 31, 1999 and 2000 were as follows:
Packaging
Three months ended Equipment Materials
March 31, 1999: Segment Segment Corporate Total
-------- -------- -------- --------
Net sales ....................... $ 44,769 $ 28,792 $ 73,561
Cost of goods sold .............. 32,044 20,492 52,536
-------- -------- -------- --------
Gross profit .................... 12,725 8,300 21,025
Operating expenses .............. 20,702 5,929 $ 2,025 28,656
Resizing and relocation
Costs .......................... 5,521 5,521
Purchased in-process
research and development ....... 3,935 3,935
-------- -------- -------- --------
Income (loss)
from operations ................ $(13,498) $ 2,371 $ (5,960) $(17,087)
======== ======== ======== ========
Equity in loss of
joint ventures ................. $ -- $ -- $ (4,772) $ (4,772)
======== ======== ======== ========
7
<PAGE>
Packaging
Six months ended Equipment Materials
March 31, 1999: Segment Segment Corporate Total
--------- --------- --------- ---------
Net Sales ................... $ 78,392 $ 56,344 $ 134,736
Cost of goods sold .......... 56,229 41,306 97,535
--------- --------- --------- ---------
Gross profit ................ 22,163 15,038 37,201
Operating expenses .......... 39,781 11,512 $ 3,424 54,717
Resizing and relocation
costs ...................... 5,918 5,918
Purchased in-process
research and development ... 3,935 3,935
--------- --------- --------- ---------
Income (loss)
from operations ............ $ (23,536) $ 3,526 $ (7,359) $ (27,369)
========= ========= ========= =========
Equity in loss of
joint ventures ............. $ -- $ -- $ (8,273) $ (8,273)
========= ========= ========= =========
Segment assets
at March 31, 1999 .......... $ 128,962 $ 78,659 $ 114,347 $ 321,968
========= ========= ========= =========
Advanced
Packaging Packaging
Three months ended Equipment Materials Technology
March 31, 2000: Segment Segment Segment(1) Corporate Total
--------- --------- ---------- ---------- --------
Net sales ............... $ 172,845 $ 42,841 $ 6,467 $222,153
Cost of goods sold ...... 110,094 30,424 6,035 146,553
--------- --------- ---------- --------- --------
Gross profit ............ 62,751 12,417 432 75,600
Operating expenses ...... 29,804 7,246 4,725 $ 3,991 45,766
--------- --------- ---------- --------- --------
Income (loss)
from operations ........ $ 32,947 $ 5,171 $ (4,293) $ (3,991) $ 29,834
========= ========= ========== ========= ========
Equity in loss of
joint ventures ......... $ -- $ (363) $ -- $ -- $ (363)
========= ========= ========== ========= ========
8
<PAGE>
<TABLE>
<CAPTION>
Advanced
Packaging Packaging
Six months ended Equipment Materials Technology
March 31, 2000: Segment Segment Segment(1) Corporate Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales ................... $ 305,376 $ 85,281 $ 11,345 402,002
Cost of goods sold .......... 194,427 60,747 11,316 266,490
--------- --------- --------- --------- ---------
Gross profit ................ 110,949 24,534 29 135,512
Operating expenses .......... 58,095 13,924 8,961 $ 7,582 88,562
--------- --------- --------- --------- ---------
Income (loss)
from operations ............ $ 52,854 $ 10,610 $ (8,932) $ (7,582) $ 46,950
========= ========= ========= ========= =========
Equity in loss of
joint ventures ............. $ -- $ (709) $ -- $ -- $ (709)
========= ========= ========= ========= =========
Segment Assets
at March 31, 2000 .......... $ 270,385 $ 93,163 $ 44,651 $ 234,369 $ 642,568
========= ========= ========= ========= =========
</TABLE>
(1) Comprised of Flip Chip Technologies, LLC ("FCT") and the Company's X-LAM
division. Effective May 31, 1999, the Company increased its ownership of
FCT and began consolidating FCT's results with the operating results of the
Company. Accordingly, the results of FCT are included in Income(loss) from
Operations for the three and six month periods ended March 31, 2000 but
were not consolidated with the operating results of the Company in the
three and six month periods ended March 31, 1999.
Note 5 - LONG TERM DEBT
In December, 1999, the Company issued $175.0 million of convertible subordinated
notes through a private placement to qualified institutional investors and
institutional accredited investors. On April 24, 2000, the Securities and
Exchange Commission declared effective a registration statement on Form S-3
registering the notes for resale. The notes are general obligations of the
Company and subordinated to all senior debt. The notes bear interest at a fixed
rate of 4 3/4%, are convertible into the Company's common stock at $45.7993 per
share (subject to adjustment upon the occurrence of certain events) and mature
on December 15, 2006. There are no financial covenants associated with the notes
and there are no restrictions on paying dividends, incurring additional debt or
issuing or repurchasing the Company's securities. Interest on the notes will be
paid on June 15 and December 15 of each year beginning June 15, 2000. The
Company may redeem the notes in whole or in part at any time after December 18,
2002 at prices decreasing from 102.714% at December 19, 2002 to 100.0% at
December 15, 2006.
Note 6 - RESIZING COSTS
During fiscal 1999, the Company announced plans to relocate its automatic ball
bonder manufacturing from Willow Grove, Pennsylvania to Singapore. As a result,
the Company recorded a charge for severance of $3,955 for the elimination of
approximately 230 positions and asset
9
<PAGE>
writeoffs of $1,566. In fiscal 1999, the Company also recorded a charge of $397
for severance for an additional 30 employees related to the reduction in
workforce that began in fiscal 1998.
Write-downs of property, plant and equipment were made where carrying values
exceeded the Company's estimate of proceeds from abandonment or disposal. These
estimates were based principally on past experience of comparable asset
disposals. Cash payments for severance and the disposition of assets identified
are expected to be substantially paid or completed by the end of fiscal 2000.
The balance of the severance and other resizing reserves is included within
accrued liabilities. The components of these resizing reserves and the movement
within these components during the six months ended March 31, 2000 are as
follows:
Severance Other Total
--------- ------- -------
Balance at
September 30, 1999 ............ $ 4,144 $ 481 $ 4,625
Payments made ................... (176) -- (176)
------- ------- -------
Balance at
March 31, 2000 ................ $ 3,968 $ 481 $ 4,449
======= ======= =======
The severance reserve at March 31, 2000 is comprised of the estimated cost to
eliminate approximately 230 positions associated with the move of the ball
bonder manufacturing to Singapore and expensed in fiscal 1999 and remaining
severance for 2 employees terminated and expensed in fiscal 1998. The payments
made against the severance reserve in the six months ended March 31, 2000
related to 3 employees terminated and expensed in fiscal 1998.
Note 7 - INVESTMENTS IN JOINT VENTURES
In the three month and six month periods ended March 31, 2000 the Company
recognized as Equity in Loss of Joint Ventures 50% or $0.4 million and $0.7
million, respectively, of the loss on its equity interest in Advanced Polymer
Solutions, LLC.
Effective May 31, 1999 the Company increased its ownership interest in Flip Chip
Technologies, LLC ("FCT"), the Company's joint venture with Delco Electronics
Corporation, from 51.0% to 73.6% by converting all of its outstanding loans to
FCT and accrued interest totaling $32.8 million into equity units. The Company
accounted for the increase in ownership by the purchase method of accounting and
began reporting the operating results of FCT on a consolidated basis with the
operating results of the Company on June 1, 1999. The Company contributed an
additional $3.5 million to FCT during the six month period ended March 31, 2000
and increased its ownership interest to 76.2%. The Company's financial
statements for the three and six month periods ended March 31, 2000 reflect
FCT's operating results on a consolidated basis.
10
<PAGE>
The Company recorded a pretax loss from FCT operations for the three and six
month periods ended March 31, 1999 and March 31, 2000 as follows:
Three Months Ended Six Months Ended
March 31, March 31,
1999 2000 1999 2000
------- ------- ------- -------
Equity in loss of joint venture .... $(4,772) $ -- $(8,273) $ --
Consolidated with operations
of the Company ................... -- (670) -- (2,049)
------- ------- ------- -------
Pretax loss from FCT operations .... $(4,772) $ (670) $(8,273) $(2,049)
======= ======= ======= =======
Note 8 - COMPREHENSIVE INCOME (LOSS):
For the three and six month periods ended March 31, 1999 and 2000, the
components of total comprehensive income (loss) are as follows:
Three months ended Six months ended
March 31, March 31,
-------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- --------
Net income(loss) ............... $(14,776) $ 22,022 $(23,639) $ 34,823
-------- -------- -------- --------
Foreign currency translation
adjustment .................... (464) (672) 727 (455)
Minimum pension liability,
net of taxes .................. -- -- (1,137) --
Unrealized gain(loss)
on investments, net of taxes .. 14 (39) (94) (35)
-------- -------- -------- --------
Other comprehensive income(loss) (450) (711) (504) (490)
-------- -------- -------- --------
Comprehensive income(loss) ..... $(15,226) $ 21,311 $(24,143) $ 34,333
======== ======== ======== ========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to historical information, this report contains statements relating
to future events or our future results. These statements are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Act of 1934, as amended (the "Exchange Act"), and
are subject to the Safe Harbor provisions created by statute. Such
forward-looking statements include, but are not limited to, statements that
relate to our future revenue, product development, demand forecasts,
competitiveness, gross margins, operating expenses, cost savings expected from
the transfer of our automatic ball bonder manufacturing to Singapore and
benefits expected as a result of:
o The projected growth rates in the overall semiconductor industry, the
semiconductor assembly equipment market and the market for semiconductor
packaging materials;
11
<PAGE>
o the anticipated development, production and licensing of our advanced
packaging technology;
o the projected continuing demand for wire bonders; and
o the anticipated growing importance of the flip chip assembly process in
high-end market segments.
Generally words such as "may," "will," "should," "could," "anticipate,"
"expect," "intend," "estimate," "plan," "continue," and "believe," or the
negative of or other variation on these and other similar expressions identify
forward-looking statements. These forward-looking statements are made only as of
the date of this report. We do not undertake to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise.
Forward-looking statements are based on current expectations and involve risks
and uncertainties and our future results could differ significantly from those
expressed or implied by our forward-looking statements. These risks and
uncertainties include, without limitation, those described below and under the
heading "Risk Factors" within this section and in our reports and registration
statements filed from time to time with the Securities and Exchange Commission.
This discussion should be read in conjunction with the Condensed Consolidated
Financial Statements and Notes on pages 3 to 11 of this Form 10-Q for a full
understanding of our financial position and results of operations for the three
and six month periods ended March 31, 2000.
INTRODUCTION
We design, manufacture and market capital equipment and packaging materials and
provide flip chip bumping services for sale to companies that manufacture and
assemble semiconductor devices. We also service, maintain, repair and upgrade
assembly equipment and license our flip chip bumping process technology. Our
operating results primarily depend upon the capital and operating expenditures
of semiconductor manufacturers and subcontract assemblers worldwide which, in
turn, depend on the current and anticipated market demand for semiconductors and
products using semiconductors. The semiconductor industry historically has been
highly volatile and has experienced periodic downturns and upturns which have
had severe effects on the semiconductor industry's demand for capital equipment,
including the assembly equipment we manufacture and market and, to a lesser
extent, the packaging materials we sell. We do not consider our business to be
seasonal in nature.
Beginning in the third quarter of fiscal 1999 the semiconductor industry
business cycle started to recover from a business downturn that negatively
affected our operating results in the first half of fiscal 1999 and the demand
for our assembly equipment and packaging materials increased. This industry
recovery, combined with favorable market acceptance of our Model 8028 automatic
ball bonder resulted in record net sales, net income and new orders in the three
months ended March 31, 2000.
12
<PAGE>
During the three months ended March 31, 2000 we reported bookings of $242.0
million compared to our previous high of $206.9 million recorded in the prior
quarter and $98.0 million recorded for the three months ended March 31, 1999. At
March 31, 2000, we had a backlog of customer orders totaling $140.0 million
compared to $120.1 million at December 31, 1999 and $43.9 million at March 31,
1999. Since the timing of deliveries may vary and orders generally are subject
to delay or cancellation, our backlog as of any date may not be indicative of
sales for any succeeding period.
RESULTS OF OPERATIONS
Sales
Net sales for the three and six month periods ended March 31, 2000 increased
202.0% and 198.4%, respectively, over the comparable periods in the prior year.
The higher net sales in both the three and six month periods ended March 31,
2000 was primarily due to strong demand for semiconductors which is driving the
need for incremental assembly equipment and packaging materials. This increased
demand resulted in a 336.8% increase in unit shipments of our automatic ball
bonders (primarily our Model 8028) in the three months ended March 31, 2000
compared to the prior year and an increase of 383.5% for the six months ended
March 31, 2000. Additionally, the average selling price of our automatic ball
bonders was approximately 8.0% higher than the prior year in both the three and
six months ended March 31, 2000. Sales of our packaging material businesses for
the three and six month periods ended March 31, 2000 were 48.8% and 51.4%,
respectively, higher than the comparable periods in the prior year due to
increased demand for gold wire and expendable tools.
Effective May 31, 1999 we began reporting Flip Chip Technologies LLC, our joint
venture with Delco Electronics Corporation, on a consolidated basis with the
Company's operating results. In the three and six month periods ended March 31,
2000 we recorded net sales from Flip Chip Technologies LLC of $6.5 million and
$11.3 million, respectively. In the same period of fiscal 1999 the results of
Flip Chip Technologies, LLC were recorded as Equity in Loss of Joint Ventures.
See Note 7 to our Condensed Consolidated Financial Statements for more
information on Flip Chip Technologies LLC.
Net sales in the second quarter of fiscal 2000 were 23.5% higher than the first
quarter of fiscal 2000 which in turn were 17.3% higher than the fourth quarter
of fiscal 1999. We expect this trend to continue at least through the remainder
of the fiscal year.
International sales (shipments of our products with ultimate foreign
destinations) comprised 90.6% and 80.6% of our total sales during the six months
ended March 31, 2000 and 1999, respectively. Sales to customers in the
Asia/Pacific region accounted for approximately 80.3% and 68.0% of our total
sales during the six months ended March 31, 2000 and 1999, respectively. Sales
to customers located in Taiwan, the
13
<PAGE>
Philippines and Malaysia accounted for 29.1%, 13.6% and 9.3%, respectively, of
our total sales for the first six months of fiscal 2000. Net sales to all major
geographic regions were above the comparable period of the prior year for both
the three and six month periods ended March 31, 2000.
Gross Profit
Gross profit increased to $75.6 million or 34.0% of net sales during the three
months ended March 31, 2000 compared to $21.0 million or 28.6% of net sales
during the comparable period of the prior year. For the six month period ended
March 31, 2000 gross profit increased to $135.5 million or 33.7% of net sales
compared to $37.2 million or 27.6% of net sales during the comparable period of
the prior year. The higher gross profit in both the three and six month periods
ended March 31, 2000 was due primarily to the higher unit sales and higher
average selling price of our automatic ball bonders. Our equipment business
gross profit as a percentage of sales ("gross margin") was 36.3% in both the
three and six month periods ended March 31, 2000 compared to 28.4% and 28.3% in
the comparable periods of the prior year. The higher gross margin in fiscal 2000
was due to lower cost of production and the higher average selling price of our
automatic ball bonders (primarily our Model 8028). We expect our equipment
business gross margin to further improve in the second half of fiscal year 2000
as the transition of our automatic ball bonder production to Singapore is
completed.
The packaging materials business reported gross margins of 29.0% and 28.8% for
the three and six month periods ended March 31, 2000 compared to 28.8% and 26.7%
in the comparable periods of fiscal 1999. The increase in fiscal 2000 over the
prior year was due to lower average cost of production resulting primarily from
operating efficiencies from the higher unit volume and a shift in product mix to
higher margin fine pitch products.
Flip Chip Technologies, LLC reported gross margins of 6.7% and 0.2%,
respectively, for the three and six months ended March 31, 2000. This had the
effect of reducing the overall gross margin of the Company. The three months
ended March 31, 2000 was the first quarter in which Flip Chip Technologies, LLC
has recorded a gross profit.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased $13.6 million or
68.5% in the three months ended March 31, 2000 and $27.0 million or 72.9% for
the six months ended March 31, 2000 from the comparable periods in the prior
year. SG&A expense included $3.9 million in the three month period and $7.1
million for the six month period ended March 31, 2000 associated with the new
Advanced Packaging Technology business segment and $2.0 million in the three
month period and $4.3 for the six month period ended March 31, 2000 for start-up
costs for our new Singapore facility. The remaining increase in SG&A
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expenses primarily reflects higher compensation and travel expense associated
with the significant increase in net sales.
Research and Development
Net research and development ("R&D") expense increased $3.5 million for the
three month period and $6.8 million for the six month period ended March 31,
2000 from the comparable periods of the prior year. The higher R&D spending was
due to our commitment to provide total process solutions combining our equipment
and packaging materials businesses and new initiatives in microelectronics. In
the third quarter of fiscal year 2000 we plan to offer an enhanced version of
the Model 8028 automatic ball bonder with additional enhancements planned for
introduction in early 2001. We also have and will continue to devote significant
R&D efforts to the development of advanced packaging technologies.
Income form Operations
Income from operations for the three and six months ended March 31, 2000 was
$29.8 million and $47.0 million, respectively, compared to a loss from
operations of $(17.1) million and $(27.4) million in the comparable periods of
the prior year. The increase in operating income for both the three and six
month periods ended March 31, 2000 was due primarily to the higher sales volume
and gross margin partially offset by higher operating expenses.
Interest
In December 1999 we issued $175.0 million of fixed rate 4 3/4% convertible
subordinated notes through a private placement to qualified institutional
investors and institutional accredited investors. On April 24, 2000, the
Securities and Exchange Commission declared effective a registration statement
on Form S-3 registering the notes for resale. We recorded interest expense of
$2.0 million and $2.5 million, respectively, for the three and six months ended
March 31, 2000 associated with this debt. We recorded interest income, primarily
from investments of the proceeds from the debt offering, of $3.2 million in the
three months ended March 31, 2000 and interest income of $4.4 million for the
six months ended March 31, 2000.
Equity in Loss of Joint Ventures
In the three and six months ended March 31, 2000 we recognized as Equity in Loss
of Joint Ventures 50% or $0.4 million and $0.7 million, respectively, of the
loss on our equity interest in Advanced Polymer Solutions, LLC ("APS"). In the
three and six months ended March 31, 1999 we recognized as Equity in Loss of
Joint Ventures 100% or $4.6 million and $8.1 million, respectively, of the loss
at Flip Chip Technologies, LLC ("FCT") and $0.2 million of the loss on our
equity interest in APS. On May 31, 1999, we increased our ownership in FCT and
began reporting the operating results of FCT on a consolidated basis with the
Company's operating results. As a result we stopped reflecting
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FCT under the equity method of accounting. See Note 7 to the Condensed
Consolidated Financial Statements and the discussion of advanced packaging
technologies other than wire bonding under the "Risk Factors" section of this
Item 2.
Tax Expense
Our effective tax rate for fiscal 2000 is expected to approximate 28.0%,
compared to 32.7% for fiscal 1999. The lower effective tax rate expected for
fiscal 2000 is due to a lower tax rate on projected income generated in
Singapore. However, the timing and success of the transition of the manufacture
of our automatic ball bonders to our new Singapore facility could have an impact
on our final effective tax rate for fiscal 2000.
Minority Interest in Net Loss of Subsidiary
We recorded minority interest of $0.2 million in the three months ended March
31, 2000 and $0.6 million for the six month period ended March 31, 2000
reflecting our joint venture partner's share of the loss incurred at Flip Chip
Technologies, LLC.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued. SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This standard is effective for the Company's
financial statements in the first quarter in fiscal 2001. We do not believe that
the adoption of SFAS 133 will have a material impact on our financial
statements.
In December 1999, the Security and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". The SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. While, we believe that the requirement under SAB 101 that revenue be
deferred until final "acceptance" of products by customers may impact the timing
of our recognition of revenue on certain of our shipments, we are currently
assessing SAB 101 and cannot quantify its impact on our Company, if any, at this
time. Any change resulting from the application of SAB 101 will be reported as a
change in accounting principle in accordance with APB Opinion No. 20,
"Accounting Changes". We are required to begin reporting changes, if any, to our
revenue recognition policy in the first quarter of fiscal year 2001.
LIQUIDITY AND CAPITAL RESOURCES:
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As of March 31, 2000, we had $222.0 million in cash and short term investments
compared to $39.3 million at September 30, 1999. Additionally, we have a $60.0
million bank revolving credit facility, which expires in March 2003. Borrowings
are subject to our compliance with financial and other covenants set forth in
the revolving credit documents. At March 31, 2000, we were in compliance with
the covenants of the credit facility and had no cash borrowings outstanding
under the facility, but had utilized $1.1 million of the available credit
facility to support letters of credit issued as security deposits for our new
manufacturing facility in Singapore and our X-LAM facility. The revolving credit
facility provides for borrowings denominated in either U.S. dollars or foreign
currencies. Borrowings in U.S. dollars bear interest either at a Base Rate
(defined as the greater of the prime rate minus 1/4% or the federal funds rate
plus 1/2%) or, at a LIBOR Rate (defined as LIBOR plus 0.4% to 0.8%, depending on
our leverage ratio). Foreign currency borrowings bear interest at a LIBOR Rate,
as defined above, applicable to the foreign currency.
In December 1999, we issued $175.0 million of convertible subordinated notes.
The notes are general obligations of the Company and subordinated to all senior
debt. The notes bear interest at 4 3/4%, are convertible into the Company's
common stock at $45.7993 per share (subject to adjustment upon the occurrence of
certain events) and mature on December 15, 2006. There are no financial
covenants associated with the notes and there are no restrictions on paying
dividends, incurring additional debt or issuing or repurchasing the Company's
securities.
Cash provided by operating activities totaled $29.0 million during the six
months ended March 31, 2000 compared to a use of cash by operating activities of
$12.5 million during the comparable period in the prior year. The cash provided
from operating activities in the first six months of fiscal 2000 was primarily
the result of the net income generated in the period partially offset by the
buildup of accounts receivable and inventory associated with the increase in
sales and customer order levels.
At March 31, 2000, our working capital was $368.5 million compared to $167.1
million at September 30, 1999. The higher working capital was due primarily to
the proceeds from the convertible debt offering.
During the six months ended March 31, 2000, we invested approximately $22.1
million in property and equipment compared to $2.3 million in the comparable
period of the prior year. The capital spending in the six months ended March 31,
2000 was primarily for the purchase of equipment and leasehold improvements for
our research and manufacturing facility to develop the X-LAM technology, tooling
and equipment for our new manufacturing facility in Singapore and additional
manufacturing capacity in our packaging materials businesses and at Flip Chip
Technologies, LLC. We expect to invest at least $22.0 million in additional
capital in the areas mentioned above during the remainder of fiscal year 2000.
In the six months ended March 31, 2000 we contributed $3.5 million to FCT,
increasing our equity ownership to 76.2% from 73.6%. We also contributed $1.5
million to Advanced Polymer Solutions during the six months ended March 31,
2000, bringing our total investment in Advanced
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Polymer Solutions to $5.2 million. We have committed to invest an additional
$0.8 million in Advanced Polymer Solutions.
We believe that anticipated cash flows from operations, the proceeds from the
sale of the $175.0 million of 4 3/4% convertible subordinated notes, working
capital and amounts available under our revolving credit facility will be
sufficient to meet our liquidity and capital requirements for at least the next
12 months. However, we may seek, as required, equity or debt financing to
provide capital for corporate purposes and/or to fund strategic business
opportunities, including possible acquisitions, joint ventures, alliances or
other business arrangements which could require substantial capital outlays. The
timing and amount of such potential capital requirements cannot be determined at
this time and will depend on a number of factors, including demand for the
Company's products, semiconductor and semiconductor capital equipment industry
conditions, competitive factors and the nature and size of strategic business
opportunities which the Company may elect to pursue.
RISK FACTORS
OUR QUARTERLY OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND MAY CONTINUE TO DO
SO IN THE FUTURE
In the past, our quarterly operating results have fluctuated significantly.
Although these fluctuations are partly due to the volatile nature of the
semiconductor industry, they also reflect the impact of other factors, some of
which are outside of our control.
Some of the factors that could cause our revenues and/or operating margins to
fluctuate significantly from period to period are:
o the mix of products that we sell because, for example:
- packaging materials generally have lower margins than assembly
equipment,
- some lines of equipment are more profitable than others, and
- some sales arrangements have higher margins than others;
o the volume and timing of orders for our products and any order
postponements and cancellations by our customers;
o adverse changes in our pricing, or that of our competitors;
o higher than anticipated costs of development or production of new
equipment models;
o the availability and cost of key components for our products;
o market acceptance of our new products and upgraded versions of our
products;
o our announcement of, or perception by others that we will introduce,
new or upgraded products, which could delay customers from purchasing
our products;
o the timing of acquisitions; and
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o our competitors' introduction of new products.
Many of our expenses, such as research and development and selling, general and
administrative expenses, do not vary directly with our net sales. As a result, a
decline in our net sales would adversely affect our operating results. In
addition, if we were to incur additional expenses in a quarter in which we did
not experience comparable increased net sales, our operating results would
decline.
Factors that could cause our expenses to fluctuate from period to period
include:
o the timing and extent of our research and development efforts;
o severance and other costs of relocating facilities or resizings in
market downturns; and
o inventory writeoffs due to obsolesence.
Because our revenues and operating results are volatile and difficult to
predict, we believe that period-to-period comparisons of our operating results
are not a good indication of our future performance.
THE SEMICONDUCTOR INDUSTRY AS A WHOLE IS VOLATILE, AS ARE OUR FINANCIAL RESULTS
Our operating results are significantly affected by the capital expenditures of
semiconductor manufacturers and assemblers worldwide. Expenditures by
semiconductor manufacturers and assemblers depend on the current and anticipated
market demand for semiconductors and products that use semiconductors, such as
personal computers, telecommunications, consumer electronics and automotive
goods. Any significant downturn in the market for semiconductor devices or in
general economic conditions would likely reduce demand for our products and
adversely affect our business, financial condition and operating results.
Historically, the semiconductor industry has been volatile with sharp periodic
downturns and slowdowns. These downturns have been characterized by, among other
things, diminished product demand, excess production capacity and accelerated
erosion of selling prices. This has severely and negatively affected the
industry's demand for capital equipment, including the assembly equipment that
we manufacture and market and, to a lesser extent, the packaging materials that
we sell. These downturns and slowdowns have adversely affected our operating
results. In the 1998 downturn, for example, our net sales declined from
approximately $501.9 million in fiscal 1997 to $411.0 million in fiscal 1998 and
continued to decline in the first half of fiscal 1999. Downturns in the future
could similarly adversely affect our business, financial condition and operating
results.
THE TRANSFER OF OUR AUTOMATIC BALL BONDER MANUFACTURING TO SINGAPORE, COULD
DISRUPT OUR ABILITY TO SUPPLY OUR CUSTOMERS AND MAY NOT RESULT IN THE COST
SAVINGS WE ANTICIPATE
The transfer of our automatic ball bonder manufacturing to Singapore has
required and will continue to require us to relocate equipment, hire and train
production, engineering and management personnel, qualify suppliers and develop
a purchasing and delivery infrastructure. In addition, we expect to experience
increased selling, general and administrative expenses in fiscal 2000 in
connection with start up costs. We plan to source a significantly higher
percentage of materials
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from suppliers in Singapore. To the extent we experience availability,
reliability or quality problems as a result of this shift in supply source, our
business would be adversely affected. In addition, we do not intend to move our
research and development function from Willow Grove to the Singapore facility.
If we are unable to accomplish the move efficiently and commence full production
as scheduled, our ability to fill orders could be hurt, which could damage our
relationships with customers. In addition, our ability to meet production
requirements may be adversely affected by any problems associated with the start
up of this facility. We also anticipate cost savings from the transfer of our
automatic ball bonder manufacturing as a result of reduced costs of labor,
shipping and materials. However, we cannot assure you that we will realize these
savings.
OUR BUSINESS DEPENDS ON ATTRACTING AND RETAINING MANAGEMENT, MARKETING AND
TECHNICAL EMPLOYEES WHO ARE IN GREAT DEMAND
As is the case with all technology companies, our future success depends on our
ability to hire and retain qualified management, marketing and technical
employees. Competition is intense in personnel recruiting in the semiconductor
and semiconductor equipment industries, particularly with respect to some
engineering disciplines. In particular, we have experienced periodic shortages
of software engineers. If we are unable to continue to attract and retain the
technical and managerial personnel we require, our business, financial condition
and operating results could be adversely affected.
WE MAY NOT BE ABLE TO RAPIDLY DEVELOP AND MANUFACTURE NEW AND ENHANCED PRODUCTS
REQUIRED TO MAINTAIN OR EXPAND OUR BUSINESS
We believe that our continued success will depend on our ability to continuously
develop and manufacture or acquire new products and product enhancements on a
timely and cost-effective basis. We also must introduce these products and
product enhancements into the market in response to customers' demands for
higher performance assembly equipment. Our competitors may develop enhancements
to or future generations of competitive products that will offer superior
performance, features and lower prices that may render our products
noncompetitive. We may not be able to develop and introduce products
incorporating new technologies in a timely manner or at a price that will
satisfy future customers' needs or achieve market acceptance. For example, the
introduction of the Model 8020 wire bonder in 1998 was less successful than we
had hoped because of higher than anticipated design and production costs and
lower than anticipated sales prices.
WE MAY NOT BE ABLE TO ACCURATELY FORECAST DEMAND FOR OUR PRODUCT LINES
We typically operate our business with a relatively short backlog and order
supplies and otherwise plan production based on internal forecasts of demand.
Due to these factors, we have in the past, and may again in the future, fail to
accurately forecast demand, in terms of both volume and configuration for either
our current or next-generation wire bonders. This has led to and may in the
future lead to delays in product shipments or, alternatively, an increased risk
of inventory obsolescence. For example, we inaccurately forecasted demand for
the Model 8020 wire bonder in 1998 and consequently recorded writeoffs for
excess inventory. Also, we underestimated the magnitude of the improvement in
the semiconductor industry at the end of fiscal 1999 and
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the demand for the new Model 8028 ball bonder; as a result some customer
shipments may be delayed in fiscal 2000.
If we fail to accurately forecast demand for our products, our business,
financial condition and operating results could be materially and adversely
affected.
ADVANCED PACKAGING TECHNOLOGIES OTHER THAN WIRE BONDING MAY RENDER SOME OF OUR
PRODUCTS OBSOLETE AND OUR STRATEGY FOR PURSUING THESE OTHER TECHNOLOGIES MAY BE
COSTLY AND INEFFECTIVE
Advanced packaging technologies have emerged that may improve device performance
or reduce the size of an integrated circuit or IC package, as compared to
traditional die and wire bonding. These technologies include flip chip, chip
scale packaging and tape automated bonding. In general, these advanced
technologies eliminate the need for wires to establish the electrical connection
between a die and its package. For some assemblies, these advanced technologies
have largely replaced wire bonding. However, today most ICs still employ die and
wire bonding technology, and the possible extent, rate and timing of change is
difficult, if not impossible, to predict. In fact, wire bonding has proved more
durable than we originally anticipated, largely because of its reliability and
cost. However, we cannot assure you that the semiconductor industry will not, in
the future, shift a significant part of its volume into advanced packaging
technologies, such as those discussed above. Presently, Intel, Motorola, IBM and
Advanced Micro Devices, for example, have developed flip chip technologies for
internal use, and a number of other companies are also increasing their
investments in advanced packaging technologies. If a significant shift to
advanced technologies were to occur, demand for our wire bonders and related
packaging materials would diminish.
One component of our strategy is to develop the capacity to use advanced
technologies to allow us to compete in those portions of the market that
currently use these advanced technologies and to prepare for any eventual
decline in the use of wire bonding technology.
There are a number of risks associated with our strategy to diversify into new
technologies:
o The technologies that we have invested in represent only some of the
advanced technologies that may one day supercede wire bonding;
o Other companies are developing similar or alternative advanced
technologies;
o Wire bonding may continue as the dominant technology for longer than
we anticipate;
o The cost of developing advanced technologies may be significantly
greater than we expect; and
o We may not be able to develop the necessary technical, research,
managerial and other related skills to develop, produce, market and
support these advanced technologies.
As a result of these risks, we cannot assure you that any of our attempts to
develop alternative technologies will be profitable or that we will be able to
realize the benefits that we anticipate from them.
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BECAUSE WE HAVE A SMALL NUMBER OF PRODUCTS, A DECLINE IN DEMAND FOR, OR THE
PRICE OF, ANY OF OUR PRODUCTS COULD CAUSE OUR REVENUES TO DECLINE SIGNIFICANTLY
Historically, our wire bonders have comprised at least 55% of our net sales. If
demand for, or pricing of, our wire bonders declines because our competitors
introduce superior or lower cost systems, the semiconductor industry changes or
because of other occurrences beyond our control, our business, financial
condition and operating results would be materially and adversely affected.
BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR NEARLY ALL OUR SALES, OUR
REVENUES COULD DECLINE IF WE LOSE ANY SIGNIFICANT CUSTOMER
The semiconductor manufacturing industry is highly concentrated, with a
relatively small number of large semiconductor manufacturers and subcontract
assemblers purchasing a substantial portion of semiconductor assembly equipment
and packaging materials. Sales to our five largest customers accounted for
approximately 45.2% of our fiscal 1997 net sales, 41.4% of our fiscal 1998 net
sales and 31.7% of our fiscal 1999 net sales. In fiscal 1997, our sales to Anam
accounted for 12.5% of our net sales, and sales to Intel accounted for 10.2% of
our net sales. In fiscal 1998, sales to Intel accounted for 17.6% of our net
sales. During fiscal 1999, no customer accounted for more than 10% of our net
sales.
We expect that sales of our products to a limited number of customers will
continue to account for a high percentage of our net sales for the foreseeable
future. If we lose orders from a significant customer, or if a significant
customer reduces its orders substantially, these losses or reductions will
adversely affect our business, financial condition and operating results.
WE DEPEND ON A SMALL NUMBER OF SUPPLIERS FOR MATERIALS AND, IF OUR SUPPLIERS DO
NOT DELIVER THEIR PRODUCTS TO US, WE MAY BE UNABLE TO DELIVER OUR PRODUCTS TO
OUR CUSTOMERS
Our products are complex and require materials, components and subassemblies of
an exceptionally high degree of reliability, accuracy and performance. We rely
on subcontractors to manufacture many of the components and subassemblies for
our products and we rely on sole source suppliers for some material components.
Our reliance involves a number of significant risks, including:
o loss of control over the manufacturing process;
o changes in our manufacturing processes, dictated by changes in the market,
that have delayed our shipments;
o our inadvertent use of defective or contaminated materials;
o the relatively small operations and limited manufacturing resources of some
of our contractors and suppliers, which may limit their ability to
manufacture and sell subassemblies, components or parts in the volumes we
require and at quality levels and prices we can accept;
o reliability and quality problems we experience with certain key
subassemblies provided by single source suppliers; and
o delays in the delivery of subassemblies, which, in turn, have caused delays
in some of our shipments.
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If we are unable to deliver products to our customers on time for these or any
other reasons, or if we do not maintain acceptable product quality or
reliability in the future, our business, financial condition and operating
results would be materially and adversely affected.
WE ARE EXPANDING AND DIVERSIFYING OUR OPERATIONS, AND IF WE FAIL TO MANAGE OUR
EXPANDING AND MORE DIVERSE OPERATIONS SUCCESSFULLY, OUR BUSINESS AND FINANCIAL
RESULTS MAY BE MATERIALLY AND ADVERSELY AFFECTED
In recent years, we have broadened our product offerings to include
significantly more packaging materials. Although our strategy is to diversify
our products and services, we may not be able to develop, acquire, introduce or
market new products in a timely or cost-effective manner and the market may not
accept any new or improved products we develop, acquire, introduce or market.
Our diversification into new lines of business and our expansion through
acquisitions and alliances has increased, and is expected to continue to
increase, demand on our management, financial resources and information and
internal control systems. Our success depends in significant part on our ability
to manage and integrate acquisitions, joint ventures and other alliances and to
continue to implement, improve and expand our systems, procedures and controls.
If we fail to do this at a pace consistent with the development of our business,
our business, financial condition and operating results would be materially and
adversely affected.
As we seek to expand our operations, we expect to encounter a number of risks,
which will include:
o risks associated with hiring additional management and other critical
personnel;
o risks associated with adding equipment and capacity; and
o risks associated with increasing the scope, geographic diversity and
complexity of our operations.
In addition, sales and servicing of packaging materials and advanced
technologies require different organizational and managerial skills than sales
of traditional wire bonding technology. We cannot assure you that we will be
able to develop the necessary skills to successfully produce and market these
different products.
WE MAY BE UNABLE TO CONTINUE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE
SEMICONDUCTOR EQUIPMENT AND PACKAGING MATERIALS INDUSTRIES
The semiconductor equipment and packaging materials industries are intensely
competitive. Significant competitive factors in the semiconductor equipment
market include performance quality, customer support and price. Our major
equipment competitors include:
o ASM Pacific Technology, Shinkawa, Kaijo and ESEC in wire bonders;
o ESEC, Nichiden, ASM Pacific Technology and Alphasem in die bonders; and
o Disco Corporation in dicing saws.
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Competitive factors in the semiconductor packaging materials industry include
price, delivery and quality. Our significant packaging materials competitors
with respect to expendable tools and blades include:
o Gaiser Tool Co. and Small Precision Tools, Inc. in expendable tools; and
o Disco Corporation in blades;
and in the bonding wire market:
o Tanaka Electronic Industries and Sumitomo Metal Mining.
In each of the markets we serve, we face competition and the threat of
competition from established competitors and potential new entrants, some of
which may have greater financial, engineering, manufacturing and marketing
resources than we have. Some of these competitors are Japanese or Korean
companies that have had and may continue to have an advantage over us in
supplying products to local customers because many of these customers appear to
prefer to purchase from local suppliers, without regard to other considerations.
We expect our competitors to improve their current products' performance, and to
introduce new products with improved price and performance characteristics. New
product introductions by our competitors or by new market entrants could hurt
our sales. If a particular semiconductor manufacturer or subcontract assembler
selects a competitor's product for a particular assembly operation, we may not
be able to sell a product to that manufacturer or assembler for a significant
period of time because manufacturers and assemblers sometimes develop lasting
relations with suppliers, and products in our industry often go years without
requiring replacement. In addition, we may have to lower our prices in response
to price-cuts by our competitors, which could materially and adversely affect
our business, financial condition and operating results. We cannot assure you
that we will be able to continue to compete in these or other areas in the
future.
WE SELL MOST OF OUR PRODUCTS TO CUSTOMERS LOCATED OUTSIDE OF THE U.S. AND WE
HAVE SUBSTANTIAL MANUFACTURING OPERATIONS LOCATED OUTSIDE OF THE U.S., BOTH OF
WHICH SUBJECT US TO RISKS FROM CHANGES IN TRADE REGULATIONS, CURRENCY
FLUCTUATIONS, POLITICAL INSTABILITY AND WAR
Approximately 85% of our net sales for fiscal 1997, 80% of our net sales for
fiscal 1998 and 83% of our net sales for fiscal 1999 were attributable to sales
to customers for delivery outside of the United States. We expect our sales
outside of the United States to continue to represent a substantial portion of
our future revenues. Our future performance will depend, in significant part, on
our ability to continue to compete in foreign markets, particularly in Asia.
Asian economies have been highly volatile, resulting in significant fluctuation
in local currencies, and political and economic instability. These conditions
may continue or worsen, which could
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materially and adversely affect our business, financial condition and operating
results. In addition, we rely on non-U.S. suppliers for materials and components
used in the equipment that we sell. We also maintain substantial manufacturing
operations in countries other than the United States, including operations in
Israel and Singapore. As a result, a major portion of our business is subject to
the risks associated with international commerce such as, risks of war and civil
disturbances or other events that may limit or disrupt markets; expropriation of
our foreign assets; longer payment cycles in foreign markets; international
exchange restrictions; the difficulties of staffing and managing dispersed
international operations; tariff and currency fluctuations; changing political
conditions; foreign governments' monetary policies; and less protective foreign
intellectual property laws.
Because most of our foreign sales are denominated in United States dollars, an
increase in value of the United States dollar against foreign currencies,
particularly the Japanese yen, will make our products more expensive than those
offered by some of our foreign competitors. Our ability to compete overseas in
the future could be materially and adversely affected by a strengthening of the
United States dollar against foreign currencies.
The ability of our international operations to prosper also will depend, in
part, on a continuation of current trade relations between the United States and
foreign countries in which our customers operate and in which our subcontractors
have assembly operations. A change toward more protectionist trade legislation
in either the United States or foreign countries in which we do business, such
as a change in the current tariff structures, export compliance or other trade
policies, could adversely affect our ability to sell our products in foreign
markets.
OUR SUCCESS DEPENDS IN PART ON OUR INTELLECTUAL PROPERTY, WHICH WE MAY BE UNABLE
TO PROTECT
Our success depends in part on our proprietary technology. To protect this
technology, we rely principally on contractual restrictions (such as
nondisclosure and confidentiality agreements) in our agreements with employees,
vendors, consultants and customers and on the common law of trade secrets and
proprietary "know-how." We secondarily rely, in some cases, on patent and
copyright protection, which may become more important to us as we expand our
investment in advanced packaging technologies. We may not be successful in
protecting our technology for a number of reasons, including:
o Our competitors may independently develop technology that is similar to or
better than ours;
o Employees, vendors, consultants and customers may not abide by their
contractual agreements, and the cost of enforcing those agreements may be
prohibitive, or those agreements may prove to be unenforceable or more
limited than we anticipate;
o Foreign intellectual property laws may not adequately protect our
intellectual property rights; and
o Our patent and copyright claims may not be sufficiently broad to
effectively protect our technology; patents or copyrights may be
challenged, invalidated or circumvented; and we may otherwise be unable to
obtain adequate protection for our technology.
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In addition, our partners in joint ventures and alliances may also have rights
to technology we develop through those joint ventures and alliances. If we are
unable to protect our technology, we could weaken our competitive position or
face significant expense to protect or enforce our intellectual property rights.
THIRD PARTIES MAY CLAIM WE ARE INFRINGING ON THEIR INTELLECTUAL PROPERTY, WHICH
COULD CAUSE US TO INCUR SIGNIFICANT LITIGATION COSTS OR OTHER EXPENSES, OR
PREVENT US FROM SELLING SOME OF OUR PRODUCTS
The semiconductor industry is characterized by rapid technological change, with
frequent introductions of new products and technologies. As a result, industry
participants often develop products and features similar to those introduced by
others, increasing the risk that their products and processes may give rise to
claims that they infringe on the intellectual property of others. We may
unknowingly infringe on the intellectual property rights of others and incur
significant liability for that infringement. If we are found to infringe on the
intellectual property rights of others, we could be enjoined from continuing to
manufacture, market or use the affected product, or be required to obtain a
license to continue manufacturing or using the affected product. A license could
be very expensive to obtain or may not be available at all. Similarly, changing
our products or processes to avoid infringing the rights of others may be costly
or impractical.
Occasionally, third parties assert that we are, or may be, infringing on or
misappropriating their intellectual property rights. In these cases, we will
defend against claims or negotiate licenses where we consider these actions
appropriate. Intellectual property cases are uncertain and involve complex legal
and factual questions. If we become involved in this type of litigation, it
could consume significant resources and divert our attention from our business.
Some of our customers have received notices of infringement from the Lemelson
Medical, Education and Research Foundation Limited Partnership (the "Lemelson
Foundation"), alleging that equipment we have supplied to our customers, and
processes this equipment performs, infringes on patents held by the Lemelson
Foundation. These notices increased substantially in 1998, the year in which the
Lemelson Foundation settled its suit against the Ford Motor Company, and entered
into license agreements with Ford, GM and Chrysler. Since the settlement, a
number of our customers, including Intel, have been sued by the Lemelson
Foundation.
Some of our customers have requested that we defend and indemnify them against
the Lemelson Foundation's claims or contribute to any settlement the customer
reaches with the Lemelson Foundation. We have received opinions from our outside
patent counsel with respect to various Lemelson Foundation patents. We are not
aware that any equipment we market or that any process performed by our
equipment infringes on the Lemelson Foundation patents and we do not believe
that the Lemelson Foundation matter or any other pending intellectual property
claim against us will materially and adversely affect our business, financial
condition or operating results. The ultimate outcome of any infringement or
misappropriation claim affecting us is uncertain, however, and we cannot assure
you that our resolution of this litigation will not materially and adversely
affect our business, financial condition and operating results.
26
<PAGE>
YEAR 2000
If our products or our internal data management, accounting, manufacturing or
operating software and systems do not adequately or accurately process or manage
day or date information beyond the year 1999, our operations could be affected
adversely. To address the issue, we created an internal task force to assess our
state of readiness for possible "Year 2000" issues and to take the necessary
actions to ensure our Year 2000 compliance. The taskforce has evaluated:
o our products and our internal business systems and software; and
o our vulnerability to possible Year 2000 exposure due to suppliers' and
other third parties' lack of preparedness for the year 2000.
To evaluate equipment that we sell and equipment, tools or software that we use,
we employed Year 2000 Readiness Test scenarios established by SEMATECH, an
industry group comprised of U.S. semiconductor manufacturers. Based on this
assessment, we do not believe the operation of the equipment that we sell or the
equipment, tools and software that we use will be affected by the transition to
the year 2000. We completed our review, material corrective measures and
contingency planning in September 1999.
In connection with our review and corrective measures, we replaced the business
and accounting systems of our U.S. and Israeli equipment manufacturing sites
with a new Enterprise Resource Planning System that was represented to us to be
Year 2000 compliant. We spent approximately $9.8 million in hardware, software,
consulting costs and internal expenses to implement this new system.
In addition, we have been in contact with our suppliers and other third parties
to determine the extent to which they may be vulnerable to Year 2000 issues. We
have received representations as to the Year 2000 compliance of our major
suppliers.
We believe that the reasonably anticipated worst case scenario for our business
resulting from Year 2000 problems would be unexpected delays of supplier
deliveries and customer shipments. If these delays are significant, customers
may cancel orders and long-term customer relationships could be damaged. We
believe that we have developed appropriate contingency plans for any Year 2000
delays, including carrying larger inventory of products from a small number of
suppliers that we believe may be vulnerable to year 2000 disruptions.
To date we have experienced no material Year 2000 issues, and we do not expect
future Year 2000 issues based on the performance to date of internal systems
that we use and the products we supply to our customers.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At March 31, 2000, we had a non-trading investment portfolio, excluding those
classified as cash and cash equivalents, of $62.7 million. Due to the short term
nature of the investment portfolio, if market interest rates were to increase
immediately and uniformly by 100 basis points there would be no material adverse
affect on our business, financial condition or operating results.
27
<PAGE>
PART II. OTHER INFORMATION.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2000 Annual Meeting of Shareholders of the Company was held on February 8,
2000.
At this meeting, Mr. Larry D. Striplin, Jr. was reelected to the Board of
Directors of the Company for a term expiring at the 2004 Annual Meeting. In such
election, 20,243,627 votes were cast for Mr. Striplin, Jr. Under Pennsylvania
Law, votes cannot be cast against a candidate. Proxies filed by the holders of
178,012 shares at the 2000 Annual Meeting withheld authority to vote for Mr.
Striplin, Jr.
Lastly, 20,371,265 shares were voted in favor of the reappointment of
PricewaterhouseCoopers LLP as independent accountants of the Company to serve
until the 2001 Annual Meeting, and 19,315 shares were voted against such
proposal. Proxies filed by the holders of 31,059 shares at the 2000 Annual
Meeting instructed the proxy holders to abstain from voting on such proposal.
No "broker non votes" were received at the 2000 Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter to which
this report relates.
28
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KULICKE AND SOFFA INDUSTRIES, INC.
Date: May 12, 2000 By: /s/ CLIFFORD G. SPRAGUE
- ------------------------- ---------------------------------
Clifford G. Sprague
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
29
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