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THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE 901(D)
OF REGULATION S-T
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1996 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 NUMBER 0-12853
ELECTRO SCIENTIFIC INDUSTRIES, INC.
OREGON 93-0370304
13900 N.W. SCIENCE PARK DRIVE, PORTLAND, OREGON
97229
(503) 641-4141
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- ---
AS OF AUGUST 31, 1996 THERE WERE 8,662,675 SHARES OF COMMON STOCK OF ELECTRO
SCIENTIFIC INDUSTRIES, INC. OUTSTANDING.
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Part I. Financial Information
Page No.
--------
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets 3-4
August 31, 1996 and May 31, 1996
Consolidated Statements of Income 5
Three Months ended
August 31, 1996 and August 31, 1995
Consolidated Statements of Cash Flows 6-7
Three Months ended
August 31, 1996 and August 31, 1995
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of Financial 10-12
Condition and Results of Operations
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 13-14
Signature 15
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
ASSETS August 31, 1996* May 31, 1996
- ------ --------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 18,819 $ 18,622
Securities available for sale 17,119 18,363
Trade receivables, net 41,700 39,792
Inventories 33,827 30,167
Deferred income taxes 3,884 3,884
Other current assets 1,027 819
-------- --------
Total current assets 116,376 111,647
-------- --------
PROPERTY AND EQUIPMENT, AT COST 39,527 38,853
Less - Accumulated depreciation (22,917) (22,191)
-------- --------
Net property and equipment 16,610 16,662
-------- --------
OTHER ASSETS 3,613 4,216
-------- --------
$136,599 $132,525
-------- --------
-------- --------
The accompanying notes are an integral part of these statements.
* Unaudited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
LIABILITIES AND
- ----------------
SHAREHOLDERS' EQUITY AUGUST 31, 1996* MAY 31, 1996
- -------------------- --------------- ------------
CURRENT LIABILITIES:
Accounts payable $ 6,219 $ 5,142
Accrued liabilities:
Payroll related 3,040 3,433
Commissions 1,794 1,890
Income taxes 3,120 2,463
Other 2,918 4,681
-------- --------
Total accrued liabilities 10,872 12,467
-------- --------
Total current liabilities 17,091 17,609
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, without par value;
1,000,000 shares authorized, no shares
issued -- --
Common stock, without par value; Authorized:
40,000,000 shares; Outstanding:
8,662,675, and 8,655,408 respectively 55,919 55,790
Retained earnings 63,589 59,126
-------- --------
Total shareholders' equity 119,508 114,916
-------- --------
$136,599 $132,525
-------- --------
-------- --------
The accompanying notes are an integral part of these statements.
* Unaudited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share)
Three Months Ended* Three Months Ended*
August 31, 1996 August 31, 1995
--------------- ---------------
Net sales $34,856 $35,975
Cost of sales 15,044 16,767
-------- --------
Gross margin 19,812 19,208
-------- --------
Operating expenses:
Selling, service and administrative 8,870 8,802
Research, development and engineering 4,201 3,907
Acquired in-process research and development -- 6,000
-------- --------
Total operating expenses 13,071 18,709
Operating income 6,741 499
Interest income 378 273
Other income (expense), net (276) 85
-------- --------
Income before income taxes 6,843 857
Provision for income taxes 2,464 317
-------- --------
Net income $ 4,379 $ 540
-------- --------
-------- --------
Net income per share $ 0.51 $ 0.06
-------- --------
-------- --------
Weighted average number of shares
used in computing per share amounts 8,655 8,521
The accompanying notes are an integral part of these statements.
* Unaudited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended
August 31, 1996 August 31, 1995
--------------- ---------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $4,379 $540
Adjustments to reconcile net income
to cash used in operating activities:
Acquired in-process research and development (1) -- 6,000
Depreciation and amortization 838 1,008
Effect of exchange rates on operating accounts 91 (402)
Deferred income taxes -- (1,989)
Changes in operating accounts:
(Increase) decrease in trade receivables (1,908) 3,594
Increase in inventories (3,194) (163)
Increase in other current assets (208) (204)
Decrease in accounts payable and accrued liabilities (518) (3,202)
------- -------
Net cash (used in) provided by operating activities: (520) 5,182
------- -------
Cash Flows From Investing Activities:
Acquisition of XRL subsidiary (2) -- 104
Purchases of property and equipment (692) (669)
Purchase of securities (7,563) (11,000)
Proceeds from sales of securities and maturing securities 8,800 11,049
Decrease (increase) in other assets 43 (490)
------- -------
Net cash used in investing activities: 588 (1,006)
------- -------
Cash Flows From Financing Activities:
Proceeds from exercise of stock options and stock plans 129 301
------- -------
Net cash, provided by (used in) financing activities: 129 301
------- -------
Net Change In Cash And Cash Equivalents 197 4,477
Cash and Cash Equivalents at Beginning of Period 18,622 11,385
------- -------
Cash and Cash Equivalents at End of Period $18,819 $15,862
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Thousands of dollars)
(Unaudited)
Cash payments for interest were not significant for the three months ended
August 31, 1996 and August 31, 1995. Cash payments for income taxes were $1,896
and $871 for the three months ended August 31, 1996 and August 31, 1995,
respectively.
Notes:
(1) See Note 5 in Notes to Consolidated Financial Statements.
(2) Acquisition of XRL subsidiary:
Assets less liabilities acquired, net of cash $(5,113)
Issuance of Common Stock 5,217
------
Cash acquired $(104)
------
------
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in these interim statements. Management believes that the interim
statements include all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of results for the interim periods.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in the
Company's 1996 Annual Report.
Results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of $312 at
August 31, 1996 and $314 at May 31, 1996.
NOTE 3 - INVENTORIES
Inventories consist of the following:
August 31, 1996 May 31, 1996 *
--------------- --------------
Raw materials and purchased parts $22,206 $21,000
Work-in-process 8,360 6,188
Finished goods 3,261 2,979
------- -------
$33,827 $30,167
------- -------
------- -------
Note 4 - Net Income Per Share
Net income per share is computed using the weighted average number of common
shares and common stock equivalents (stock options) outstanding.
*Audited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands)
(Unaudited)
NOTE 5 - ACQUISITION OF XRL, INC.
In July 1995, the Company acquired all of the outstanding stock of XRL, Inc., a
privately held company based in Canton, Massachusetts. XRL provides capital
equipment for semiconductor memory yield improvement. The preliminary purchase
consideration consisted of 206,867 shares of ESI stock. These shares were
subsequently reduced due to price adjustments and other elections provided for
by the agreement. The transaction was accounted for as a purchase.
In connection with the purchase price allocation, the Company obtained an
appraisal of the intangible assets which indicated that substantially all of the
acquired intangible assets consisted of research and development projects in
process. At that time, the development of these projects had not reached
technological feasibility and the technology was believed to have no alternative
future use. In accordance with generally accepted accounting principles, the
acquired in-process research and development of $6.0 million was charged to
expense during the quarter ended August 31, 1995 and is reflected in the
accompanying Consolidated Statements of Income.
Pro-forma combined income statement data for the three months ended August 31,
1995 was not materially different from results presented in the accompanying
Consolidated Statements of Income.
NOTE 6 - TERMINATED MERGER AGREEMENT - APPLIED INTELLIGENT SYSTEMS, INC. (AISI)
On August 9, 1996, the Company announced the agreement to acquire AISI would be
terminated due to current market conditions. As a result of the acquisition
effort, $0.2 million was charged to expense during the quarter ended August 31,
1996 and is reflected in the accompanying Consolidated Statements of Income.
NOTE 7 - INCOME TAXES
The effective income tax rate for the interim period is based on estimates of
annual amounts of taxable income, tax credits and other factors.
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
Results of Operations
Revenue of $34.9 million for the quarter ended August 31, 1996, was 3.1% or $1.1
million lower as compared to the same quarter of the prior year. The first
quarter results reflect the turbulence in some of ESI's markets. Demand remains
strong for equipment in the semiconductor yield improvement and the vision and
printed circuit board markets. Shipments of laser trimming systems and capacitor
production equipment were substantially lower during the first quarter of fiscal
1997 than the same period last year. Capacity added by customers in early fiscal
1996 is still in the process of being absorbed by market demand.
Gross margin for the three months ended August 31, 1996, increased to 56.8% from
53.4% for the same period of the prior year. Gross margin improved as a result
of increased sales of higher margin semiconductor yield improvement systems,
electronic packaging equipment and machine vision systems.
Selling, service and administrative expenses increased by less than 1% for the
three months ended August 31, 1996, as compared to the first quarter of the
prior year as higher spending on travel and consulting were offset by lower
commissions and profit sharing associated with lower sales volumes. As a
percentage of sales, selling, service and administrative expenses increased to
25.4% from 24.5% for the first quarter of fiscal 1996 compared to the same
quarter of the prior year.
Research, development and engineering expenses increased 7.5% for the current
quarter compared to the same period of the prior year as a result of
compensation increases. As a percentage of sales, research, development and
engineering expenses rose to 12.1% for the current quarter from 10.9% for the
same quarter of the prior year. The comparison between the current quarter and
the first quarter of last year does not include the acquired in-process research
and development charge of $6.0 million incurred in connection with the purchase
price allocation of XRL, Inc.
Other income (expense) during the first quarter was $0.3 million lower as
compared to the same quarter a year ago, as the Company absorbed costs
associated with the terminated Applied Intelligent Systems Inc. (AISI) merger.
Net income for the quarter ended August 31, 1996, was $4.4 million or $0.51 per
share compared to $0.5 million or $0.06 per share for the same period of the
prior year after the effect of the $6.0 million acquired in-process research and
development charge incurred in connection with the acquisition of XRL, Inc. Net
income for the first quarter of last year excluding the acquired in-process
research and development charge was $4.4 million or $0.51 per share.
Incoming orders were $27 million and ending backlog on August 31, 1996, was $27
million which represents a 22% decrease from May 31, 1996.
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LIQUIDITY, CAPITAL RESOURCES AND BUSINESS ENVIRONMENT
The Company's principal sources of liquidity are existing cash and cash
equivalents and marketable debt securities of $35.9 million, accounts receivable
of $41.7 million, and a $7.0 million line of credit, none of which was
outstanding at August 31, 1996. ESI has no debt and a current ratio of 6.8:1.
Working capital increased to $99.3 million at August 31, 1996, from $94.0
million at May 31, 1996. Accounts receivable increased on a lower sales volume
due to substantial foreign shipments with payment terms longer than the norm.
In September 1996, collections of accounts receivable reduced the balance below
$35.0 million.
The Company's business depends, in large part, upon the capital expenditures of
manufacturers of electronic devices, including miniature capacitors and
semiconductor memory devices, and circuits used in wireless telecommunications
equipment, including pagers and cellular phones, automotive electronics and
computers. The markets for products manufactured by the Company's customers are
cyclical and have historically experienced periodic downturns, which often have
had a negative effect on the demand for capital equipment such as that sold by
the Company. Several large, multinational electronics companies constituted
41.8% of the Company's fiscal 1996 sales and are expected to comprise a similar
ratio in fiscal 1997; therefore, the loss of any of these customers would be
significant.
The market for the Company's products is characterized by rapidly changing
technology and evolving industry standards. The Company believes that its
future success will depend on its ability to develop and manufacture new
products and product enhancements and to introduce them successfully into the
market. Failure to do so in a timely fashion could harm the Company's
competitive position. The announcements or introductions of new products by the
Company or its competitors may adversely affect the Company's operating results,
since these announcements or introductions may cause customers to defer or
forego ordering products from the Company's existing product lines.
International sales accounted for 70.3% of first quarter sales compared to 66.8%
of the Company's net sales for fiscal 1996. The Company expects that
international sales will continue to represent a significant percentage of net
sales in the future. As a result, a significant portion of the Company's net
sales will be subject to certain risks, including changes in demand resulting
from fluctuations in interest and currency exchange rates, as well as factors
such as government financed competition, changes in trade policies, tariff
regulations, difficulties in obtaining US export licenses and the difficulties
of staffing and managing foreign operations.
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Most of the Company's sales are transacted in dollars and the Company's products
are made in the United States. Many Japanese customers pay in yen; therefore,
ESI hedges these sales transactions to mitigate currency risks. The European
and Asian sales subsidiaries' operating expenses are denominated in their
respective local currencies. These transactions represent approximately 16.0%
of total consolidated operating expenses and are equally split between Europe
and Asia. Changes in the value of the local currency, as measured in US dollars,
will commensurably increase or decrease operating expenses.
ESI believes that it has the product offerings and resources needed for
continuing success; however, future revenue and margin trends cannot be reliably
predicted and may cause the Company to adjust its operations. Factors external
to the company can result in volatility of the Company's common stock price.
Because of the foregoing factors, recent trends should not be considered
reliable indicators of future stock prices or financial results.
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Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Shareholders was held on Tuesday, July 30, 1996 to vote on
the issuance of up to 3,000,000 shares of Common Stock as merger consideration
in connection with the proposed acquisition of Applied Intelligent Systems, Inc.
(AISI), a privately held company located in Ann Arbor, Michigan. This matter
was approved by the vote indicated:
For 5,554,309
Against 321,224
Abstain 76,296
The 1996 Annual Meeting of Shareholders was held on Friday, September 20, 1996.
The following items were approved by the vote indicated:
1. W. Arthur Porter and Douglas C. Strain were re-elected to the Board of
Directors for a three year term. David F. Bolender, Larry L. Hansen,
Vernon B. Ryles, Jr., Keith L. Thomson and Donald R. VanLuvanee continue as
directors.
For 7,284,946
Against 0
Abstain 373,592
2. Amendment of the 1989 Stock Option Plan was approved. The shares reserved
for issuance was increased by 400,000 to a total of 1,700,000 shares. In
addition, it was approved to increase the shares issued to non-employee
directors from 1,000 shares to 3,000 on July 31 of each year. Approval of
the amendment constitutes reapproval of the per-employee limit on grants of
options under the Option Plan of 250,000 shares annually. This reapproval
is required every five years for compliance with Internal Revenue Service
regulations.
For 5,316,317
Against 567,872
Abstain 210,008
No Vote 1,564,341
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3. Amendment of the 1990 Employee Stock Purchase Plan was approved. Commencing
on January 8 of each year and ending on January 7 of the following year,
eligible employees will receive the option of purchasing stock to be
automatically exercised on the last trading day of the offering period.
Eligible employees are not permitted to purchase more than 3,000 shares or
accrue at a rate that exceeds $25,000 of fair market value (determined at
the offering date) for each calendar year the option is outstanding. Stock
purchases will be made annually, at a purchase price equal to the lower of
85 percent of the market price on the first day or the last day of the
annual offering period.
For 5,830,360
Against 60,241
Abstain 203,596
No Vote 1,564,341
4. Adoption of the 1996 Stock Incentive Plan was approved. The Plan allows
the Company to give stock awards of up to 150,000 shares to employees,
officers and directors.
For 5,480,324
Against 407,020
Abstain 206,853
No Vote 1,564,341
5. Selection of Arthur Andersen LLP as independent auditors for the Company
was approved.
For 7,628,280
Against 16,332
Abstain 13,523
No Vote 403
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
LECTRO SCIENTIFIC INDUSTRIES, INC.
Dated: October 4, 1996 By /s/ Barry L. Harmon
-----------------------------------
Barry L. Harmon, Senior Vice
President and Chief Financial
Officer
<TABLE> <S> <C>
<PAGE>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 18819
<SECURITIES> 17119
<RECEIVABLES> 42012
<ALLOWANCES> 312
<INVENTORY> 33827
<CURRENT-ASSETS> 116376
<PP&E> 39527
<DEPRECIATION> 22917
<TOTAL-ASSETS> 136599
<CURRENT-LIABILITIES> 17091
<BONDS> 0
55919
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<COMMON> 0
<OTHER-SE> 63589
<TOTAL-LIABILITY-AND-EQUITY> 136599
<SALES> 34856
<TOTAL-REVENUES> 34856
<CGS> 15044
<TOTAL-COSTS> 15044
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<LOSS-PROVISION> 0
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<INCOME-PRETAX> 6843
<INCOME-TAX> 2464
<INCOME-CONTINUING> 0
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<NET-INCOME> 4379
<EPS-PRIMARY> 0.51
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</TABLE>
