<PAGE>
Page 1 of 12
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 NOVEMBER 30, 1995 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 November 30, 1995 there were 8,630,774 shares of Common Stock of Electro
Scientific Industries, Inc. outstanding.
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Page 2 of 12
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Part I. FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3-4
November 30, 1995 and May 31, 1995
Consolidated Statements of Income 5
Three Months and Six Months ended
November 30, 1995 and November 30, 1994
Consolidated Statements of Cash Flows 6-7
Six Months ended November 30, 1995 and November 30, 1994
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of Financial 10-11
Condition and Results of Operations
Signature 12
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Page 3 of 12
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ASSETS NOVEMBER 30, 1995* MAY 31, 1995
------------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,028 $ 11,385
Securities available for sale 16,981 17,011
Trade receivables, net 35,504 33,331
Inventories 29,491 25,478
Deferred income taxes 3,119 2,946
Other current assets 1,817 1,018
----- -----
Total current assets 101,940 91,169
------- ------
PROPERTY AND EQUIPMENT, AT COST 38,558 36,003
Less - accumulated depreciation (21,998) (20,387)
------- -------
Net property and equipment 16,560 15,616
------ ------
OTHER ASSETS:
Deferred income taxes 1,979 --
Other assets 3,409 3,813
----- -----
$123,888 $110,598
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
* UNAUDITED
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Page 4 of 12
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
LIABILITIES AND
- ---------------
SHAREHOLDERS' EQUITY NOVEMBER 30, 1995* MAY 31, 1995
- -------------------- ------------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 6,250 $ 7,002
Accrued liabilities:
Payroll related 2,583 2,324
Commissions 2,696 1,706
Income taxes 698 1,258
Other 3,674 1,758
----- -----
Total accrued liabilities 9,651 7,046
Deferred revenue 787 1,032
------- -----
Total current liabilities 16,688 15,080
OTHER LONG-TERM LIABILITIES 1,078 1,074
----- -----
Total liabilities 17,766 16,154
------ ------
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:
8,630,774, and 8,374,546 respectively 55,314 49,762
Retained earnings 50,808 44,682
------ ------
Total shareholders' equity 106,122 94,444
------- ------
$123,888 $110,598
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
* UNAUDITED
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Page 5 of 12
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(THOUSANDS EXCEPT PER SHARE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
NOV. 30, 1995 NOV. 30, 1994 NOV. 30, 1995 NOV. 30, 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales $ 40,836 $ 24,803 $ 76,811 $ 45,809
Cost of sales 18,723 11,446 35,490 21,620
------ ------ ------ ------
Gross margin 22,113 13,357 41,321 24,189
Operating expenses:
Selling, service and administrative 10,368 6,629 19,170 12,169
Research, development and engineering 4,112 3,028 8,019 5,185
Acquired in-process research and
development * -- -- 6,000 --
------ ------ ----- ------
Total operating expenses 14,480 9,657 33,189 17,354
------ ----- ------ ------
Operating income 7,633 3,700 8,132 6,835
Interest income (expense) 313 (29) 586 (42)
Other income (expense) (229) 29 (144) 27
---- -- ---- --
Income before income taxes 7,717 3,700 8,574 6,820
Provision for income taxes 2,836 1,117 3,153 2,037
----- ----- ----- -----
Net income $ 4,881 $ 2,583 $ 5,421 $ 4,783
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share $ 0.57 $ 0.36 $ 0.63 $ 0.69
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares used
in computing per share amounts 8,629 7,142 8,575 6,977
</TABLE>
The acquired in-process research and development represents a one time charge
associated with the acquisition of XRL, Inc.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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Page 6 of 12
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Six Months Ended
NOV. 30,1995 NOV. 30,1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,421 $ 4,783
Adjustments to reconcile net income
to cash provided by (used in) operating activities:
Acquired in-process research and development(1) 6,000 --
Depreciation and amortization 1,264 1,211
Loss on sale of property and equipment -- 25
Deferred income taxes (1,984) (1,208)
Deferred revenue (245) --
Stock compensation agreement -- 14
Changes in operating accounts:
(Increase) in trade receivables (704) (6,737)
(Increase) in inventory (2,235) (1,275)
(Increase) in other current assets (725) (325)
(Decrease) increase in accounts payable, accrued liabilities and
other long-term liabilities (2,463) 267
(Decrease) increase in income taxes (560) 1,672
---- -----
Net cash provided by (used in) operating activities 3,769 (1,573)
----- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of XRL subsidiary, net of cash(2) 102 --
Purchase of Chicago Laser subsidiary, net of cash (3) -- (707)
Purchases of property and equipment (1,741) (1,331)
Proceeds from sale of property and equipment -- 5
Purchases of securities (16,879) --
Proceeds from sales of securities and maturing securities 16,930 --
Decrease (increase) in other assets 438 (398)
------ ----
Net cash used in investing activities (1,150) (2,431)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments to retire long-term debt -- (768)
Reduction of notes payable to banks (4) -- (415)
Proceeds from stock offering -- 22,509
Proceeds from exercise of stock options and stock plans 377 392
--- ---
Net cash provided by financing activities 377 21,718
--- ------
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS 647 198
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,643 17,912
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,385 8,221
------ -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD (5) $ 15,028 $ 26,133
---------- ---------
---------- ---------
</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)
(UNAUDITED)
(THOUSANDS OF DOLLARS)
Cash payments for interest were not significant for the six months ended
November 30, 1995 and 1994. Cash payments for income taxes were $4,861 and
$1,596 for the six months ended November 30, 1995 and 1994, respectively.
Notes:
(1) See Note 6 in Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C> <C>
(2) Acquisition of XRL subsidiary:
Assets less liabilities acquired, net of cash $ (5,073)
Issuance of common stock 5,175
-----
Cash acquired $ 102
-----------
(3) Acquisition of Chicago Laser subsidiary:
Assets less liabilities acquired, net of cash $ (2,646)
Issuance of common stock 1,939
-----
Net cash used to acquire Chicago Laser subsidiary $ (707)
-----------
</TABLE>
(4) Activity for the six months ended November 30, 1994 includes debt
acquired in August 1994, related to the Chicago Laser acquisition
which was subsequently paid off in August 1994.
(5) Cash and cash equivalents at November 30, 1994 includes the proceeds
from the stock offering of $22.5 million. Subsequent to November 30,
1994, the Company invested these funds in marketable securities which
are classified as securities available for sale in the accompanying
Consolidated Balance Sheets.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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Page 8 of 12
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
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 1995 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 $504 at
November 30, 1995 and $299 at May 31, 1995.
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
NOV. 30, 1995 MAY 31, 1995*
------------- -------------
<S> <C> <C>
Raw materials and purchased parts $16,860 $15,566
Work-in-process 6,912 7,225
Finished goods 5,719 2,687
----- -----
$29,491 $25,478
------- -------
</TABLE>
NOTE 4 - NET INCOME PER SHARE
Net income per share are computed using the weighted average number of common
shares and common stock equivalents (stock options) outstanding.
NOTE 5 - OTHER LONG-TERM LIABILITIES
Other long-term liabilities represent a termination reserve for the employees of
the Company's Japanese subsidiary as mandated by Japanese law.
* Audited
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Page 9 of 12
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
NOTE 6 - 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 purchase
consideration consisted of 206,867 shares of ESI stock. The shares are
restricted, subject to registration rights in December 1995 and March 1996. The
transaction was accounted for as a purchase.
The Company is still obtaining certain data related to the acquisition and,
accordingly, the purchase price allocation remains open. The Company recorded
the acquisition at the estimated fair value of the assets acquired and
liabilities assumed. 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. The development of these projects had not
reached technological feasibility and the technology has 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 first quarter ended August 31, 1995 and is reflected in the
accompanying Consolidated Statements of Income.
Pro-forma combined income statement data for the six months ended November 30,
1995 and 1994 was not materially different from results presented in the
accompanying Consolidated Statements of Income.
NOTE 7- ACQUISITION OF CHICAGO LASER SYSTEMS, INC.
On August 12, 1994, the Company acquired the stock of Chicago Laser
Systems, Inc. ("Chicago Laser"), a privately held company based in Des Plaines,
Illinois. The purchase consideration consisted of approximately $1,280 in cash
and 333,000 shares of ESI stock. The shares are restricted, subject to
Securities and Exchange Commission Rule 144. The transaction was accounted for
as a purchase.
The Company recorded the acquisition at the estimated fair value of the assets
acquired and liabilities assumed. The following pro-forma combined income
statement data for the six months ended November 30, 1994 was prepared as if the
acquisition had occurred at the beginning of the period.
<TABLE>
<CAPTION>
PRO FORMA
COMBINED INCOME STATEMENTS DATA
SIX MONTHS ENDED
NOVEMBER 30, 1994
<S> <C>
Net Sales $48,870
Net Income $4,360
Net Income per share $0.61
</TABLE>
NOTE 8 - 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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Page 10 of 12
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
Results of Operations
Net sales increased 64.6% or $16.0 million for the three months ended November
30, 1995 and 67.7% or $31 million for the six months ended November 30, 1995
compared to the same periods of the prior year. These increases result from
strong unit sales of memory repair systems, laser trimming systems and miniature
capacitor test and production systems. XRL, Inc. acquired in July, 1995
contributed $7.5 million year-to-date toward the increase in memory repair
sales.
Gross margin for the three months ended November 30, 1995 increased to 54.2%
from 53.9% for the same period of the prior year as a result of reduced costs
associated with higher sales volumes of ESI's miniature capacitor test and
production systems and increased sales of higher margin laser trimming products.
Year-to-date gross margin increased from 52.8% for the six months ended November
30, 1994 to 53.8% as a result of cost savings associated with increased sales of
miniature capacitor test and production systems.
Selling, service and administrative expenses increased $3.7 million for the
three months ended November 30, 1995 and $7.0 million for the six months ended
November 30, 1995 over the comparable periods of the prior year as a result of
higher selling commissions associated with increased sales volumes and employee
success sharing accruals. As a percentage of sales, selling, service and
administrative expenses decreased to 25.4% from 26.7% for the second quarter of
fiscal 1996 compared to the same quarter of the prior year and to 25.0% from
26.6% for the six months ended November 30, 1995 compared to the same period of
the prior year.
Research, development and engineering expenses increased $1.1 million for the
current quarter and $2.8 million for the six months ended November 30, 1995
compared to the same periods of the prior year as a result of compensation
increases as well as additional engineering costs associated with XRL. As a
percentage of sales, research, development and engineering expenses declined to
10.1% for the current quarter from 12.2% for the same quarter of the prior year.
Year-to-date research, development and engineering expenses as a percentage of
sales declined slightly to 10.4% for the six months ended November 30, 1995 from
11.3% for the same period of the prior year.
For the six months ended November 30, 1995, the acquired in-process research and
development expense of $6.0 million occurred in connection with the purchase
price allocation of XRL, Inc. The Company obtained an appraisal of the
intangible assets which indicated that substantially all of the acquired
intangible assets consisted of research and development in process. In
accordance with generally accepted accounting principles, the acquired in-
process research and development was expensed during the first quarter ended
August 31, 1995.
Interest income (expense) for the current quarter and year-to date increased $
0.3 million and $0.6 million, respectively, over the same periods of the prior
year as a result of investing the November 1994 stock offering funds in
marketable securities; there were no such investments during the first two
quarters of the prior year.
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Page 11 of 12
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (CONT.)
The effective tax rate of 37% for the three month and six month periods ended
November 30, 1995 increased from approximately 30% for the three month and six
month periods ended November 30, 1994 as a result of the utilization of
certain deferred tax assets in fiscal 1994 which had previously been reserved.
Net income for the quarter ended November 30, 1995 was $4.9 million or $0.57 per
share compared to $2.6 million or $0.36 per share for the same period of the
prior year. Net income for the six months ended November 30, 1995, after the
effect of the acquired in-process research and development charge of $6.0
million, was $5.4 million or $0.63 per share compared to $4.8 million or $0.69
per share for the six months ended November 30, 1994. Net income for the six
months ended November 30, 1995, excluding the acquired in-process research and
development charge, was $9.2 million or $1.08 per share.
Incoming orders were $45 million and ending backlog on November 30, 1995 was $43
million which represents a 65% increase from May 31, 1995.
Liquidity, Capital Resources and Business Environment
The Company's principal sources of liquidity are operating earnings, existing
cash and cash equivalents and marketable debt securities of $32.0 million,
accounts receivable of $35.5 million, and a $7.0 million line of credit, none of
which was outstanding at November 30, 1995. ESI has no debt and a current ratio
of 6.1:1. Working capital increased to $87.2 million at November 30, 1995, from
$76.1 million at May 31, 1995, as a result of the increased level of sales.
The Company's business depends in large part upon the capital expenditures of
manufacturers of electronic devices, including miniature capacitors and DRAMs,
and circuits used in wireless telecommunications equipment. 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.
There is no assurance that these markets will not experience downturns in the
future or that such downturns would not have a material adverse effect on the
Company's operating results.
ESI's business success depends on: accurate identification of viable markets;
timely development of technologically superior products; and providing excellent
service to a small number of customers located throughout the world. Several
large, multinational companies represent a substantial portion of the Company's
sales and the loss of any one of these customers would be significant.
The cost of product development requires the Company to make large investments
in relation to its ability to recover from unforeseen market shifts. A
significant portion of future revenues are expected from new products. However,
a number of uncertainties exist, including ESI's product performance and
pricing, compared to competitors, and uncertain worldwide conditions.
Therefore, the Company can not predict the ultimate effect new products will
have on sales or net income. The combination of these factors can result in
large swings in working capital and results of operations from year to year.
<PAGE>
Page 12 of 12
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
SIGNATURE
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.
ELECTRO SCIENTIFIC INDUSTRIES, INC.
Dated: January 12, 1996 By /s/ Barry L. Harmon
-----------------------------------
Barry L. Harmon, Vice President,
Finance and Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> NOV-30-1995
<CASH> 15028
<SECURITIES> 16981
<RECEIVABLES> 36008
<ALLOWANCES> 504
<INVENTORY> 29491
<CURRENT-ASSETS> 101940
<PP&E> 38558
<DEPRECIATION> 21998
<TOTAL-ASSETS> 123888
<CURRENT-LIABILITIES> 16688
<BONDS> 0
55314
0
<COMMON> 0
<OTHER-SE> 50808
<TOTAL-LIABILITY-AND-EQUITY> 123888
<SALES> 76811
<TOTAL-REVENUES> 76811
<CGS> 35490
<TOTAL-COSTS> 35490
<OTHER-EXPENSES> 33189
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8574
<INCOME-TAX> 3153
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5421
<EPS-PRIMARY> .63
<EPS-DILUTED> .63
</TABLE>
