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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 February 29, 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 February 29, 1996 there were 8,636,672 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
Consolidated Balance Sheets 3-4
February 29, 1996 and May 31, 1995
Consolidated Statements of Income 5
Three Months and Nine Months ended
February 29, 1996 and February 28, 1995
Consolidated Statements of Cash Flows 6-7
Nine Months ended February 29, 1996 and February 28, 1995
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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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
<TABLE>
<CAPTION>
ASSETS February 29, 1996 * May 31, 1995
- ------ -------------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,288 $ 11,643
Securities available for sale 20,063 17,011
Trade receivables, net 40,190 33,331
Inventories 29,894 24,882
Deferred income taxes 3,136 2,946
Other current assets 1,272 760
-------- --------
Total current assets 106,843 90,573
-------- --------
PROPERTY AND EQUIPMENT, AT COST 38,729 36,003
Less - accumulated depreciation (22,582) (20,387)
-------- --------
Net property and equipment 16,147 15,616
-------- --------
OTHER ASSETS:
Deferred income taxes 1,979 --
Other assets 5,028 4,409
-------- --------
$129,997 $110,598
-------- --------
-------- --------
</TABLE>
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, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
LIABILITIES AND
- ---------------
SHAREHOLDERS' EQUITY February 29, 1996 * May 31, 1995
- -------------------- -------------------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 7,286 $ 7,002
Accrued liabilities:
Payroll related 2,443 2,324
Commissions 2,352 1,706
Income taxes 928 1,258
Other 4,104 1,758
-------- --------
Total accrued liabilities 9,827 7,046
Deferred revenue 519 1,032
-------- --------
Total current liabilities 17,632 15,080
OTHER LONG-TERM LIABILITIES 1,107 1,074
-------- --------
Total liabilities 18,739 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: 8,636,672, and
8,374,546 respectively 55,516 49,762
Retained earnings 55,742 44,682
-------- --------
Total shareholders' equity 111,258 94,444
-------- --------
$129,997 $110,598
-------- --------
-------- --------
</TABLE>
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
(UNAUDITED)
(THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Feb. 29, 1996 Feb. 28, 1995 Feb. 29, 1996 Feb. 28, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales $ 41,626 $ 29,398 $ 118,437 $ 75,207
Cost of sales 19,034 13,792 54,524 35,412
--------- --------- -------- ---------
Gross margin 22,592 15,606 63,913 39,795
Operating expenses:
Selling, service and administrative 10,535 7,557 29,705 19,726
Research, development and engineering 3,886 3,588 11,905 8,773
Acquired in-process research and
development * -- -- 6,000 --
--------- --------- -------- ---------
Total operating expenses 14,421 11,145 47,610 28,499
--------- --------- -------- ---------
Operating income 8,171 4,461 16,303 11,296
Interest income (expense) 293 334 879 350
Other income (expense) (147) (259) (291) (290)
--------- --------- -------- ---------
Income before income taxes 8,317 4,536 16,891 11,356
Provision for income taxes 3,073 1,360 6,226 3,397
--------- --------- -------- ---------
Net income $ 5,244 $ 3,176 $ 10,665 $ 7,959
--------- --------- -------- ---------
--------- --------- -------- ---------
Net income per share $ 0.61 $ 0.39 $ 1.24 $ 1.10
--------- --------- -------- ---------
--------- --------- -------- ---------
Weighted average number of shares used in
computing per share amounts 8,628 8,205 8,593 7,238
</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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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Nine Months Ended
Feb. 29,1996 Feb. 28,1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,665 $ 7,959
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 2,100 1,807
Deferred income taxes (2,001) (1,608)
Deferred revenue (513) --
Stock compensation agreement -- 58
Changes in operating accounts:
(Increase) in trade receivables (5,304) (11,195)
(Increase) in inventory (2,957) (2,205)
(Increase) decrease in other current assets (437) 219
(Decrease) increase in accounts payable,
accrued liabilities and other long-term
liabilities (1,444) 1,829
(Decrease) increase in income taxes (330) 1,804
-------- --------
Net cash provided by (used in) operating
activities 5,779 (1,332)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of XRL subsidiary, net of cash(2) (492) --
Purchase of Chicago Laser subsidiary, net
of cash (3) -- (707)
Purchases of property and equipment (2,352) (2,432)
Purchases of securities (24,900) --
Proceeds from sales of securities and
maturing securities 21,850 --
(Increase) in other assets (474) (217)
-------- --------
Net cash used in investing activities (6,368) (3,356)
-------- --------
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 972 811
-------- --------
Net cash provided by financing activities 972 22,137
-------- --------
EFFECT OF EXCHANGE RATE ON CASH AND CASH
EQUIVALENTS 262 (525)
NET CHANGE IN CASH AND CASH EQUIVALENTS 645 16,924
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 11,643 8,221
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD (5) $12,288 $25,145
-------- --------
-------- --------
</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 nine months ended
February 29, 1996 and 1995. Cash payments for income taxes were $7,681 and
$2,819 for the nine months ended February 29, 1996 and 1995, respectively.
Notes:
(1) See Note 6 in Notes to Consolidated Financial Statements
(2) Acquisition of XRL subsidiary:
Assets less liabilities acquired, net of cash $(5,073)
Issuance of common stock 4,581
-------
Net cash used to acquire XRL subsidiary $ (492)
-------
-------
(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)
-------
-------
(4) Activity for the nine months ended February 28, 1995 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 February 28, 1995 includes the proceeds from
the stock offering of $22.5 million. Subsequent to February 28, 1995,
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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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.
Certain reclassifications have been made in the accompanying consolidated
financial statements for fiscal 1995 to conform with fiscal 1996 presentation.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of $504 at
February 29, 1996 and $299 at May 31, 1995.
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
Feb. 29, 1996 May 31, 1995*
------------- -------------
<S> <C> <C>
Raw materials and purchased parts $20,316 $15,566
Work-in-process 6,765 7,225
Finished goods 2,813 2,091
------- -------
$29,894 $24,882
------- -------
------- -------
</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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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 preliminary purchase
consideration consisted of 206,867 shares of ESI stock. These shares were
subsequently reduced by 23,227 shares due to an adjustment provided for by the
agreement. The shares are restricted, subject to registration rights in 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 nine months ended February 29,
1996 and 1995 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 nine months ended February 28, 1995 was prepared as if
the acquisition had occurred at the beginning of the period.
<TABLE>
<CAPTION>
Pro Forma
---------
Combined Income Statements Data
-------------------------------
Nine months ended
-----------------
February 28, 1995
-----------------
<S> <C>
Net Sales $78,268
Net Income $7,536
Net Income per share $1.04
</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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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
Results of Operations
Net sales increased 41.6% or $12.2 million for the three months ended February
29, 1996 and 57.5% or $43.2 million for the nine months ended February 29, 1996
compared to the same periods of the prior year. These increases result from
strong unit sales of semiconductor yield improvement systems, laser trimming
systems and capacitor manufacturing equipment. XRL, Inc. acquired in July, 1995
contributed $13.0 million year-to-date toward the increase in semiconductor
yield improvement sales, which represents a significant increase over XRL
historical sales levels.
Gross margin for the three months ended February 29, 1996 increased to 54.3%
from 53.1% for the same period of the prior year as a result of increased sales
of higher margin semiconductor yield improvement systems, laser trimming systems
and equipment used in the production of miniature capacitors. Year-to-date gross
margin increased from 52.9% for the nine months ended February 28, 1995 to 54.0%
as a result of increased volume of semiconductor yield improvement equipment
sold, increased sales of higher margin laser trimming systems, and cost savings
associated with increased sales of capacitor manufacturing equipment.
Selling, service and administrative expenses increased $3.0 million for the
three months ended February 29, 1996 and $10.0 million for the nine months ended
February 29, 1996 over the comparable periods of the prior year as a result of
higher selling commissions associated with increased sales volumes and employee
profit sharing accruals. As a percentage of sales, selling, service and
administrative expenses decreased to 25.3% from 25.7% for the third quarter of
fiscal 1996 compared to the same quarter of the prior year and to 25.1% from
26.2% for the nine months ended February 29, 1996 compared to the same period of
the prior year.
Research, development and engineering expenses increased $0.3 million for the
current quarter and $3.1 million for the nine months ended February 29, 1996
compared to the same periods of the prior year as a result of project material
increases, compensation increases and additional engineering costs associated
with XRL. As a percentage of sales, research, development and engineering
expenses declined to 9.3% 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 to 10.1% for the nine months ended
February 29, 1996 from 11.7% for the same period of the prior year. The
decreases are a reflection of the change in sales year over year rather than a
decline in research and development efforts.
For the nine months ended February 29, 1996, 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.
Year-to-date interest income (expense) increased $ 0.5 million over the same
period 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.
The effective tax rate of 37% for the three month and nine month periods ended
February 29, 1996 increased from 30% for the three month and nine month periods
ended February 28, 1995 as a result of utilization of certain deferred tax
assets in fiscal 1994 which had previously been reserved.
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Net income for the quarter ended February 29, 1996 was $5.2 million or $0.61 per
share compared to $3.2 million or $0.39 per share for the same period of the
prior year. Net income for the nine months ended February 29, 1996, after the
effect of the acquired in-process research and development charge of $6.0
million, was $10.7 million or $1.24 per share compared to $7.9 million or $1.10
per share for the nine months ended February 28, 1995. Net income for the nine
months ended February 29, 1996, excluding the acquired in-process research and
development charge, was $14.4 million or $1.68 per share.
Incoming orders were $31 million and ending backlog on February 29, 1996 was $32
million which represents a 23% 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 $32.4 million,
accounts receivable of $40.2 million, and a $7.0 million line of credit, none of
which was outstanding at February 29, 1996. ESI has no debt and a current ratio
of 6.1:1. Working capital increased to $89.2 million at February 29, 1996, from
$75.5 million at May 31, 1995, as a result of the increased level of sales and
resulting operating income. In addition to the increased level of sales,
accounts receivable of $40.2 million at February 29, 1996 reflects an increase
in shipments near quarter end compared to prior fiscal year end, and delays in
receiving a critical component for the Company's semiconductor yield improvement
products.
Inventory increases of $5.0 million over May 31, 1995 is the result of increased
sales associated with the Company's laser business. Other accrued liabilities
increased over the prior fiscal year end primarily due to employee profit
sharing accruals.
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 and automotive 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.
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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: April 4, 1996 By /s/ Barry L. Harmon
-------------------------------------
Barry L. Harmon, Senior Vice President,
Finance and Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 12288
<SECURITIES> 20063
<RECEIVABLES> 40694
<ALLOWANCES> 504
<INVENTORY> 29894
<CURRENT-ASSETS> 106843
<PP&E> 38729
<DEPRECIATION> 22582
<TOTAL-ASSETS> 129997
<CURRENT-LIABILITIES> 17632
<BONDS> 0
0
0
<COMMON> 55516
<OTHER-SE> 55742
<TOTAL-LIABILITY-AND-EQUITY> 129997
<SALES> 118437
<TOTAL-REVENUES> 118437
<CGS> 54524
<TOTAL-COSTS> 54524
<OTHER-EXPENSES> 47610
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16891
<INCOME-TAX> 6226
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10665
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.24
</TABLE>
