<PAGE>
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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, 1997 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, 1997 THERE WERE 9,922,624 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, 1997 and May 31, 1997
Consolidated Statements of Income 5
Three Months ended
August 31, 1997 and August 31, 1996
Consolidated Statements of Cash Flows 6-7
Three Months ended
August 31, 1997 and August 31, 1996
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial 11-13
Condition and Results of Operations
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 14
Signature 15
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
ASSETS August 31, 1997* May 31, 1997
---------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 14,242 $ 17,801
Securities available for sale 30,332 27,860
Trade receivables, net 49,910 50,869
Inventories 38,948 32,851
Deferred income taxes 2,366 2,366
Other current assets 1,530 580
-------- --------
Total current assets 137,328 132,327
-------- --------
PROPERTY AND EQUIPMENT, AT COST 43,467 40,963
Less - Accumulated depreciation (25,347) (24,559)
-------- --------
Net property and equipment 18,120 16,404
-------- --------
DEFERRED INCOME TAXES 4,042 1,042
OTHER ASSETS 9,807 5,040
-------- --------
$169,297 $154,813
-------- --------
-------- --------
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, 1997* May 31, 1997
---------------- ------------
CURRENT LIABILITIES:
Accounts payable $ 7,516 $ 6,494
Accrued liabilities:
Payroll related 4,338 4,126
Commissions 2,326 2,189
Income taxes 3,163 811
Other 2,424 2,001
-------- --------
Total accrued liabilities 12,251 9,127
Deferred revenue -- 78
-------- --------
Total current liabilities 19,767 15,699
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, without par value; 1,000
shares authorized, no shares issued -- --
Common stock, without par value; Authorized:
40,000 shares; Outstanding:
9,922, and 9,468 respectively 72,093 57,736
Retained earnings 77,437 81,378
-------- --------
Total shareholders' equity 149,530 139,114
-------- --------
$169,297 $154,813
-------- --------
-------- --------
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, 1997 August 31, 1996
------------------- -------------------
Net sales $48,356 $36,199
Cost of sales 21,291 15,509
------- -------
Gross margin 27,065 20,690
Operating expenses:
Selling, service and administrative 12,249 9,242
Research, development and engineering 5,034 4,326
Acquired in-process research and
development and merger related
expenses 11,124 --
------- -------
Total operating expenses 28,407 13,568
------- -------
Operating income (loss) (1,342) 7,122
Interest income 453 392
Other income (expense), net 57 (276)
------- -------
Income (loss) before income taxes (832) 7,238
Provision for income taxes 3,029 2,635
------- -------
Net income (loss) $(3,861) $ 4,603
------- -------
------- -------
Net income (loss) per share $ (0.39) $ 0.49
------- -------
------- -------
Weighted average number of shares
used in computing per share amounts 9,842 9,355
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
(Thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
August 31, 1997* August 31, 1996*
---------------- ----------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(3,861) $ 4,603
Adjustments to reconcile net income
to cash used in operating activities:
Acquired in-process research and
development and merger-related expenses (1) 11,124 --
Depreciation and amortization 1,186 1,034
Changes in operating accounts:
Decrease (increase) in trade receivables 3,317 (2,276)
Increase in inventories (1,268) (3,102)
Increase in other current assets (909) (208)
Decrease in accounts payable and accrued liabilities (4,040) (813)
------- -------
Net cash provided by (used in) operating activities: 5,549 (762)
------- -------
Cash Flows From Investing Activities:
Purchases of property and equipment (1,919) (683)
Purchase of securities (9,972) (7,563)
Proceeds from sales of securities and maturing securities 7,500 8,800
(Increase) decrease in other assets (145) 41
------- -------
Net cash (provided by) used in investing activities: (4,536) 595
------- -------
Cash Flows From Financing Activities:
Repayment of Dynamotion subsidiary debt (2) (6,979) --
Proceeds from exercise of stock options and stock plans 2,407 129
------- -------
Net cash, provided by (used in) financing activities: (4,572) 129
------- -------
Net Change In Cash And Cash Equivalents (3,559) (38)
Cash and Cash Equivalents at Beginning of Period 17,801 19,600
------- -------
Cash and Cash Equivalents at End of Period $14,242 $19,562
------- -------
------- -------
</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 CASH FLOWS (continued)
(Thousands of dollars)
(Unaudited)
Cash payments for interest were not significant for the three months ended
August 31, 1997 and August 31, 1996. Cash payments for income taxes were $518
and $1,896 for the three months ended August 31, 1997 and August 31, 1996,
respectively.
Notes:
(1) See Note 5 in Notes to Consolidated Financial Statements.
(2) Acquisition of Dynamotion subsidiary:
Assets less liabilities acquired, net of cash $(11,950)
Issuance of common stock and common stock options 11,950
--------
Net cash used to acquire Dynamotion: $ 0
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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 1997 Annual Report filed on Form 10-K and Form 8-KA filed in
conjunction with the Chip Star pooling.
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 $412 at
August 31, 1997 and $230 at May 31, 1997.*
NOTE 3 - INVENTORIES
Inventories consist of the following:
August 31, 1997 May 31, 1997*
--------------- -------------
Raw materials and purchased parts $23,064 $21,772
Work-in-process 10,229 6,757
Finished goods 5,655 4,322
------- -------
$38,948 $32,851
------- -------
------- -------
*Audited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands)
(Unaudited)
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.
In March 1997, the financial Accounting Standards Board issued Statement 128 ,
Earnings Per Share ("SFAS 128"), superseding APB Opinion 15. SFAS 128 is
required to be adopted for periods ending after December 15, 1997. When
adopted, all prior earnings per share (EPS) calculations will be restated to
conform to SFAS 128. The pro forma effects of applying SFAS 128 to EPS are as
follows:
Quarter Ended August 31,
------------------------
1997 1996
------- ------
Primary ESP as reported: $ (0.39) $ 0.49
Effect of SFAS 128 0.00 0.00
------- ------
Basic EPS as restated $ (0.39) $ 0.49
Fully diluted EPS as reported: $ (0.39) $ 0.49
Effect of SFAS 128 0.00 (0.01)
------- ------
Diluted EPS as restated $ (0.39) $ 0.48
NOTE 5 - ACQUISITION OF DYNAMOTION, INC.
On June 9, 1997, the Company acquired all of the outstanding stock of
Dynamotion Corp., a producer of high performance mechanical drilling and routing
systems based in Santa Ana, California. The preliminary purchase consideration
consisted of 347,000 shares of ESI stock. The transaction was accounted for as
a purchase.
The Company is still obtaining data about certain contingent assets and
liabilities related to the acquisition and, accordingly, the purchase price
allocation remains open. 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
was charged to expense during the quarter ended August 31, 1997 and is reflected
in the accompanying Consolidated Statements of Income.
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The following pro-forma combined income statement data for the three months
ended August 31, 1996 was prepared as if the acquisition had occurred at the
beginning of the period.
Pro-forma Combined
Statement of Income
-------------------
(Unaudited)
Three Months Ended August 31, 1996
----------------------------------
Net sales $39,530
Net income $ 3,385
Net income per share $ 0.35
NOTE 6 - ACQUISITION OF CHIP STAR, INC.
On June 26, 1997, the Company completed the acquisition of Chip Star Inc., a
provider of ceramic capacitor termination systems located in San Marcos,
California through the issuance of 700,000 shares of ESI stock.
The transaction has been accounted for as a pooling of interests and,
accordingly, all data included in the Consolidated Financial Statements have
been restated to reflect the Chip Star acquisition.
Disclosure of ESI and Chip Star's revenue and net income, on an individual
basis from June 1 to June 25, 1997 is not deemed to be significant.
A reconciliation of amounts previously reported to amounts included in the
financial statements is as follows:
Three Months Ended August 31, 1996
------------------------------------
As Previously
Reported Chip Star Combined
------------- --------- --------
Revenue $ 34,856 $ 1,343 $ 36,199
Net income $ 4,379 $ 224 $ 4,603
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 $48.4 million for the quarter ended August 31, 1997 was 33.7% or
$12.2 million higher as compared to the same quarter of the prior year, and was
4.7% or $2.2 million higher than that in the prior quarter. The increase in
revenues was due to higher demand for semiconductor yield improvement and
electronic packaging equipment, coupled with an improved market for capacitor
test and termination equipment.
Gross margin for the three months ended August 31, 1997 decreased to 56.0% from
57.2% for the same period of the prior year. Increased margins for
semiconductor yield improvement and capacitor test and termination equipment
were more than offset by a decline in margin for circuit fine tuning products
and lower margin Dynamotion products.
Selling, service and administrative expenses were $3.0 million higher for the
three months ended August 31, 1997 than for the first quarter of the prior year.
The increase is due to higher selling commissions associated with increased
sales volumes and higher incentive compensation accruals. Selling service and
administrative expenses, as a percentage of sales, decreased to 25.3% from
25.5%.
Research, development and engineering expenses for the quarter ended August 31,
1997 increased by $0.7 million as compared to the same quarter of the prior
year. Research, development and engineering expenses, as a percentage of sales,
decreased to 10.4% from 12.0% for the first quarter of fiscal 1997. The
comparison between current year and prior year does not include the acquired
in-process research and development charge incurred in connection with the
purchase price allocation of Dynamotion, Corp.
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 was charged to expense during the quarter ended
August 31, 1997. The Company currently believes that the research and
development efforts will result in commercially feasible products in the next
24 months at an estimated additional cost of $2,000.
Net income for the quarter ended August 31, 1997, excluding $11.1 million in
transaction costs associated with the acquisitions of Dynamotion, Corp. and Chip
Star, Inc, was $6.7 million or $0.68 per share compared to $4.6 million or $0.49
per share for the same period of the prior year. Including acquired in-process
research and development and merger related expenses, a net loss of $(3.9)
million or $(0.39) per share was recorded.
Ending backlog on August 1, 1997 was $30 million, compared to $25 million on May
31, 1997. Customer demand in each of ESI's served markets is strong and the
products introduced over the last year continue to represent a growing
percentage of sales.
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (CONT.)
Liquidity, Capital Resources and Business Environment
The Company's principal sources of liquidity are existing cash and cash
equivalents and marketable debt securities of $44.6 million, accounts receivable
of $49.9 million, and a $7.0 million line of credit, none of which was
outstanding at August 31, 1997. ESI has no debt and a current ratio of 7.0:1.
Working capital increased to $117.6 million at August 31, 1997, from $116.6
million at May 31, 1997. Inventory increased by $6.1 million from the May 31,
1997 level due to inventories acquired in the purchase of Dynamotion, Corp.
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, such as 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
47.1% of the Company's fiscal 1997 sales and are expected to comprise a similar
ratio in fiscal 1998. 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, to introduce them successfully into the
market and to create and sustain intellectual property protection for these new
products. 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 may cause customers to defer or forego ordering
products from the Company's existing product lines.
International shipments accounted for 55% of first quarter sales for fiscal 1998
compared to 70% for the first quarter of fiscal 1997. The Company expects that
international shipments 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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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (CONT.)
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 8.5% 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.
Information in the Management Discussion and Analysis regarding expectations for
future product demand, customers, international shipments and future product
offerings and resources constitute forward-looking statements that involve a
number of risks and uncertainties. In addition, the Company may from time to
time issue other forward-looking statements. The following factors are among
the factors that could cause actual results to differ materially from the
forward-looking statements: general economic conditions, including their impact
on capital expenditures; business conditions in the electronics industry,
including the cyclical nature of the market for the Company's products; rapidly
changing technology and evolving industry standards; availability and continued
validity of intellectual property protection; competitive factors, including
increased competition, new product offerings by competitors and price pressures;
availability of supplies from third party suppliers on a timely basis and at
reasonable prices; and international business conditions, including fluctuations
in interest and currency exchange rates, government financed competition,
changes in trade policies, tariff regulations, and the difficulties of staffing
and managing foreign operations. The forward-looking statements should be
considered in light of these factors.
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Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The 1997 Annual Meeting of Shareholders was held on Friday, September 19, 1997.
The following items were approved by the vote indicated:
1. David F. Bolender and Keith L. Thomson were re-elected to the Board of
Directors for a three year term. Larry L. Hansen, Vernon B. Ryles, Jr., W.
Arthur Porter, Douglas C. Strain and Donald R. VanLuvanee continue as
Directors.
For 7,939,280
Against 0
Abstain 4,896
2. Selection of Arthur Andersen LLP as independent auditors for the Company
was approved.
For 7,933,365
Against 3,315
Abstain 7,496
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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.
ELECTRO SCIENTIFIC INDUSTRIES, INC.
Dated: September 26, 1997 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-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 14,242
<SECURITIES> 30,332
<RECEIVABLES> 50,322
<ALLOWANCES> 418
<INVENTORY> 38,948
<CURRENT-ASSETS> 137,328
<PP&E> 43,467
<DEPRECIATION> 25,347
<TOTAL-ASSETS> 169,297
<CURRENT-LIABILITIES> 19,767
<BONDS> 0
0
0
<COMMON> 72,093
<OTHER-SE> 77,437
<TOTAL-LIABILITY-AND-EQUITY> 169,297
<SALES> 48,356
<TOTAL-REVENUES> 48,356
<CGS> 21,291
<TOTAL-COSTS> 21,291
<OTHER-EXPENSES> 28,407
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (832)
<INCOME-TAX> 3,029
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,861)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> (.39)
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