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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 NOVEMBER 30, 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 NOVEMBER 30, 1996 THERE WERE 8,671,333 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
November 30, 1996 and May 31, 1996
Consolidated Statements of Income 5
Three Months and Six Months ended
November 30, 1996 and November 30, 1995
Consolidated Statements of Cash Flows 6-7
Six Months ended November 30, 1996 and
November 30, 1995
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of Financial 10-12
Condition and Results of Operations
Signature 13
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS November 30, 1996* May 31, 1996
- ------ ------------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 9,911 $ 18,622
Securities available for sale 22,735 18,363
Trade receivables, net 46,359 39,792
Inventories 34,549 30,167
Deferred income taxes 3,884 3,884
Other current assets 1,251 819
-------- --------
Total current assets 118,689 111,647
-------- --------
PROPERTY AND EQUIPMENT, AT COST 40,254 38,853
Less - accumulated depreciation (23,470) (22,191)
-------- --------
Net property and equipment 16,784 16,662
-------- --------
OTHER ASSETS: 3,842 4,216
-------- --------
$139,315 $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 November 30, 1996* May 31, 1996
- -------------------- ------------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 5,273 $ 5,142
Accrued liabilities:
Payroll related 3,200 3,433
Commissions 1,913 1,890
Income taxes 2,105 2,463
Other 2,802 4,681
-------- --------
Total accrued liabilities 10,020 12,467
-------- --------
Total current liabilities 15,293 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: 8,671,333 and
8,655,408, respectively 56,017 55,790
Retained earnings 68,005 59,126
-------- --------
Total shareholders' equity 124,022 114,916
-------- --------
$139,315 $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
(UNAUDITED)
(THOUSANDS EXCEPT PER SHARE)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
Nov. 30, 1996 Nov. 30, 1995 Nov. 30, 1996 Nov. 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales $ 35,101 $ 40,836 $ 69,957 $ 76,811
Cost of sales 15,706 18,723 30,750 35,490
--------- --------- --------- ---------
Gross margin 19,395 22,113 39,207 41,321
Operating expenses:
Selling, service and administrative 8,668 10,368 17,538 19,170
Research, development and engineering 4,082 4,112 8,283 8,019
Acquired in-process research and
development * -- -- -- 6,000
--------- --------- --------- ---------
Total operating expenses 12,750 14,480 25,821 33,189
--------- --------- --------- ---------
Operating income 6,645 7,633 13,386 8,132
Interest income 337 313 715 586
Other income (expense) 33 (229) (243) (144)
--------- --------- --------- ---------
Income before income taxes 7,015 7,717 13,858 8,574
Provision for income taxes 2,428 2,836 4,892 3,153
--------- --------- --------- ---------
Net income $ 4,587 $ 4,881 $ 8,966 $ 5,421
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share $ 0.53 $ 0.57 $ 1.04 $ 0.63
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of shares used
in computing per share amounts 8,669 8,629 8,662 8,575
</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>
Six Months Ended
Nov. 30, 1996 NOV. 30, 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,966 $ 5,421
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 1,569 1,264
Effect of exchange rates on operating accounts (68) 647
Deferred income taxes -- (1,984)
Changes in operating accounts:
(Increase) in trade receivables (6,567) (704)
(Increase) in inventories (3,513) (2,235)
(Increase) in other current assets (432) (725)
(Decrease) in accounts payable and accrued liabilities (2,316) (3,268)
-------- -------
Net cash (used in) provided by operating activities (2,361) 4,416
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of XRL subsidiary, net of cash(2) -- 102
Purchases of property and equipment (1,566) (1,741)
Purchases of securities (25,191) (16,879)
Proceeds from sales of securities and maturing securities 20,800 16,930
(Increase) decrease in other assets (620) 438
-------- -------
Net cash used in investing activities (6,577) (1,150)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options and stock plans 227 377
-------- -------
Net cash provided by financing activities 227 377
-------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (8,711) 3,643
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,622 11,385
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,911 $15,028
-------- -------
-------- -------
</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, 1996 and 1995. Cash payments for income taxes were $5,511 and
$4,861 for the six months ended November 30, 1996 and 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 $ (5,073)
Issuance of common stock 5,175
------
Cash acquired $ 102
-----------
-----------
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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 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 $318 at
November 30, 1996 and $314 at May 31, 1996.
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
Nov. 30, 1996 May 31, 1996*
------------- -------------
<S> <C> <C>
Raw materials and purchased parts $22,727 $21,000
Work-in-process 7,590 6,188
Finished goods 4,232 2,979
------- -------
$34,549 $30,167
------- -------
------- -------
</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.
* Audited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
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 $35.1 million for the quarter ended November 30, 1996, was 14.0% or
$5.7 million lower as compared to the same quarter of the prior year. The second
quarter results reflect a continuation of the uncertainty experienced in recent
quarters in some of ESI's markets. Second quarter fiscal 1997 revenue was
slightly higher than that in the prior quarter. Demand remains strong for
equipment in the semiconductor yield improvement market and in ESI's emerging
machine vision and electronic packaging businesses. Shipments of laser trimming
systems and capacitor production equipment were substantially lower during the
second quarter of fiscal 1997 than in the same period last year. Capacity added
by customers in early fiscal 1996, particularly in the capacitor business, is
still being absorbed by market demand during the second quarter of fiscal 1997.
Year-to-date revenue of $70.0 million was 8.9% or $6.8 million lower than for
the first six months of fiscal 1996.
Gross margin for the three months ended November 30, 1996 increased to 55.3%
from 54.2% for the same period of the prior year, and increased to 56.0%
year-to-date fiscal 1997 from 53.8% for the first six months of fiscal 1996. The
improvement was a result of increased sales of higher margin semiconductor yield
improvement systems, electronic packaging equipment and machine vision systems,
more than offsetting the negative impact of a significant decline in the
capacitor business.
Selling, service and administrative expenses were $1.7 million lower for the
three months ended November 30, 1996 and $1.6 million lower for the six months
ended November 30, 1996 than for the comparable periods of the prior year. The
decrease is a result of lower selling commissions associated with decreased
sales volumes and incentive compensation accrued in the second quarter of fiscal
1996. As a percentage of sales, selling, service and administrative expenses
decreased to 24.7% from 25.4% for the second quarter of fiscal 1997 compared to
the same quarter of the prior year and were 25.1% of sales for the six months
ended November 30, 1996 as compared to 25.0% for the same period of the prior
year.
Research, development and engineering expenses for the quarter ended November
30, 1996 remained constant with the same quarter of the prior year and were up
$0.3 million for the six months ended November 30, 1996 compared to the same
periods of the prior year. As a percentage of sales, research, development and
engineering expenses increased to 11.6% for the current quarter from 10.1% for
the same quarter of the prior year. Year-to-date research, development and
engineering expenses as a percentage of sales increased to 11.8% for the six
months ended November 30, 1996 from 10.4% for the same period of the prior year.
The comparison between year-to-date spending of the current year and
year-to-date of the prior 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.
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (CONT.)
Net income for the quarter ended November 30, 1996 was $4.6 million or $0.53 per
share compared to $4.9 million or $0.57 per share for the same period of the
prior year. Net income for the six months ended November 30, 1996 was $9.0
million or $1.04 per share compared to $5.4 million or $0.63 per share after the
effect of the acquired in-process research and development charge of $6.0
million for the six months ended November 30, 1995. Net income for the six
months ended November 30, 1995, excluding the acquired in-process research and
development charge, was $9.2 million or $1.07 per share.
The second quarter results reflect the shorter decision cycle time in many of
ESI's markets. Incoming orders were $28 million and ending backlog on November
30, 1996 was $20 million which represents a 42% decrease from May 31, 1996.
Liquidity, Capital Resources and Business Environment
The Company's principal sources of liquidity are existing cash and cash
equivalents and marketable debt securities of $32.6 million, accounts receivable
of $46.4 million, and a $7.0 million line of credit, none of which was
outstanding at November 30, 1996. ESI has no debt and a current ratio of 7.8:1.
Working capital increased to $103.4 million at November 30, 1996, from $94.0
million at May 31, 1996. Accounts receivable increased because the payment
terms are longer for the recently introduced models 9300, 3300 and 5100 and
several large accounts were paid in December 1996. Inventory has increased
since the end of fiscal 1996 due to expected increases in demand for new product
offerings in the semiconductor yield improvement, capacitor and electronic
packaging businesses.
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, 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.
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (CONT.)
International sales accounted for 81.2% of second quarter sales and 75.8% of
year-to-date sales for fiscal 1997 compared to 74.8% of second quarter and 71.1%
of year-to-date sales for fiscal 1996. 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.
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 17.0% 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.
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, difficulties 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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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 14, 1997 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> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 9911
<SECURITIES> 22735
<RECEIVABLES> 46677
<ALLOWANCES> 318
<INVENTORY> 34549
<CURRENT-ASSETS> 118689
<PP&E> 40254
<DEPRECIATION> 23470
<TOTAL-ASSETS> 139315
<CURRENT-LIABILITIES> 15293
<BONDS> 0
0
0
<COMMON> 56017
<OTHER-SE> 68005
<TOTAL-LIABILITY-AND-EQUITY> 139315
<SALES> 69957
<TOTAL-REVENUES> 69957
<CGS> 30750
<TOTAL-COSTS> 30750
<OTHER-EXPENSES> 25821
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13858
<INCOME-TAX> 4892
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8966
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
</TABLE>
