<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 NOVEMBER 30, 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 NOVEMBER 30, 1997 THERE WERE 9,955,422 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
November 30, 1997 and May 31, 1997
Consolidated Statements of Income 5
Three Months and Six Months ended
November 30, 1997 and November 30, 1996
Consolidated Statements of Cash Flows 6-7
Six Months ended
November 30, 1997 and November 30, 1996
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial 12-14
Condition and Results of Operations
Signature 15
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
ASSETS November 30, 1997* May 31, 1997
- ------ ----------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 10,940 $ 17,801
Securities available for sale 29,231 27,860
------ ------
Total Cash and Securities 40,171 45,661
Trade receivables, net 52,457 50,869
Inventories 42,811 32,851
Deferred income taxes 2,366 2,366
Other current assets 1,868 580
----- -----
Total current assets 139,673 132,327
------- -------
PROPERTY AND EQUIPMENT, AT COST 48,158 40,963
Less - Accumulated depreciation (26,320) (24,559)
------- -------
Net property and equipment 21,838 16,404
------ ------
DEFERRED INCOME TAXES 4,042 1,042
OTHER ASSETS 8,953 5,040
----- -----
$ 174,506 $ 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)
LIABILITIES AND
- ---------------
SHAREHOLDERS' EQUITY November 30, 1997* May 31, 1997
- -------------------- ------------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 9,094 $ 6,494
Accrued liabilities:
Payroll related 4,008 4,126
Commissions 3,411 2,189
Warranty reserve 1,666 1,239
Income taxes (1,360) 811
Other 1,005 762
----- -----
Total accrued liabilities 8,730 9,127
Deferred revenue 1,013 78
----- --
Total current liabilities 18,837 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:
9,955, and 9,468 respectively 72,681 57,736
Retained earnings 82,988 81,378
------ ------
Total shareholders' equity 155,669 139,114
------- -------
$174,506 $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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
Nov. 30, 1997* Nov. 30, 1996* Nov. 30, 1997* Nov. 30, 1996*
----------------------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Sales $51,390 $37,415 $99,746 $ 73,614
Cost of sales 23,551 16,483 44,842 31,992
------ ------ ------ ------
Gross margin 27,839 20,932 54,904 41,622
Operating expenses:
Selling, service and administrative 13,547 9,259 25,796 18,501
Research, development and engineering 5,225 4,207 10,259 8,533
Acquired in-process research and
development and merger related expenses -- -- 11,124 --
------ ------ ------ ------
Total operating expenses 18,772 13,466 47,179 27,034
------ ------ ------ ------
Operating income 9,067 7,466 7,725 14,588
Interest income 363 350 816 742
Other income (expense) 267 33 324 (243)
------ ------ ------ ------
Income before income taxes 9,697 7,849 8,865 15,087
Provision for income taxes 3,527 2,756 6,556 5,391
------ ------ ------ ------
Net income $ 6,170 $ 5,093 $ 2,309 $ 9,696
------- ------- ------- -------
------- ------- ------- -------
Net income per share $ 0.62 $ 0.54 $ 0.23 $ 1.04
------- ------- ------- -------
------- ------- ------- -------
Weighted average number of shares used in
computing per share amounts 9,949 9,369 9,896 9,362
</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
(Thousands of dollars)
<TABLE>
<CAPTION>
Six Months Ended
November 30, November 30,
------------ ------------
1997* 1996*
------ ------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 2,309 $ 9,696
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 2,399 1,613
Changes in operating accounts:
Increase in trade receivables (97) (7,478)
Increase in inventories (4,976) (3,113)
Increase in other current assets (1,250) (432)
Decrease in accounts payable and accrued liabilities (5,418) (2,346)
Increase (decrease) in deferred revenue 935 (37)
--- ---
Net cash provided by (used in) operating activities: 5,026 (2,097)
----- ------
Cash Flows From Investing Activities:
Purchases of property and equipment (6,495) (1,571)
Purchase of securities (12,871) (25,191)
Proceeds from sales of securities and maturing securities 11,500 20,800
Increase in other assets (37) (622)
--- ----
Net cash used in investing activities: (7,903) (6,584)
------ ------
Cash Flows From Financing Activities:
Repayment of Dynamotion subsidiary debt (2) (6,979) --
Proceeds from exercise of stock options and stock plans 2,995 227
----- ---
Net cash, provided by (used in) financing activities: (3,984) 227
------ ---
Net Change In Cash And Cash Equivalents (6,861) (8,454)
Cash and Cash Equivalents at Beginning of Period 17,801 19,600
------ ------
Cash and Cash Equivalents at End of Period $ 10,940 $ 11,146
-------- --------
-------- --------
</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 six months ended
November 30, 1997 and November 30, 1996. Cash payments for income taxes were
$8,911 and $6,262 for the six months ended November 30, 1997 and November 30,
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 $414 at
November 30, 1997 and $230 at May 31, 1997*.
NOTE 3 - INVENTORIES
Inventories consist of the following:
November 30, 1997 May 31, 1997 *
----------------- --------------
Raw materials and purchased parts $24,775 $21,772
Work-in-process 11,954 6,757
Finished goods 6,081 4,322
------- -------
$42,811 $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:
Three Months Ended Six Months Ended
November 30 November 30
----------- ------------
1997 1996 1997 1996
---- ---- ---- ----
Primary EPS as reported: $ 0.62 $ 0.54 $ 0.23 $ 1.04
Effect of SFAS 128 0.00 0.00 0.00 0.00
---- ---- ---- ----
Basic EPS as restated $ 0.62 $ 0.54 $ 0.23 $ 1.04
Fully diluted EPS as reported: $ 0.62 $ 0.54 $ 0.23 $ 1.04
Effect of SFAS 128 (0.02) (0.01) (0.01) (0.03)
---- ---- ---- ----
Diluted EPS as restated $ 0.60 $ 0.53 $ 0.22 $ 1.01
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 estimated the fair value of the intangible assets indicating 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
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expense during the period ended November 30, 1997 and is reflected in the
accompanying Consolidated Statements of Income.
The following pro forma combined income statement data for the six months ended
November 30, 1996 was prepared as if the acquisition had occurred at the
beginning of the period. The pro forma affect of Dynamotion's revenue and net
income for the period from June 1 to June 9, 1997 is not deemed to be
significant.
Pro forma Combined
Statement of Income
-------------------
(Unaudited)
Six Months Ended November 30, 1996
----------------------------------
Net sales $ 80,880
Net income $ 5,826
Net income per share $ 0.60
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
company 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 Nov. 30, 1996 Six Months Ended Nov. 30, 1996
-------------------------------- ------------------------------
As Previously As Previously
Reported Chip Star Combined Reported Chip Star Combined
--------- --------- -------- -------- ---------- --------
Revenue $35,101 $2,314 $37,415 $69,957 $3,657 $73,614
Net Income $ 4,587 $ 506 $ 5,093 $ 8,966 $ 730 $ 9,696
NOTE 7 - INCOME TAXES
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The effective income tax rate for the interim period is based on estimates of
annual amounts of taxable income, tax credits and other factors.
SUBSEQUENT EVENT - ACQUISITION OF APPLIED INTELLIGENT SYSTEMS, INC. (AISI)
On December 1, 1997, the Company completed the acquisition of AISI, a provider
of machine vision solutions for the semiconductor and electronics industries,
located in Ann Arbor, Michigan. The acquisition consideration consists of
1,400,000 shares of ESI common stock, of which 1,126,000 have been issued and
the remaining 274,000 have been reserved for stock options assumed in the
acquisition. The transaction will be accounted for as a pooling-of-interests.
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
Results of Operations
Revenue of $51.4 million for the quarter ended November 30, 1997 was 37.4% or
$14.0 million higher as compared to the same quarter of the prior year, and was
6.3% or $3.0 million higher than that in the prior quarter. The increase in
revenues was due to continued market improvement for capacitor test and
termination equipment, higher demand for electronic packaging equipment and
incremental sales associated with the purchase of Dynamotion.
Gross margin for the three months ended November 30, 1997 decreased to 54.2%
from 55.9% for the same period of the prior year. Margins increased slightly
for semiconductor yield improvement and capacitor test and termination
equipment, whereas changes in product mix for electronic packaging and circuit
fine tuning equipment resulted in reduced margins in those business segments.
Selling, service and administrative expenses were $4.3 million higher for the
three months ended November 30, 1997 than for the second quarter of the prior
year. The increase is due to higher selling commissions associated with
increased sales volumes, higher incentive compensation accruals, and
administrative expenses associated with Dynamotion Corp., which was acquired in
June 1997. Selling service and administrative expenses, as a percentage of
sales, increased to 26.4% from 24.7% in the second quarter of fiscal 1997.
Research, development and engineering expenses for the quarter ended November
30, 1997 increased by $1.0 million as compared to the same quarter of the prior
year. Research, development and engineering expenses, as a percentage of sales,
decreased to 10.2% from 11.2% for the same period of the prior year.
Net income for the quarter ended November 30, 1997 was $6.2 million or $0.62 per
share, an increase of 21.1% over the prior year's second quarter earnings of
$5.1 million or $0.54 per share.
Ending backlog on November 30, 1997 was $25 million, as compared to $30 million
on August 31, 1997.
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
(continued)
Liquidity, Capital Resources and Business Environment
The Company's principal sources of liquidity are existing cash and cash
equivalents and marketable debt securities of $40.2 million, accounts receivable
of $52.5 million, and a $7.0 million line of credit, none of which was
outstanding at November 30, 1997. ESI has no debt and a current ratio of 7.4:1.
Working capital increased to $120.8 million at November 30, 1997, from $117.6
million at August 31, 1997. Inventory increased by $3.9 million from the
August 31, 1997 level due to higher levels of work in process associated with
increased production levels.
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 62% of year-to-date sales for fiscal 1998
compared to 71% for fiscal 1997. About one-third of the Company's products are
sold to Asian customers. Several countries in this region, notably South Korea,
Japan and Taiwan, have experienced currency devaluation and/or difficulties in
financing short-term obligations. The Company's customers in these countries
thus far have continued to purchase and pay for ESI products on normal terms.
There can be no assurance that difficulties in the Asian economy will not
adversely affect the demand for the company's products in that region or
elsewhere.
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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 9.9% of
total consolidated operating expenses with about 60% attributable to Europe and
40% to 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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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: January 8, 1998 Barry L. Harmon
--------------------------------------
Barry L. Harmon, Senior Vice President
and Chief Financial Officer
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