<PAGE>
Page 1/22
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 26, 2000 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
0
(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 26, 2000 THERE WERE 26,670,996 SHARES OF COMMON STOCK OF ELECTRO
SCIENTIFIC INDUSTRIES, INC. OUTSTANDING.
<PAGE>
Page 2/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Part I. Financial Information
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets 3-4
February 26, 2000 and May 31, 1999
Consolidated Statements of Income 5
Three Months and Nine Months ended
February 26, 2000 and February 28, 1999
Consolidated Statements of Cash Flows 6-7
Nine Months ended February 26, 2000 and
February 28, 1999
Notes to Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of Financial 14-19
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 20-21
Item 6. Exhibits and Reports on Form 8K 22
Signature 23
</TABLE>
<PAGE>
Page 3/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS February 26, 2000* May 31, 1999
- ------ ------------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 19,334 $ 7,793
Securities available for sale 39,964 24,865
------ ------
Total cash and securities 59,298 32,658
Trade receivables, net 83,518 78,998
Income tax refund receivable 4,664 2,835
Inventories 53,218 51,313
Deferred income taxes 6,779 6,699
Other current assets 2,794 1,198
----- -------
Total current assets 210,271 173,701
------- -------
PROPERTY AND EQUIPMENT, AT COST 75,554 70,047
Less - Accumulated depreciation (41,409) (36,585)
-------- --------
Net property and equipment 34,145 33,462
------ ------
DEFERRED INCOME TAXES 2,539 2,455
OTHER ASSETS 13,972 12,205
------ ------
Total assets $260,927 $221,823
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
* Unaudited
<PAGE>
Page 4/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY February 26, 2000* May 31, 1999
- -------------------- ------------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 10,975 $ 6,698
Accrued liabilities:
Payroll related 7,533 4,478
Commissions 4,288 5,340
Warranty 2,301 2,103
Other 1,875 1,603
-------- --------
Total accrued liabilities 15,997 13,524
Deferred revenue 518 340
-------- --------
Total current liabilities 27,490 20,562
------ ------
SHAREHOLDERS' EQUITY:
Preferred stock, without par value
1,000 shares authorized; no shares issued -- --
Common stock, without par value; Authorized:
40,000 shares; Outstanding:
26,670 and 26,094 respectively 114,701 107,206
Retained earnings 120,200 96,545
Accumulated other comprehensive income (loss) (1,464) (2,490)
------- -------
Total shareholders' equity 233,437 201,261
------- -------
Total liabilities and shareholders' equity $260,927 $221,823
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
*Unaudited
<PAGE>
Page 5/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Feb. 26, 2000 Feb. 28, 1999 Feb. 26, 2000 Feb. 28, 1999
------------- ----------------- ------------- -------------------
<S> <C> <C> <C> <C>
Net Sales $ 82,081 $ 51,506 $207,990 $148,965
Cost of sales 36,182 25,415 95,182 74,118
------ ------ ------ ------
Gross margin 45,899 26,091 112,808 74,847
Operating expenses:
Selling, service and administrative 21,584 14,331 57,322 42,964
Research, development and engineering 7,738 7,340 22,267 22,908
Non-recurring operating expenses -- 2,773 - 2,773
-- ----- - -----
Total operating expenses 29,322 24,444 79,589 68,645
------ ------ ------ ------
Operating income 16,577 1,647 33,219 6,202
Interest income 828 304 1,405 907
Other income, net 158 84 163 190
-------- -------- --------- -------
Income before income taxes 17,563 2,035 34,787 7,299
Provision for income taxes 5,620 1,115 11,132 2,707
----- ----- ------ -----
Net income $ 11,943 $ 920 $ 23,655 $ 4,592
======== ===== ======== =======
Net income per share: (1)
Basic $ 0.45 $ 0.04 $ 0.90 $ .18
======== ======== ======== ========
Diluted $ 0.43 $ 0.03 $ 0.87 $ .17
======== ======== ======== ========
Weighted average number of shares: (1)
Basic 26,329 25,886 26,208 25,790
Diluted 27,489 26,688 27,094 26,360
</TABLE>
(1) Share and per share amounts for all periods presented have been restated
to reflect a two-for-one stock split in February 2000. See note 3 to the
consolidated financial statements.
<PAGE>
Page 6/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Feb. 26, 2000 Feb. 28, 1999
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 23,655 $ 4,592
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Non-recurring operating expenses -- 2,773
Depreciation and amortization 6,861 4,907
Deferred income taxes (165) --
Changes in operating accounts:
Increase in trade receivables (3,289) (12,806)
Increase in inventories (4,255) (1,610)
(Increase) Decrease in other current assets (3,155) 1,313
Increase (Decrease) in current liabilities 6,228 (3,890)
----- -------
Net cash provided by (used in) operating activities 25,880 (4,721)
------ -------
Cash Flows From Investing Activities:
Purchases of property and equipment (6,229) (5,998)
Purchase of securities (28,301) (16,330)
Proceeds from sales of securities and maturing securities 13,164 18,745
Increase in other assets (468) (1,213)
-------- -----------
Net cash used in investing activities (21,834) (4,796)
-------- -------
Cash Flows From Financing Activities:
Distributions to shareholders -- (573)
Proceeds from exercise of stock options and stock plans 7,495 2,912
------ -------
Net cash provided by financing activities 7,495 2,339
------ ------
Net Change in Cash and Cash Equivalents 11,541 (7,178)
Cash and Cash Equivalents at Beginning of Period 7,793 10,034
----- ------
Cash and Cash Equivalents at End of Period $ 19,334 $ 2,856
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Page 7/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
(unaudited)
Cash payments for interest were not significant for the nine months ended
February 26, 2000 and February 28, 1999. Cash payments for income taxes were
$11,683 and $2,839 for the nine months ended February 26, 2000 and February 28,
1999, respectively.
<PAGE>
Page 8/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
(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 1999 Annual Report filed on Form 10-K.
Results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
February 26, 2000 May 31, 1999*
----------------- -------------
<S> <C> <C>
Raw materials and purchased parts $ 27,645 $32,419
Work-in-process 12,646 8,575
Finished goods 12,927 10,319
------ --------
Total inventories $ 53,218 $51,313
======= =======
</TABLE>
*Audited
<PAGE>
Page 9/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands except per share data)
(unaudited)
NOTE 3 - STOCK SPLIT
The Company's Board of Directors approved a two-for-one stock split to
shareholders of record at the close of business February 23, 2000, effective
February 24, 2000. All per share and share data in the Consolidated Financial
Statements and Notes to Consolidated Financial Statements have been
retroactively restated to reflect the stock split.
NOTE 4- NET INCOME PER SHARE
The Company computes net income per share in accordance with Statement of
Financial Accounting Standards 128, "Earnings Per Share" (SFAS 128). All
earnings per share amounts in the following table are presented to conform to
the SFAS 128 requirements.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Feb 26, 2000 Feb. 28,1999 Feb 26, 2000 Feb. 28,1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $11,943 $920 $23,655 $4,592
Weighted average number of shares
of common stock and common stock
equivalents outstanding:
Weighted average number of
shares outstanding for computing
basic net income per share 26,329 25,886 26,208 25,790
Dilutive effect of employee stock
plans 1,160 802 886 570
----- --- --- ---
Weighted average number of shares
outstanding for computing diluted net
income per share 27,489 26,688 27,094 26,360
====== ====== ====== ======
Net income per share - basic $ 0.45 $ 0.04 $ 0.90 $ 0.18
====== ====== ====== ======
Net income per share - diluted $ 0.43 $ 0.03 $ 0.87 $ 0.17
====== ====== ====== ======
</TABLE>
<PAGE>
Page 10/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands except per share data)
(unaudited)
NOTE 4- CONT.
For purposes of computing diluted earnings per share, weighted average common
share equivalents do not include the following stock options because inclusion
would have an anti-dilutive effect on the earnings per share calculation. The
following shares have not been recalculated using the treasury stock method.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Feb. 26, 2000 Feb. 28, 1999 Feb. 26, 2000 Feb. 28, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Number of Employee Stock Option 5 252 9 524
</TABLE>
NOTE 5- ACQUISITIONS
MICROVISION, INC.
On January 29, 1999, the Company completed the acquisition of MicroVision, a
provider of integrated, vision-based inspection and automation solutions for use
in semiconductor front-end and back-end applications, located in Chanhassen,
Minnesota. The acquisition consideration consisted of 2,037 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 has been
restated.
TESTEC, INC.
On December 21, 1998, the Company completed the acquisition of Testec, a
provider of electrical test systems for the passive component marketplace,
located in Phoenix, Arizona. The acquisition consideration consisted of 1,000
shares of ESI common stock. The transaction has been accounted for as a
pooling-of-interests and, accordingly, all data included in the Consolidated
Financial Statements has been restated.
<PAGE>
Page 11/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands except per share data)
(unaudited)
NOTE 5 CONT.
A reconciliation of amounts prior to these acquisitions to amounts included in
the financial statements is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Feb. 28, 1999 Feb. 28, 1999
------------- -------------
<S> <C> <C>
Revenue:
ESI $ 48,917 $ 139,458
MicroVision 1,772 6,920
Testec 817 2,587
-------- ---------
As Restated $ 51,506 $ 148,965
Net Income: (Loss)
ESI $ 827 $ 3,917
MicroVision (122) 335
Testec 215 340
-------- ---------
As Restated $ 920 $ 4,592
</TABLE>
NOTE 6- 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.
<PAGE>
Page 12/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands except share data)
(unaudited)
NOTE 7 NEW ACCOUNTING PRONOUNCEMENTS
REVENUE RECOGNITION
The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 101 (SAB 101), "Revenue Recognition in Financial Statements," in December
1999. SAB 101 provides guidance for applying Generally Accepted Accounting
Principles (GAAP) to revenue recognition in financial statements filed with the
SEC. Specifically, SAB 101 addresses recognizing revenue upon acceptance versus
shipment. The Company currently recognizes revenue generally upon shipment.
Although the Company believes its revenue recognition policies are in
accordance with GAAP, the Company is currently studying SAB 101 to determine
its impact on the Company's financial statements. The Company is required to
adopt SAB 101 in the first quarter of FY2001 ended August 2000.
HEDGING ACTIVITIES
The Financial Accounting Standards Board issued "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), in June 1998. SFAS 133 requires
the company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of the derivatives will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments through
earnings, or recognized in other comprehensive income until the hedged item is
recognized in earnings. The change in the derivative's fair value related to the
ineffective portion of a hedge, if any, will be immediately recognized in
earnings. The Company expects to adopt this Standard as of the beginning of its
fiscal year 2002. The effect of adopting this standard is currently being
evaluated, but is not expected to have a material effect on the Company's
financial position or its results of operations.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company has an employee savings plan under the provisions of section 401(k)
of the Internal Revenue Code. Effective January 2000, the Company increased its
contribution to 6% from 5% in 1999. This increase is not expected to have a
material effect on the Company's financial position or its results of
operations.
<PAGE>
Page 13/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands except share data)
(unaudited)
NOTE 9 - SUBSEQUENT EVENTS
ESI initiated litigation against Dynamic Details, Inc. and GSI Lumonics, Inc.
for patent infringement in March 2000 in the U.S. District Court of California.
The complaint alleges that Dynamic Details and Lumonics are violating ESI's U.S.
patent 5,847,960 entitled "Multi-Tool Positioning System." The complaint alleges
that Dynamic Details infringes ESI's patent 5,847,960 and that GSI Lumonics has
actively induced infringement of, and contributorily infringed, ESI's patent
5,857,960.
<PAGE>
Page 14/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
Results of Operations
Revenue of $82.1 million for the quarter ended February 26, 2000 was $30.6
million or 59.4% higher than in the third quarter of fiscal 1999, and was $15.1
million or 22.6% higher than in the quarter ended November 27, 1999. Revenue of
$208.0 million for the nine months ended February 26, 2000 was $59.0 million or
39.6% higher as compared to the nine months ended February 28, 1999.
Higher revenues for the three month period ended February 26, 2000 over both
the prior year and prior quarter were to due increased sales in all product
lines due mainly to an increase in units shipped. These increases are tied to
general growth in our markets. Electronic Component Systems represented the
largest increase in sales, increasing by 130.5% over the prior year and 35.6%
over the prior quarter and represented 37.2% of sales for the quarter. Vision
and Inspection product sales increased for the three-month period over both
the prior year and prior quarter by 102.7% and 27.6%, respectively, and
represented 15.9% of total sales for the quarter. Circuit Fine Tuning sales
increased over both the prior year and prior quarter by 52.4% and 24.8%,
respectively, and represented 9.9% of total sales for the quarter. Memory
Yield Improvement system sales increased over the prior year and prior
quarter by 19.7% and 13.3%, respectively, and represented 24.9% of total
sales for the quarter. Advanced Electronic Packaging system sales increased
over the prior year and prior quarter by 5.7% and 3.1%, respectively, and
represented 12.1% of total sales for the quarter.
Higher revenues for the nine-month period ended February 26, 2000 over the
prior year were due to higher sales in all product lines except Advanced
Electronic Packaging systems. The largest percentage increase in sales was
due to Electronic Component Systems, which increased 114.8% over the prior
year and represented 33.9% of year to date sales. Vision and Inspection
products increased 68.9% over the prior year and represented 15.3% of year to
date sales. Memory Yield Improvement system sales increased 19.6% over the
prior year and represented 26.8% of year to date sales. Circuit Fine Tuning
system sales increased 11.6% over the prior year and represented 9.9% of
total year to date sales. Advanced Electronic Packaging systems sales
decreased 8.9% from the prior year, and represented 14.1% of total year to
date sales. Revenue growth rates for most product lines are expected to
remain in the mid-teens in the near term. However, a change in general
economic conditions or in business conditions in the electronic industry
could cause revenue growth to vary materially from these expectations.
Gross margin for the three months ended February 26, 2000 increased
substantially to 55.9% from 50.7% for the same period in the prior year.
Gross margin for the nine months ended February 26, 2000 increased to 54.2%
from 50.2% for the same period in the prior year. Gross margin was up about
1.7% compared to the prior quarter.
<PAGE>
Page 15/22
Higher margins were the result of a shift in product mix, and a higher level
of absorption of fixed manufacturing costs.
Selling, service and administrative expenses for the three months ended February
26, 2000 were $7.3 million higher in the current quarter as compared to the
third quarter of fiscal 1999, but decreased as a percentage of sales from 27.8%
to 26.3%. Year to date, selling, service and administrative expenses were $14.4
million higher as compared to the nine months ended February 28, 1999. A higher
volume of business for both the current quarter and year to date resulted in
increased payroll and commission expense as compared to prior year levels.
Expenses for sales, services and administration increased about $2.4 million
from the prior quarter as a result of increased sales volume and increased
profits, as well as a shift in the geography of shipments. These factors
resulted in an increase in commission expense and in the profit sharing accrual.
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (continued)
Results of Operations
Expenses associated with research, development and engineering for the three
months ended February 26, 2000 increased by $.4 million compared to the same
period in the prior year and the prior quarter. Research, development and
engineering expenses for the nine months ended February 26, 2000 were $.6
million lower compared to the same period in the prior year. The decrease
over prior year levels is attributable to lower spending on engineering
project material. Research, development and engineering spending typically
fluctuates from quarter to quarter as engineering projects move through their
life cycles.
Merger related expenses for fiscal 1999 principally include one-time transaction
costs associated with the acquisitions referred to in Note 5 to the financial
statements. Such costs include investment banking, legal, and accounting costs
as well as certain one-time costs incurred to consolidate the operations of
these acquisition entities.
The Company's effective tax rate for the three and nine months ended February
26, 2000 was 32% compared to a tax rate of 34% for the same periods in the
prior year. The decrease in the effective tax rate for both the six and nine
months ended February 26, 2000 over the prior year was due to a decrease in
the valuation allowance related to tax loss and credit carryforwards.
On February 23, 2000, the World Trade Organization (WTO) ruled that Foreign
Sales Corporations (FSC) provisions violated U.S. obligations under the
General Agreement on Tariffs and Trade (GATT). As a result, the Company is
required to discontinue use of its FSC by October 1, 2000. The Company is
currently studying the effects of this ruling on its financial statements.
Negotiations may take place, which will change the deadline. Additionally,
legislation for an alternative to the FSC may be forthcoming. However,
without such alternatives, the Company believes that the WTO ruling will
significantly increase its effective rate.
Net income for the quarter ended February 26, 2000 was $11.9 million or $0.45
per basic share. This represents an increase of $8.8 million or 276.4% from the
third quarter of fiscal 1999, when earnings, excluding merger related expenses,
were $3.2 million or $0.12 per basic share. Net income for the nine months
ended February 26, 2000 was $23.7 million or $0.90 per basic share. This
represents an increase of $17.0 million or 256.0% from the year to date ended
February 28, 1999, when earnings, excluding merger related expenses, were $6.6
million or $0.26 per basic share.
Ending backlog on February 26, 2000 was $96.2 million as compared to $57.1
million for November 27, 1999.
<PAGE>
Page 16/22
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 $59.3 million, accounts receivable
of $83.5 million, and a $7.0 million line of credit, none of which was
outstanding at February 26, 2000. Accounts receivable was significantly higher
than on May 31, 1999, but the increase is a function of increased revenues and
does not include a significant increase in past due receivables. ESI has a
current ratio of 7.6:1 and no long-term debt. Working capital increased to
$182.8 million at February 26, 2000 versus $153.1 million at May 31, 1999.
Inventory increased by $1.9 million over May 31, 1999 due mainly to the
Company's increase in production. This increase is mainly in work in process
inventories and finished goods.
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, 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
26.9% of the Company's fiscal 1999 sales and are expected to comprise a similar
ratio in fiscal 2000. 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, as these
announcements may cause customers to defer or forego ordering products from the
Company's existing product lines.
<PAGE>
Page 17/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (continued)
Liquidity, Capital Resources and Business Environment
International shipments have accounted for 71% of year-to-date sales for
fiscal 2000 as compared to 56% for the fiscal year 1999. Japan, Asia, Europe
and North America accounted for 23%, 43%, 11%, and 23% of current quarter
sales, respectively. Year to date, Japan, Asia, Europe and North America
accounted for 21%, 41%, 9% and 29% of total sales, respectively. For the nine
months ended February 28, 1999, sales to Japan, Asia, Europe and North
America accounted for 14%, 31%, 11% and 44% of total sales, respectively.
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 have continued to
purchase and pay for products within agreed upon terms. In addition, a
majority of Asian end customer receivables are secured by letter of credit.
There can be no assurance that any residual difficulties in Asian economies will
not adversely affect the demand for the Company's products in that region or
elsewhere.
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. These risks
include 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 U.S.
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 us in yen, and the
Company 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 9.0% of
total consolidated operating expenses with about 54% attributable to Europe and
46% to Asia. Changes in the value of the local currency, as measured in US
dollars, will commensurably increase or decrease operating expenses.
<PAGE>
Page 18/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (CONT.)
Year 2000
The Company created a task force to prepare for Year 2000 (Y2K) issues. The Vice
President and Chief Technology Officer continues to serve as the Y2K coordinator
and has overall responsibility for organizing and managing the Company's Y2K
program. The coordinator reports to the President and CEO. As of the end of the
calendar year, The Company had completed its evaluation of its technology and
data used in the creation and delivery of its products and services and in its
internal operations, and had identified Y2K issues related to its customers and
suppliers.
To date, there have been no significant issues attributable to Y2K.
The Company has incurred costs associated with assessing the Y2K issue and
implementing its Y2K plan. These costs have included consultants, software
upgrades, and security system upgrades. The Company estimates it has incurred
substantially all of its total expected Y2K costs. Total costs of assessing and
implementing the Company's Y2K plan have not had and are not expected to have a
material effect on the Company's consolidated financial position or the results
of its operations.
The Company believes implementation of the plan has been successful after each
key rollover date. The Company believes it will have no material business risk
from any additional Y2K issues. However, there can be no assurances that third
parties, over which the company has no control, will successfully address any
remaining Y2K issues.
New Accounting Pronouncements
The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 101 (SAB 101), "Revenue Recognition in Financial Statements," in December
1999. SAB 101 provides guidance for applying Generally Accepted Accounting
Principles (GAAP) to revenue recognition in financial statements filed with
the SEC. Specifically, SAB 101 addresses recognizing revenue upon acceptance
versus shipment. The Company currently recognizes revenue generally upon
shipment. Although the Company believes its revenue recognition policies are
in accordance with GAAP, the Company is currently studying SAB 101 to
determine its impact on the Company's financial statements. The Company is
required to adopt SAB 101 in the first quarter of FY2001 ended August 2000.
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 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.
<PAGE>
Page 19/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
Part II. Other Information
Item 1. Legal Proceedings
ESI initiated litigation against General Scanning Inc. for patent infringement
in December 1996 in the U.S District Court for the Northern District of
California (Electro Scientific Industries, Inc. v. General Scanning Inc., No.
C-96-4268 SBA). On April 2, 1999 a federal court jury issued a verdict upholding
the validity of ESI's link blowing patent, U.S. patent 5,265,114 entitled
"System and Method for Selectively Laser Processing a Target Structure of One or
More Materials of a Multimaterial, Multilayer Device". The jury found U.S.
patent 5,473,624 entitled "Laser System and Method for Selectively Serving
Links" invalid for reasons of obviousness. On April 8, 1999 the same federal
court jury awarded ESI $13,133,170 in damages, and also concluded that General
Scanning's infringement was willful. On July 8, 1999 the court issued orders
denying General Scanning's motions for a new trial and to set aside the jury
verdict. The court also entered a permanent injunction, prohibiting General
Scanning from making, using, selling, or offering for sale in the United States
memory repair systems and upgrade kits equipped with 1.3 micron lasers. General
Scanning has filed an appeal of the U.S. District Court judgement with the U.S.
Court of Appeals for the Federal Circuit. Separately, the U.S. Patent and
Trademark Office has issued an order granting a request to re-examine ESI's
patent 5,265,114. ESI has not reflected this award in its financial results.
However, ESI continues to record legal expenses related to this litigation as
these expenses are incurred.
In July 1999, ESI announced a settlement with GSI Lumonics Inc. and General
Scanning Inc. in ESI's laser trimming patent infringement suit. ESI initiated
the suit against General Scanning in October 1998 in the United States District
Court for the Northern District of California. The complaint alleged that
General Scanning violated the following ESI's patents: 5,569,398 entitled "Laser
System and Method for Selectively Trimming Films" issued on October 29, 1996;
5,685,995 entitled "Method for Laser Functional Trimming of Films and Devices"
issued on November 11, 1997; and 5,808,272 entitled "Laser System for Functional
Trimming of Films and Devices" issued on September 15, 1998. GSI is not making,
using, selling or offering to sell any laser trim systems operating at a
wavelength between 1.2 and 3.0 microns, or any kit for converting a laser trim
system to operate at a wavelength between 1.2 and 3.0 microns. The terms of the
settlement agreement are confidential.
ESI initiated litigation against Dynamic Details, Inc. and GSI Lumonics, Inc.
for patent infringement in March 2000 in the U.S. District Court of California.
The complaint alleges that Dynamic Details and Lumonics are violating ESI's U.S.
patent 5,847,960 entitled "Multi-Tool Positioning System." The complaint alleges
that Dynamic Details infringes ESI's patent 5,847,960 and that GSI Lumonics has
actively induced infringement of, and contributorily infringed, ESI's patent
5,857,960.
<PAGE>
Page 20/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings (Cont.)
Numerous users of the Company's products have received notice of patent
infringement from the Lemelson Medical, Educational & Research Foundation
Limited Partnership ("Partnership") alleging that their use of the Company's
products infringes certain patents transferred to the Partnership by the late
Jerome H. Lemelson. Certain of these users have notified the Company that, in
the event it is subsequently determined that their use of the Company's products
infringes any of the Partnership's patents, they may seek indemnification from
the Company for damages or expenses resulting from this matter.
<PAGE>
Page 21/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
27. Financial Data Schedule
(b). Reports on Form 8-K. - A form 8-K was filed on October 14, 1999. On
September 30, 1999, Electro Scientific Industries, Inc. (the "Company") decided
to change its fiscal quarters to correspond with a four week, five week, four
week quarter, which means each quarter will end on a Saturday. Previously, the
quarters ended on the last day of the calendar month. There is no change in the
month in which each of the four quarters ends. However, this does translate to a
change in fiscal year end. Previously, the Company's fiscal year end was May 31.
Upon implementing this change, the fiscal year will end on the Saturday
following or directly preceding May 31; whichever Saturday is the fewest number
of days from May 31. In addition, depending on which Saturday is used; the
Company may have either a 52 or 53 week fiscal year.
There will be no report filed covering the transition period, as activity during
the transition period is deemed to be immaterial.
<PAGE>
Page 22/22
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
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: April 11, 2000 /s/ Donald R. VanLuvanee
-----------------------------------
Donald R. VanLuvanee, President and
Chief Executive Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-03-2000
<PERIOD-START> MAY-31-1999
<PERIOD-END> FEB-26-2000
<CASH> 19,334
<SECURITIES> 39,964
<RECEIVABLES> 85,072
<ALLOWANCES> 1,554
<INVENTORY> 53,218
<CURRENT-ASSETS> 210,271
<PP&E> 75,554
<DEPRECIATION> 41,409
<TOTAL-ASSETS> 260,927
<CURRENT-LIABILITIES> 27,490
<BONDS> 0
0
0
<COMMON> 114,805
<OTHER-SE> 118,632
<TOTAL-LIABILITY-AND-EQUITY> 260,927
<SALES> 82,081
<TOTAL-REVENUES> 82,081
<CGS> 36,182
<TOTAL-COSTS> 36,182
<OTHER-EXPENSES> 29,332
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17,563
<INCOME-TAX> 5,620
<INCOME-CONTINUING> 11,943
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,943
<EPS-BASIC> 0.45
<EPS-DILUTED> 0.43
</TABLE>
