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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
ý | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 2, 2002 or
o | 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 (State or other jurisdiction of incorporation or organization) | 93-0370304 (I.R.S. Employer Identification No.) |
13900 N.W. Science Park Drive, Portland, Oregon
97229
(Address and zip code of principal executive officers)
(503) 641-4141
(Registrant's phone number, including area code)
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 ý No o
As ofMarch 2, 2002 there were27,487,923 shares of Common Stock of Electro Scientific Industries, Inc. outstanding.
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
| | Page No. | ||
---|---|---|---|---|
Part I. | Financial Information | 3 | ||
Item 1. | Consolidated Financial Statements (Unaudited) | 3 | ||
Consolidated Balance Sheets March 2, 2002 and June 2, 2001* | 3 | |||
Consolidated Statements of Operations Three Months and Nine Months ended March 2, 2002 and March 3, 2001 | 5 | |||
Consolidated Statements of Cash Flows Nine Months Ended March 2, 2002 and March 3, 2001 | 6 | |||
Notes to Consolidated Financial Statements | 7 | |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 12 | ||
Item 3. | Market Risks | 21 | ||
Part II. | Other Information | 22 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 22 | ||
Item 6. | Exhibits and Reports on Form 8K | 22 | ||
Signature | 23 |
- *
- Audited
2
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
Item 1. Consolidated Financial Statements
| Mar. 2, 2002* | June 2, 2001 | |||||||
---|---|---|---|---|---|---|---|---|---|
ASSETS | |||||||||
CURRENT ASSETS: | |||||||||
Cash and cash equivalents | $ | 11,365 | $ | 68,522 | |||||
Securities available for sale | 191,528 | 81,315 | |||||||
Restricted investments | 18,179 | — | |||||||
Trade receivables, net | 63,475 | 86,508 | |||||||
Income tax receivable | 17,627 | — | |||||||
Inventory | 75,673 | 73,326 | |||||||
Deferred income taxes | 9,580 | 9,580 | |||||||
Other current assets | 7,254 | 1,997 | |||||||
Total current assets | 394,681 | 321,248 | |||||||
Long term securities available for sale | 68,444 | 13,269 | |||||||
Property and equipment, at cost | 93,414 | 94,553 | |||||||
Less—accumulated depreciation | (36,115 | ) | (39,607 | ) | |||||
Net property and equipment | 57,299 | 54,946 | |||||||
Deferred income taxes | — | 656 | |||||||
Other assets | 16,057 | 16,954 | |||||||
TOTAL ASSETS | $ | 536,481 | $ | 407,073 | |||||
- *
- Unaudited
The accompanying notes are an integral part of these statements.
3
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
| Mar. 2, 2002* | June 2, 2001 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||
CURRENT LIABILITIES: | ||||||||||
Accounts payable | $ | 6,910 | $ | 7,048 | ||||||
Accrued liabilities: | ||||||||||
Payroll related | 7,577 | 25,669 | ||||||||
Commissions | 195 | 1,221 | ||||||||
Warranty | 2,885 | 4,216 | ||||||||
Income taxes payable | — | 1,602 | ||||||||
Interest payable | 1,251 | — | ||||||||
Other | 4,622 | 2,883 | ||||||||
Total accrued liabilities | 16,530 | 35,591 | ||||||||
Deferred revenue | 188 | 1,385 | ||||||||
Total current liabilities | 23,628 | 44,024 | ||||||||
Deferred income taxes | 4,203 | — | ||||||||
Convertible subordinated notes | 145,721 | — | ||||||||
TOTAL LIABILITIES | $ | 173,552 | $ | 44,024 | ||||||
SHAREHOLDERS' EQUITY: | ||||||||||
Preferred stock, without par value; 1,000 shares authorized; no shares issued | — | — | ||||||||
Common stock, without par value; Authorized: 100,000 shares; Outstanding: 27,488, and 27,101 respectively | 133,827 | 125,997 | ||||||||
Retained earnings | 229,594 | 237,338 | ||||||||
Accumulated other comprehensive loss | (492 | ) | (286 | ) | ||||||
TOTAL SHAREHOLDERS' EQUITY | 362,929 | 363,049 | ||||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 536,481 | $ | 407,073 | ||||||
- *
- Unaudited
The accompanying notes are an integral part of these statements.
4
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Mar. 2, 2002 | Mar. 3, 2001 | Mar. 2, 2002 | Mar. 3, 2001 | |||||||||||
Net sales | $ | 36,407 | $ | 136,626 | $ | 126,592 | $ | 404,726 | |||||||
Cost of sales: | |||||||||||||||
Cost of sales | 19,394 | 57,108 | 63,888 | 167,162 | |||||||||||
Cost of sales—restructuring charge | (388 | ) | — | 3,109 | — | ||||||||||
Gross margin | 17,401 | 79,518 | 59,595 | 237,564 | |||||||||||
Operating expenses: | |||||||||||||||
Selling, service and administrative | 13,958 | 24,970 | 47,447 | 83,652 | |||||||||||
Research, development and engineering | 7,654 | 14,060 | 27,985 | 38,701 | |||||||||||
Restructuring charge | 655 | — | 6,626 | — | |||||||||||
Total operating expenses | 22,267 | 39,030 | 82,058 | 122,353 | |||||||||||
Operating income (loss) | (4,866 | ) | 40,488 | (22,463 | ) | 115,211 | |||||||||
Interest income | 2,258 | 2,295 | 5,737 | 6,267 | |||||||||||
Interest expense | (1,594 | ) | — | (1,594 | ) | — | |||||||||
Other expense, net | (83 | ) | (701 | ) | (105 | ) | (915 | ) | |||||||
Income (loss) before income taxes | (4,285 | ) | 42,082 | (18,425 | ) | 120,563 | |||||||||
Provision (benefit) for income taxes | (6,014 | ) | 14,308 | (10,680 | ) | 41,775 | |||||||||
Net income (loss) | $ | 1,729 | $ | 27,774 | $ | (7,745 | ) | $ | 78,788 | ||||||
Net income (loss) per share: | |||||||||||||||
Basic | $ | 0.06 | $ | 1.03 | $ | (0.28 | ) | $ | 2.93 | ||||||
Diluted | $ | 0.06 | $ | 1.00 | $ | (0.28 | ) | $ | 2.83 | ||||||
Weighted average number of shares: | |||||||||||||||
Basic | 27,392 | 26,986 | 27,263 | 26,928 | |||||||||||
Diluted | 28,087 | 27,764 | 27,263 | 27,841 |
The accompanying notes are an integral part of these statements.
5
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Nine Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|
| Mar. 2, 2002 | Mar. 3, 2001 | |||||||
Cash Flows From Operating Activities: | |||||||||
Net income (loss) | $ | (7,745 | ) | $ | 78,788 | ||||
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | |||||||||
Depreciation and amortization | 8,215 | 6,444 | |||||||
Non-cash charges and credits | 1,356 | — | |||||||
Deferred income taxes | 4,859 | — | |||||||
Tax benefit of stock options exercised | 1,088 | 1,331 | |||||||
Changes in operating accounts: | |||||||||
(Increase) decrease in trade receivables | 21,944 | (21,768 | ) | ||||||
Increase in income tax receivable | (17,627 | ) | — | ||||||
Increase in inventories | (2,604 | ) | (15,097 | ) | |||||
Increase in other current assets | (5,257 | ) | (619 | ) | |||||
Increase (decrease) in current liabilities | (19,126 | ) | 15,570 | ||||||
Net cash provided by (used in) operating activities | (14,897 | ) | 64,649 | ||||||
Cash Flows From Investing Activities: | |||||||||
Purchase of property and equipment | (12,076 | ) | (18,826 | ) | |||||
Proceeds from the sale of property and equipment | 633 | — | |||||||
Purchase of restricted investments | (18,179 | ) | — | ||||||
Purchase of securities | (522,904 | ) | (37,951 | ) | |||||
Proceeds from sales of securities and maturing securities | 357,480 | 30,844 | |||||||
Increase (decrease) in other assets | 544 | (1,691 | ) | ||||||
Net cash used in investing activities | (194,502 | ) | (27,624 | ) | |||||
Cash Flows From Financing Activities: | |||||||||
Proceeds from the sale of convertible notes | 145,500 | — | |||||||
Proceeds from exercise of stock options and stock plans | 6,742 | 2,490 | |||||||
Net cash provided by financing activities | 152,242 | 2,490 | |||||||
Net Change in Cash and Cash Equivalents | (57,157 | ) | 39,515 | ||||||
Cash and Cash Equivalents at Beginning of Period | 68,522 | 34,876 | |||||||
Cash and Cash Equivalents at End of Period | $ | 11,365 | $ | 74,391 | |||||
Cash payments for interest were not significant for the nine months ended March 2, 2002 and March 3, 2001. Cash payments for income taxes were $2,540 and $34,299 million for the nine months ended March 2, 2002 and March 3, 2001, respectively.
The accompanying notes are an integral part of these statements.
6
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 us, 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. We believe that the interim statements include all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of results for the interim periods. These condensed consolidated financial statements are to be read in conjunction with the financial statements and notes thereto included in the Company's 2001 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to current year presentation.
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:
| Mar. 2, 2002 | June 2, 2001* | ||||
---|---|---|---|---|---|---|
Raw materials and purchased parts | $ | 48,576 | $ | 38,855 | ||
Work-in-process | 2,543 | 14,183 | ||||
Finished goods | 24,554 | 20,288 | ||||
Total inventories | $ | 75,673 | $ | 73,326 | ||
- *
- Audited
Note 3—Net Income (Loss) Per Share
We compute 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.
| Three Months Ended | Nine Months Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Mar. 2, 2002 | Mar. 3, 2001 | Mar. 2, 2002 | Mar. 3, 2001 | |||||||||
Net income (loss) | $ | 1,729 | $ | 27,774 | $ | (7,745 | ) | $ | 78,788 | ||||
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 | 27,392 | 26,986 | 27,263 | 26,928 | |||||||||
Dilutive effect of employee stock plans | 695 | 778 | — | 913 | |||||||||
Weighted average number of shares outstanding for computing diluted net income per share | 28,087 | 27,764 | 27,263 | 27,841 | |||||||||
Net income (loss) per share—basic | $ | 0.06 | $ | 1.03 | $ | (0.28 | ) | $ | 2.93 | ||||
Net income (loss) per share—diluted | $ | 0.06 | $ | 1.00 | $ | (0.28 | ) | $ | 2.83 | ||||
7
For purposes of computing diluted earnings per share, weighted average common share equivalents do not include the following stock options or shares related to our 41/4% convertible subordinated notes due 2006 because inclusion would have an anti-dilutive effect on the earnings per share calculation.
| Three Months Ended | Nine Months Ended | ||||||
---|---|---|---|---|---|---|---|---|
| Mar. 2, 2002 | Mar. 3, 2001 | Mar. 2, 2002 | Mar. 3, 2001 | ||||
Number of Employee Stock Options | 1,156 | 1,313 | 3,766 | 1,260 | ||||
41/4% Convertible subordinated notes | 3,947 | — | 3,947 | — |
Note 4—Comprehensive Income
Comprehensive income includes net unrealized gains and losses on derivative instruments (foreign currency forward contracts), foreign currency translation gains and losses and unrealized gains on securities available for sale that are reflected in shareholders' equity instead of net income. The following table sets forth the calculation of comprehensive income for the periods indicated:
| Three Months Ended | Nine Months Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Mar. 2, 2002 | Mar. 3, 2001 | Mar. 2, 2002 | Mar. 3, 2001 | |||||||||
Net income (loss) | $ | 1,729 | $ | 27,774 | $ | (7,745 | ) | $ | 78,788 | ||||
Net unrealized loss on derivative instruments | (1 | ) | (262 | ) | — | (1,481 | ) | ||||||
Foreign currency translation adjustment | (153 | ) | (260 | ) | (170 | ) | (488 | ) | |||||
Net unrealized gain (loss) on securities | (403 | ) | 303 | (36 | ) | 435 | |||||||
Total comprehensive income (loss) | $ | 1,172 | $ | 27,555 | $ | (7,951 | ) | $ | 77,254 | ||||
Note 5—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. The latest quarter includes a tax credit of $4.6 million due to a re-evaluation of our application of the research and development tax credit for the years 1996 through 2001. Excluding this tax credit, the income tax rate for both the three months and nine months ended March 2, 2002 was 33.0% versus 34.0% and 34.6% for the three months and nine months ended March 3, 2001, respectively.
Note 6—Hedging Activities
On June 3, 2001, we adopted Statement of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 requires all derivatives to be recorded on the balance sheet at fair value. Changes in fair value of derivatives that do not qualify, or are not effective as hedges, must be recognized currently in earnings. Upon adoption, we recorded a cumulative transition gain of $.3 million to Other Comprehensive Income ("OCI") and an immaterial transition gain to current income. The transition adjustments reflected the fair value of forward contracts hedging non-functional currency sales that were previously held off-balance sheet, and the related time value that is excluded from effectiveness testing under SFAS133. All other derivatives were recorded at fair value on the balance sheet on June 2, 2001.
We are exposed to foreign currency risk through our sales and occasional purchases of product in non-functional currencies. Our policy is to hedge forecasted and actual foreign currency risk to mitigate foreign exchange market volatility on our operating results. We currently use foreign currency forward contracts that expire within 12 months to hedge forecasted sales and nonfunctional currency denominated receivables and payables. Derivatives hedging non-functional currency monetary assets
8
and liabilities are recorded on the balance sheet at fair value and any change in fair value is recognized currently in earnings.
In accordance with SFAS 133, hedges of anticipated transactions are designated and documented at inception as "cash flow hedges" and are evaluated for effectiveness, excluding time value, at least quarterly. The forward contracts designated by us to hedge anticipated sales are cash flow hedges. The critical terms of the forward contract, such as amount and timing, are matched to the forecasted sale. The effectiveness of the cash flow hedge is determined by comparing the change in value of the anticipated transaction to the change in value of the related forward contracts, excluding time value. The effective portion of the hedge is accumulated in OCI and any ineffectiveness along with the time value change in the instrument is recognized immediately in Other Income and Expense. OCI associated with the hedges of forecasted sales are reclassified to revenue upon revenue recognition. For the quarter ended March 2, 2002, immaterial amounts were recorded in Other Income and Expense relating to changes in time value of our hedging contracts. All amounts recorded in OCI at March 2, 2002 will be reclassified to earnings within 12 months.
The following table sets forth the changes in OCI during the nine-month period ending March 2, 2002:
Beginning balance, June 3, 2001 | $ | — | ||
Transition adjustment | (345 | ) | ||
Net change in value of instruments | (37 | ) | ||
Reclassification to revenue ($345 from transition adjustment) | 382 | |||
Ending balance, March 2, 2002 | $ | — | ||
Note 7—Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The use of the pooling-of-interest method will be prohibited on a prospective basis only. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. We adopted SFAS No. 142 in the first quarter of fiscal 2002 and therefore ceased amortization of goodwill recorded in past business combinations. Total goodwill included in other assets was $1.4 million for the periods ended June 2, 2001 and March 2, 2002. Accumulated amortization for the same periods was $1.3 million. Based on our impairment analysis completed in the second quarter of fiscal year 2002 and required by SFAS No. 142, we concluded that we do not have an impairment of goodwill under SFAS No. 142.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and normal operation of a long-lived asset, except for certain lease obligations. We are currently evaluating the impact of SFAS No. 143, but do not expect the adoption of SFAS No. 143 to have a significant impact on our financial position or the results of our operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which applies to financial statements issued for fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes Financial Accounting Standards Board Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
9
Long-Lived Assets to Be Disposed Of," and portions of Accounting Principles Board Opinion 30, "Reporting the Results of Operations." SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria for classifying an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value or carrying amount. SFAS No. 144 also requires expected future operating losses from discontinued operations to be displayed in the period in which the losses are incurred, rather than as of the measurement date as presently required. We are currently evaluating the impact of SFAS No. 144, but do not believe that SFAS No. 144 will have a material impact on our financial position or the results of our operations.
Note 8—Restructuring Costs
In order to better align our operating expenses with anticipated revenues, we implemented a restructuring plan during June of 2001. Pursuant to this plan, we reduced our work force by 419 employees in June and August of 2001. An additional 97 employees were terminated in October. This reduction impacted all employee groups. In connection with this plan, we recorded a charge of $3.5 million in employee severance and early retirement, $0.7 million in employee relocation and $0.2 million in other employee expenses for the nine months ended March 2, 2002. At March 2, 2002, the majority of the $.1 million remaining accrued liability was related to early retirement costs that will be paid out in the fourth quarter of fiscal year 2002.
The restructuring plan also included vacating buildings located in California, Massachusetts, Michigan, Minnesota, and Texas in 2001. As a result, we recorded a charge of approximately $1.7 million for the nine months ended March 2, 2002, which consisted of $1.1 million for lease termination fees, $.4 million for the write-off of certain leasehold improvements and other consolidation costs of $.2 million. In the second quarter of fiscal year 2002, we disposed of certain property and equipment as part of the restructuring plan. The net gain recorded in the nine months ended March 2, 2002, of $0.4 million consisted of the sale of equipment in conjunction with the discontinuing of certain products. At March 2, 2002, the majority of the $0.7 million remaining accrued liability was related to lease terminiation fees and other facility consolidation costs expected to be incurred through 2006.
The following table displays the amounts included as a restructuring charge for the three months and the nine months ended March 2, 2002:
| Three Months Ended | Nine Months Ended | |||||
---|---|---|---|---|---|---|---|
| March 2, 2002 | ||||||
Employee severance and other employee expenses | $ | 391 | $ | 4,404 | |||
Lease termination and other facility consolidation costs | 56 | 1,660 | |||||
Gain on equipment sale | — | (308 | ) | ||||
Other expenses | 208 | 870 | |||||
Total restructuring charge | $ | 655 | $ | 6,626 | |||
We also recorded a $3.1 million inventory write-off related to discontinuing the manufacturing of certain products and a $0.4 million gain related to the subsequent sales of this inventory in the three months ended March 2, 2002. This inventory write-down and the related gain were reflected in costs of sales.
10
The following table displays a rollforward of the accruals related to the restructuring:
| Accruals at Dec. 1, 2001 | Q3 Fiscal Year 2002 Charges | Q3 Fiscal Year 2002 Amounts Used | Accruals at March 2, 2002 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Employee Severance and other employee related expenses | $ | 403 | $ | 391 | $ | 674 | $ | 120 | ||||
Lease termination fees and other facility consolidation costs | $ | 842 | $ | 56 | $ | 225 | $ | 673 |
Note 9—Sale of Convertible Subordinated Notes
In December 2001 and January 2002, we sold $150 million aggregate principal amount of 41/4% convertible subordinated notes due 2006 in a private offering. We received proceeds, net of the initial purchaser's discount, from these sales of approximately $145.5 million. We intend to use the net proceeds of the offering for general corporate purposes, which could include possible future acquisitions. Interest is due semiannually and, along with accretion of the underwriting discounts, is recorded as interest expense in the accompanying financial statements. No principal is due until maturity in 2006. In accordance with the terms of the convertible subordinated note agreement, we were required to place $18.2 million in trust. This restricted investment was invested in treasury bills and is sufficient to satisfy the first six interest payments due under the terms of the agreement. The notes are convertible into shares of our common stock at a conversion price of $38.00 per share, subject to adjustment in certain circumstances. The notes are redeemable by us any time on or after December 21, 2004 at specified prices. We filed a registration statement for the resale of the notes and the shares of common stock issuable upon conversion of the notes.
11
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
Results of Operations
Net sales of $36.4 million for the quarter ended March 2, 2002 were $100.2 million or 73.4% lower than the third quarter of fiscal 2001, and were $3.8 million or 9.4% lower than the quarter ended December 1, 2001. Net sales of $126.6 million for the nine months ended March 2, 2002 were $278.1 million or 68.7% lower than net sales for the nine months ended March 3, 2001. All product lines experienced lower sales volume compared to both the three and nine months ended March 3, 2001. Similar to the prior quarter, the decrease in sales is attributable to excess capacity and reduced demand among our customer base. Sales of electronic component production equipment and vision inspection systems increased in comparison to the quarter ended December 1, 2001, while sales of semiconductor yield improvement systems, advanced electronic packaging equipment and circuit fine tuning systems decreased as compared to that same quarter. Semiconductor yield improvement systems comprised the largest percentage of sales for the quarter at 37.2% of total sales versus 32.7% in the third quarter of the prior year and 40.9% for the quarter ended December 1, 2001.
The following data represents sales by product line for the periods indicated:
| Three Months Ended | Nine Months Ended | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| Mar. 2, 2002 | Mar. 3, 2001 | Mar. 2, 2002 | Mar. 3, 2001 | ||||||||
| (in thousands) | |||||||||||
Semiconductor Yield Improvement Systems | $ | 13,551 | $ | 44,669 | $ | 53,291 | $ | 112,294 | ||||
Electronic Component Production Equipment | 11,111 | 58,139 | 33,515 | 182,458 | ||||||||
Circuit Fine Tuning Systems | 5,441 | 10,282 | 18,754 | 35,209 | ||||||||
Advanced Electronic Packaging Equipment | 2,585 | 12,613 | 12,217 | 35,998 | ||||||||
Vision and Inspection Systems | 3,719 | 10,923 | 8,815 | 38,767 | ||||||||
Total | $ | 36,407 | $ | 136,626 | $ | 126,592 | $ | 404,726 | ||||
Gross margin, excluding restructuring costs, for the three months ended March 2, 2002 decreased to 46.7% from 58.2% for the same period in the prior fiscal year and 50.4% for the quarter ended December 1, 2001. Gross margin for the nine months ended March 2, 2002 decreased to 49.5% from 58.7% for the same period in the prior year. Lower margins were due to decreased volumes, causing underabsorption of fixed manufacturing overhead, as well as a change in product mix.
Selling, service and administrative expenses for the three months ended March 2, 2002 were $14.0 million, 44.1% or $11.0 million lower than for the third quarter of fiscal 2001, and remained unchanged over the prior quarter. Selling, service and administrative expenses as a percentage of sales for the three months ended March 2, 2002 increased from 18.3% to 38.3% compared to the third quarter of fiscal year 2001 and increased from 34.9% to 38.3% over the prior quarter. Included in current quarter selling, service and administrative expenses is $0.8 million in consulting fees related to a tax credit of $4.6 million received by us due to a re-evaluation of our application of the research and development tax credit for the years 1996 through 2001.
Year-to-date, selling, service and administrative expenses were $47.4 million, 43.3% or $36.2 million lower compared to the nine months ended March 3, 2001. Selling, service and administrative expenses as a percentage of sales for the nine months ended March 2, 2002 increased from 20.7% to 37.5% compared to the nine months ended March 3, 2001. Lower sales volume for both the current quarter and year-to-date resulted in decreased payroll and commission expense compared to prior quarter and prior year levels.
Our future operating results depend to a considerable extent on our ability to maintain a competitive advantage in the products and services we provide. We continue to make substantial
12
investments in our research and development efforts. Expenses associated with research, development and engineering for the three months ended March 2, 2002 were $7.7 million, 45.6% or $6.4 million lower than for the same period in the prior fiscal year and 6.3% or $0.5 million lower compared to the prior quarter. Research, development and engineering expenses as a percentage of sales for the three months ended March 2, 2002 increased from 10.3% to 21.0% compared to the third quarter of fiscal year 2001 and increased from 20.3% to 21.0% over the prior quarter.
Year-to-date, research, development and engineering expenses were $28.0 million, 27.7% or $10.7 million lower than the nine months ended March 3, 2001. Research, development and engineering expenses as a percentage of sales for the nine months ended March 2, 2002 increased from 9.6% to 22.1% compared to the nine months ended March 3, 2001. Research and development spending often fluctuates from quarter to quarter as engineering projects move through their life cycles. Due to reduced revenues in the prior and current quarter, we have made a concentrated effort in the current quarter to reduce operating expenses, including those related to research and development. However, we continue to invest appropriately in those projects that we deem necessary and no major projects to date have been cancelled.
In order to better align our operating expenses with anticipated revenues, we implemented a restructuring plan in the first quarter of fiscal year 2002. The restructuring plan consisted of reducing our work force and vacating several buildings. This reorganization resulted in restructuring charges to operating expenses of $4.4 million in the first quarter of fiscal year 2002, $1.6 million in the second quarter of fiscal year 2002 and $0.6 million in the third quarter of fiscal year 2002 We also recorded a $3.5 million inventory write-off related to discounting the manufacturing of certain products in the three months ended September 1, 2001 and a $0.4 million gain related to the subsequent sales of this inventory in the three months ended March 2, 2002. This inventory write-down and the related gain were reflected in costs of sales. The major components of the year-to-date restructuring charge of $6.6 million were $4.4 million in employee severance and other employee expenses, $1.7 million in lease termination and other facility consolidation costs, a $0.3 million gain on equipment disposals and $0.8 million in other expenses.
Interest income for the three months ended March 2, 2002 was essentially unchanged compared to the same quarter in the prior year, and increased $0.7 million compared to last quarter. This increase is due to an increase in investment balances over the prior quarter. Interest income for the nine months ended March 2, 2002 decreased by $0.5 million compared to the same period in the prior year. This is due mainly to a decline in interest rates. Interest expense for the three months ended March 2, 2002 was $1.5 million, related to the issuance of an aggregate of $150.0 million pricipal amount 41/4% convertible subordinated notes in December 2001 and January 2002.
The latest quarter includes a tax credit of $4.6 million due to a re-evaluation of our application of the research and development tax credit for the years 1996 through 2001. Excluding this tax credit, the income tax rate for both the three months and nine months ended March 2, 2002 was 33.0% versus 34.0% and 34.6% for the three months and nine months ended March 3, 2001, respectively.
Net income for the quarter ended March 2, 2002 was $1.7 million or $0.06 per diluted share. This represents a decrease of $26.0 million or 93.8% over the third quarter in the prior year, when earnings were $27.7 million or $1.00 per diluted share. Net loss for the nine months ended March 2, 2002 was $7.7 million or $0.28 per diluted share. This represents a decrease of $86.5 million or 109.8% over the same period in the prior year, when earnings were $78.8 million or $2.83 per diluted share.
Ending backlog on March 2, 2002 was $18.5 million compared to $21.7 million on December 1, 2001 and $105.0 million at the end of the third quarter of the prior fiscal year.
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Liquidity and Capital Resources
Our principal sources of liquidity consist of existing cash and cash equivalents and marketable securities of $289.5 million, and accounts receivable of $63.5 million. At March 2, 2002, ESI had a current ratio of 16.7:1 and long-term debt of $145.7. Working capital increased to $371.1 million at March 2, 2002 compared to $277.2 million at June 2, 2001. Due to decreased sales, accounts receivable decreased $21.9 million from June 2, 2001 to March 2, 2002. Inventory increased by $2.6 million from June 2, 2001 to March 2, 2002 due to prior purchase commitments in excess of customer sales demands. Other assets increased $5.3 million due primarily to vendor deposits for future material requirements. Property and equipment increased $12.1 million from June 2, 2001 to March 2, 2002. The increase in property and equipment is due to the purchase of land in Taiwan, the continued construction of a new corporate headquarters in Portland, Oregon and the purchase of equipment for the Klamath Falls capacity expansion. Current liabilities decreased $19.1 million from June 2, 2001 due to decreases in both income taxes payable and accrued bonus expense. Decreases in income taxes payable and accrued bonus expenses were a direct result of the decrease in sales.
In December 2001 and January 2002, we sold $150 million aggregate principal amount of 41/4% convertible subordinated notes due 2006 in a private offering. We received proceeds, net of the initial purchaser's discount, from these sales of approximately $145.5 million. We intend to use the net proceeds of the offering for general corporate purposes, which could include possible future acquisitions. Interest is due semiannually and, along with accretion of the underwriting discounts, is recorded as interest expense in the accompanying financial statements. No principal is due until maturity in 2006. In accordance with the terms of the convertible subordinated note agreement, we were required to place $18.2 million in trust. This restricted investment was invested in treasury bills and is sufficient to satisfy the first six interest payments due under the terms of the agreement. The notes are convertible into shares of our common stock at a conversion price of $38.00 per share, subject to adjustment in certain circumstances. The notes are redeemable by us any time on or after December 21, 2004 at specified prices. We have agreed to file a registration statement for the resale of the notes and the shares of common stock issuable upon conversion of the notes within 90 days after the initial closing of the offering.
Factors That May Affect Future Results
The statements contained in this report that are not statements of historical fact, including without limitation, statements containing the words "believes," "expects," and similar words, constitute forward-looking statements that are subject to a number of risks and uncertainties. From time to time we may issue other forward-looking statements. Investors are cautioned that such forward-looking statements are subject to an inherent risk that actual results may materially differ. The following information highlights some of the factors that could cause actual results to differ materially from the results expressed or implied by our forward-looking statements. Forward- looking statements should be considered in light of these factors. Factors that may result in such variances include, but are not limited to the following:
The industries that comprise our primary markets are volatile and unpredictable.
Our business depends upon the capital expenditures of manufacturers of components and circuitry used in wireless communications, computers, automotive electronics and other electronic products. In the past, the markets for electronic devices have experienced sharp downturns. During these downturns, electronics manufacturers, including our customers, have delayed or canceled capital expenditures, which has had a negative impact on our financial results.
The current economic downturn has resulted in a reduction in demand for our products and significant fluctuations in our profitability and net sales. We incurred net losses of $8.0 million and
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$1.5 million, respectively, in the first two quarters of fiscal year 2002, and a pro forma net loss of $2.1 million for the third quarter of fiscal year 2002, which excludes a one-time tax credit and related consulting expenses, on net sales of $50.0 million, $40.2 million and $36.4 million for those periods, respectively. This reflects a significant fluctuation from net income of $23.3 million, $27.7 million and $27.8 million, respectively, in the first three quarters of fiscal year 2001, on net sales of $128.5 million, $139.6 million and $136.6 million for those periods, respectively. We cannot assure you when, or if, demand for our products will increase.
During any downturn, including the current downturn, it will be difficult for us to maintain our sales levels. As a consequence, in order to maintain profitability we will need to reduce our operating expenses. However, much of our operating expenses are fixed and our ability to reduce such expenses is limited. Moreover, we may be unable to defer capital expenditures, and we will need to continue investment in certain areas such as research and development. We may incur charges related to impairment of assets and inventory write-offs. We also may experience delays in payments from our customers. The combined effect of this will have a negative effect on our financial results.
If the markets for our products improve, we must attract, hire and train a sufficient number of employees, including technical personnel, to meet increased customer demand. Our inability to achieve these objectives in a timely and cost-effective manner could have a negative impact on our business.
Our recent capacity expansion may not be utilized successfully or effectively, which could negatively affect our business.
We have completed a 53,000 square-foot manufacturing facility on a 31-acre parcel in Klamath Falls, Oregon. In June 2001, we began construction of a 62,000 square foot corporate headquarters building in Portland, Oregon. Both projects have been funded with existing capital resources and internally generated funds. Our capacity expansion involves risks. For example, the electronics industry has historically been cyclical and subject to significant economic downturns characterized by over-capacity and diminished demand for products of the type manufactured by us. Unfavorable economic conditions affecting the electronics industry in general, or any of our major customers, may affect our ability to successfully utilize our additional manufacturing capacity in an effective manner, which could adversely affect our operating results.
Our ability to reduce costs is limited by our need to invest in research and development.
Our industry is characterized by the need for continued investment in research and development. Because of intense competition in the industries in which we compete, if we were to fail to invest sufficiently in research and development, our products could become less attractive to potential customers, and our business and financial condition could be materially and adversely affected. As a result of our need to maintain our spending levels in this area, our operating results could be materially harmed if our net sales fall below expectations. In addition, as a result of our emphasis on research and development and technological innovation, our operating costs may increase further in the future, and research and development expenses may increase as a percentage of total operating expenses and as a percentage of net sales.
We depend on a few significant customers and we do not have long-term contracts with these or any of our other customers.
Ten large, multinational electronics companies constituted 30.7% of our fiscal 2001 net sales, and the loss of any of these customers could significantly harm our business. In addition, none of our customers have any long-term obligation to continue to buy our products or services, and any customer could delay, reduce or cease ordering our products or services at any time.
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Delays in shipment or manufacturing of our products could substantially decrease our sales for a period.
We will continue to derive a substantial portion of our revenues from the sale of a relatively small number of products with high average selling prices, some with prices as high as $2.5 million per unit. We generally recognize revenue upon shipment of our products. As a result, the timing of revenue recognition from a small number of orders could have a significant impact on our net sales and operating results for a reporting period. Shipment delays could significantly impact our recognition of revenue and could be further magnified by announcements from us or our competitors of new products and technologies, which announcements could cause our customers to defer purchases of our existing systems or purchase products from our competitors. Any of these delays could result in a material adverse change in our results of operations for any particular period.
We depend on manufacturing flexibility to meet the changing demands of our customers. Any significant delay or interruption of manufacturing operations as a result of software deficiencies, natural disasters, or other causes could result in ineffective manufacturing capabilities or delayed product deliveries, any or all of which could materially and adversely affect our results of operations.
Failure of critical suppliers of parts, components and manufacturing equipment to deliver sufficient quantities to us in a timely and cost-effective manner could negatively affect our business.
We use a wide range of materials in the production of our products, including custom electronic and mechanical components, and we use numerous suppliers to supply materials. We generally do not have guaranteed supply arrangements with our suppliers. We seek to reduce the risk of production and service interruptions and shortages of key parts by selecting and qualifying alternative suppliers for key parts, monitoring the financial stability of key suppliers and maintaining appropriate inventories of key parts. Although we make reasonable efforts to ensure that parts are available from multiple suppliers, key parts may be available only from a single supplier or a limited group of suppliers. Operations at our suppliers' facilities are subject to disruption for a variety of reasons, including work stoppages, fire, earthquake, flooding or other natural disasters. Such disruption could interrupt our manufacturing. Our business may be harmed if we do not receive sufficient parts to meet our production requirements in a timely and cost-effective manner.
We may make additional acquisitions in the future, and these acquisitions may subject us to risks associated with integrating these businesses into our current business.
Although we have no commitments or agreements for any acquisitions, we have made, and plan in the future to make, acquisitions of, or significant investments in, businesses with complementary products, services or technologies. Acquisitions involve numerous risks, many of which are unpredictable and beyond our control, including:
- •
- difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of acquired companies;
- •
- diversion of management's attention from other operational matters;
- •
- the potential loss of key employees of acquired companies;
- •
- lack of synergy, or inability to realize expected synergies, resulting from the acquisition;
- •
- the risk that the issuance of our common stock in a transaction could be dilutive to our shareholders if anticipated synergies are not realized; and
- •
- acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance by the acquired company.
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Our inability to effectively manage these acquisition risks could materially and adversely affect our business, financial condition and results of operations. In addition, if we issue equity securities to pay for an acquisition, the ownership percentage of our existing shareholders would be reduced and the value of the shares held by our existing shareholders could be diluted. If we use cash to pay for an acquisition, the payment could significantly reduce the cash that would be available to fund our operations or to use for other purposes. In addition, the Financial Accounting Standards Board has disallowed the pooling-of-interests method of acquisition accounting. This could result is significant charges resulting from amortization of intangible assets recorded in connection with future acquisitions.
Our markets are subject to rapid technological change, and to compete effectively we must continually introduce new products that achieve market acceptance.
The markets for our products are characterized by rapid technological change and innovation, frequent new product introductions, changes in customer requirements and evolving industry standards. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address technological changes as well as current and potential customer requirements. The introduction by us or by our competitors of new and enhanced products may cause our customers to defer or cancel orders for our existing products, which may harm our operating results. We have in the past experienced a slowdown in demand for our existing products and delays in new product development, and similar delays may occur in the future. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements or, where necessary, to license these technologies from others. Product development delays may result from numerous factors, including:
- •
- changing product specifications and customer requirements;
- •
- difficulties in hiring and retaining necessary technical personnel;
- •
- difficulties in reallocating engineering resources and overcoming resource limitations;
- •
- difficulties with contract manufacturers;
- •
- changing market or competitive product requirements; and
- •
- unanticipated engineering complexities.
The development of new, technologically advanced products is a complex and uncertain process, requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Further, we cannot assure you that our new products will gain market acceptance or that we will be able to respond effectively to product announcements by competitors, technological changes or emerging industry standards. Any failure to respond to technological change would significantly harm our business.
We are exposed to the risks that others may violate our proprietary rights, and our intellectual property rights may not be well protected in foreign countries.
Our success is dependent upon the protection of our proprietary rights. In the high technology industry, intellectual property is an important asset that is always at risk of infringement. We incur substantial costs to obtain and maintain patents and defend our intellectual property. For example, we have initiated litigation alleging that certain parties have violated various of our patents. We rely upon the laws of the United States and of foreign countries in which we develop, manufacture or sell our products to protect our proprietary rights. These proprietary rights may not provide the competitive advantages that we expect, however, or other parties may challenge, invalidate or circumvent these rights.
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Further, our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as in the United States. Many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in foreign countries. If we fail to adequately protect our intellectual property in these countries, it could be easier for our competitors to sell competing products in foreign countries.
We may be subject to claims of intellectual property infringement.
Several of our competitors hold patents covering a variety of technologies, applications and methods of use similar to some of those used in our products. From time to time, we and our customers have received correspondence from our competitors claiming that some of our products, as used by our customers, may be infringing one or more of these patents. For example, in February 2001, Cognex Corporation filed a lawsuit against us claiming we infringed a patent owned by it. Competitors or others may assert infringement claims against us or our customers in the future with respect to current or future products or uses, and these assertions may result in costly litigation or require us to obtain a license to use intellectual property rights of others. If claims of infringement are asserted against our customers, those customers may seek indemnification from us for damages or expenses they incur.
If we become subject to infringement claims, we will evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question or defending our position. These licenses, however, may not be available on satisfactory terms or at all. If we are not able to negotiate the necessary licenses on commercially reasonable terms or successfully defend our position, our financial condition and results of operations could be materially and adversely affected.
We are exposed to the risks of operating a global business, including risks associated with exchange rate fluctuations and legal and regulatory changes.
International shipments accounted for 72.2% of net sales for fiscal 2001, with 58.0% of our net sales to customers in Asia. We expect that international shipments will continue to represent a significant percentage of net sales in the future. Our non-U.S. sales and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including the following:
- •
- periodic local or geographic economic downturns and unstable political conditions;
- •
- price and currency exchange controls;
- •
- fluctuation in the relative values of currencies;
- •
- difficulties protecting intellectual property;
- •
- unexpected changes in trading policies, regulatory requirements, tariffs and other barriers; and
- •
- difficulties in managing a global enterprise, including staffing, collecting accounts receivable, managing distributors and representatives and repatriation of earnings.
In addition, as a result of our significant reliance on international sales, we may also be adversely affected by challenges to U.S. tax laws that benefit companies with foreign sales. In February 2000, the World Trade Organization (WTO) ruled that foreign sales corporations (FSCs), which provide an overall reduction in effective tax rates for these businesses, violate U.S. obligations under the General Agreement on Tariffs and Trade (GATT). Responding to the WTO's decision that FSCs constitute an illegal export subsidy, the U.S. government repealed the FSC rules effective October 1, 2000, subject to certain transition rules, and created a new income tax benefit that permanently excludes "foreign extraterritorial income" from taxable income. The extraterritorial income regime applies to transactions after September 30, 2000. The European Union believes that the new regime continues to violate
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GATT. The WTO has not ruled on the legality of the extraterritorial income regime. If the WTO rules that the extraterritorial income regime violates GATT and the U.S. government repeals the extraterritorial income regime and does not replace it with an equivalent form of relief, our future results of operations may be adversely affected.
Our establishment of direct sales in Asia exposes us to the risks related to having employees in foreign countries.
We have established direct sales and service organizations in China, Taiwan, Korea and Singapore. Previously, we sold our products through a network of commission-based sales representatives in these countries. Our shift to a direct sales model in these regions involves risks. For example, we may encounter labor shortages or disputes that could inhibit our ability to effectively sell and market our products. We also are subject to compliance with the labor laws and other laws governing employers in these countries and we will incur additional costs to comply with these regulatory schemes. Additionally we will incur new fixed operating expenses associated with the direct sales organizations, particularly payroll related costs and lease expenses. If amounts saved on commission payments formerly paid to our sales representatives do not offset these expenses, our operating results may be adversely affected.
Our business is highly competitive, and if we fail to compete our business will be harmed.
The industries in which we operate are highly competitive. We face substantial competition from established competitors, some of which have greater financial, engineering, manufacturing and marketing resources than we do. If we are unable to compete effectively with these companies, our market share may decline and our business could be harmed. Our competitors can be expected to continue to improve the design and performance of their products and to introduce new products. Furthermore, our technological advantages may be reduced or lost as a result of technological advances by our competitors. Their greater capabilities in these areas may enable them to:
- •
- better withstand periodic downturns;
- •
- compete more effectively on the basis of price and technology;
- •
- more quickly develop enhancements to and new generations of products; and
- •
- more effectively retain existing customers and obtain new customers.
In addition, new companies may in the future enter the markets in which we compete, further increasing competition in those markets.
We believe that our ability to compete successfully depends on a number of factors, including:
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- performance of our products;
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- quality of our products;
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- reliability of our products;
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- cost of using our products;
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- our ability to ship products on the schedule required;
- •
- quality of the technical service we provide;
- •
- timeliness of the services we provide;
- •
- our success in developing new products and enhancements;
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- existing market and economic conditions; and
- •
- price of our products as compared to our competitors' products.
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We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, and loss of market share.
Recent terrorist attacks have increased uncertainties for our business.
Like other U.S. companies, our business and operating results are subject to uncertainties arising out of the recent terrorist attacks on the United States, including the potential worsening or extension of the current global economic slowdown, the economic consequences of military action or additional terrorist activities and associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce. In particular, due to these uncertainties we are subject to:
- •
- the risk that future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities; and
- •
- the risk of more frequent instances of shipping delays.
The loss of key management or our inability to attract and retain sufficient numbers of managerial, engineering and other technical personnel could have a material adverse effect upon our results of operations.
Our continued success depends, in part, upon key managerial, engineering and technical personnel as well as our ability to continue to attract and retain additional personnel. In particular, we depend on our president and chief executive officer, Donald VanLuvanee. The loss of key personnel could have a material adverse effect on our business or results of operations. We may not be able to retain our key managerial, engineering and technical employees. Our growth may be dependent on our ability to attract new highly skilled and qualified technical personnel, in addition to personnel that can implement and monitor our financial and managerial controls and reporting systems. Attracting qualified personnel is difficult, and our recruiting efforts to attract and retain these personnel may not be successful.
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
Item 3. Market Risk Disclosure
Interest Rate Risk
As of March 2, 2002, our investment portfolio includes marketable debt securities of $278.2 million. These securities are subject to interest rate risk, and will decline in value if interest rates increase. These securities are classified as Securities Available for Sale; therefore, the impact of interest rate changes is reflected as a separate component of shareholder's equity. Due to the short duration of our investment portfolio, an immediate 10% increase in interest rates would not have a material effect on our financial condition.
Foreign Currency Exchange Rate Risk
We have limited involvement with derivative financial instruments and do not use them for trading purposes. Hedging derivatives are used to manage well-defined foreign currency risks. We enter into forward exchange contracts to hedge the value of accounts receivable denominated in Japanese yen. The impact of exchange rates on the forward contracts will be substantially offset by the impact of such changes on the underlying transactions. The effect of an immediate 10% change in exchange rates on the forward exchange contracts and the underlying hedged positions, denominated in Japanese yen, would not be material to our financial position or results of operations.
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We initiated litigation against Dynamic Details, Inc. and GSI Lumonics, Inc. for patent infringement in March 2000 in the U.S. District Court for the Central District of California (Electro Scientific Industries v. Dynamic Details, Inc. and GSI Lumonics, Inc., No. SACV00-272 AHS (ANx)). We believe that Dynamic Details and GSI Lumonics are violating our U.S. patent 5,847,960 entitled "Multi-tool Positioning System". The complaint alleges that Dynamic Details infringes our patent 5,847,960 and that GSI Lumonics has actively induced infringement of, and contributorily infringed, our patent 5,847,960. The complaint seeks injunctive relief and monetary damages. Dynamic Details, Inc. and GSI Lumonics, Inc. have filed a counterclaim for a declaratory judgment of non-infringement and invalidity of our patent 5,847,960. In August 2001, the District Court issued an order granting Dynamic Details and GSI Lumonics' motion for summary judgment of non-infringement. We have appealed the District Court's order to the U.S. Court of Appeals for the Federal Circuit. The appeal is pending.
Item 6. Changes in Securities and Use of Proceeds.
In December 2001 and January 2002, we sold $150 million aggregate principal amount of 41/4% convertible subordinated notes due 2006 in a private offering to Merrill Lynch & Co., the initial purchaser of the notes. This transaction was exempt from registration under Section 4(2) of the Securities Act of 1933 (the "Act") because Merrill Lynch & Co. is an accredited investor, as that term is defined in Rule 501 of the Act, and the transaction fell within the parameters of Rule 506 of the Act. The notes were subsequently sold to qualified institutional buyers pursuant to the exemption provided by Rule 144A of the Act. We received proceeds, net of the initial purchaser's discount, from these sales of approximately $145.5 million. We intend to use the net proceeds of the offering for general corporate purposes, which could include possible future acquisitions. Interest is due semiannually and, along with accretion of the underwriting discounts, is recorded as interest expense in our financial statements. No principal is due until maturity in 2006. In accordance with the terms of the convertible subordinated note agreement, we were required to place $18.2 million in trust. This restricted investment was invested in treasury bills and is sufficient to satisfy the first six interest payments due under the terms of the agreement. The notes are convertible into shares of our common stock at a conversion price of $38.00 per share, subject to adjustment in certain circumstances. The notes are redeemable by us any time on or after December 21, 2004 at specified prices. We have filed a registration statement for the resale of the notes and the shares of common stock issuable upon conversion of the notes.
- (a)
- Exhibits
4.1 | Registration Rights Agreement dated December 21, 2001 between the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated. Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3 (File No. 333-84552). | |
4.2 | Indenture dated December 21, 2001 between the Company and BNY Western Trust Company. Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-3 (File No. 333-84552). | |
4.3 | Form of Note. Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-3 (File No. 333-84552). |
- (b)
- Report on Form 8-K—Form 8-K was filed on December 17, 2001 announcing our intention to sell $125 million of convertible subordinated notes due 2006 in a private offering.
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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 12, 2001 | By | /s/ JAMES T. DOOLEY James T. Dooley, Vice President and Chief Financial Officer. |
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands except per share data)
Part I. Financial Information
Item 1. Consolidated Financial Statements
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands except per share data)
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share data) (unaudited)
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except per share data) (unaudited)
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
Item 3. Market Risk Disclosure
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Changes in Securities and Use of Proceeds.
SIGNATURES