Electro Scientific Industries (ESIO) 8-K ESI Announces Fourth Quarter and Ten-Month Fiscal 2008 Results

Exhibit 99.1

ESI Announces Fourth Quarter and Ten-Month Fiscal 2008 Results

PORTLAND, Ore.--(BUSINESS WIRE)--Electro Scientific Industries, Inc. (NASDAQ:ESIO), a leading provider of world-class photonic and laser micro-engineering systems, today announced results for its fiscal 2008 fourth quarter, representing the three-month period ended March 29, 2008, and results for fiscal 2008, representing the ten-month period of June 3, 2007 through March 29, 2008. Financial measures are provided on both a GAAP and non-GAAP basis, which excludes the impact of restructuring, purchase accounting, and equity compensation expenses.

Fourth quarter sales were $70.6 million, representing a 9% decrease from the third quarter of fiscal 2008. Net income for the quarter was $3.0 million or $0.11 per diluted share. On a non-GAAP basis, net income was $5.0 million or $0.18 per diluted share, down from $8.1 million or $0.29 per diluted share in the prior quarter.

“Although fiscal 2008 was another strong period for ESI, we began to see the impact of weakness in the memory market and lower capital spending in the fourth quarter,” noted Nick Konidaris, President and CEO. “Despite weaker demand, the fourth quarter represented the fourth consecutive period of revenue over $70 million for the company with healthy adoption of new products among our customers."

Fourth quarter orders were $51.1 million, down 31% from the third quarter of fiscal 2008. Orders for the fourth quarter reflected a decline in the semiconductor segment due to weakness in the memory market. Passive component system orders were also down due to a combination of seasonality, absorption of added capacity from orders placed earlier in the year and cautious capital spending. Strong orders for interconnect and micro-machining products partially offset the decline in the other segments and represented the second highest quarterly level on record.

Gross margin for the fourth quarter was 44.7%. Excluding the impact of approximately $0.3 million in purchase accounting and $0.2 million in equity compensation, non-GAAP gross margin for the fourth quarter was 45.5%, down sequentially from 47.1% in the prior quarter. Gross margins were impacted by lower margin systems and upgrades expected in the quarter and an unfavorable shift in product mix. Compared to the third quarter of 2007, fourth quarter margins were up approximately three percentage points on both a GAAP and non-GAAP basis as a result of improved margins on newer products and higher sales volume.

Operating expenses were $28.7 million in the fourth quarter. During the quarter, we began to take actions to reduce our cost structure, including reductions of headcount, consolidation of facilities, and acceleration of off-shore manufacturing to increase unit production in Asia. Excluding the impact of approximately $1.0 million in costs associated with these actions, $0.5 million in purchase accounting expenses and $1.1 million in equity compensation, non-GAAP operating expenses for the fourth quarter were $26.1 million, approximately flat to the prior quarter. Compared to the third quarter of fiscal 2007, expenses on a non-GAAP basis for the fourth quarter were up $5.7 million, largely due to the NWR acquisition.

Operating income for the quarter was $2.8 million or 4% compared to $8.2 million or 11% in the third quarter of fiscal 2008. On a non-GAAP basis operating income was $6.0 million or 8.5% compared to $10.4 million or 13.4% in the prior quarter.

Fiscal 2008 Results

Net orders for fiscal 2008 were $224.4 million in the ten-month period, a decrease of 18% compared to $275.3 million reported in fiscal year 2007. For the ten-month 2008 fiscal period, revenue was $247.2 million, down slightly from $250.8 million for the twelve-month period of fiscal 2007.

Operating income for the 2008 ten-month period was $20.0 million or 8.1% of revenue, including the impact of $6.1 million in purchase accounting expenses, $3.7 million in stock compensation and $1.0 million of restructuring expenses. On a non-GAAP basis, operating income for the ten-month period was $30.9 million or 12.5% of revenue compared to $27.1 million, or 10.8% in the prior twelve month fiscal period.

Net income for the 2008 fiscal period was $16.6 million, or $0.59 per diluted share, compared to $23.5 million, or $0.80 per diluted share in the prior year. On a non-GAAP basis, fiscal 2008 net income was $23.5 million, or $0.84 per diluted share, compared to $25.5 million, or $0.87 per diluted share for fiscal 2007.

“Fiscal 2008 was a strong period for the company in terms of execution of our growth strategy,” Konidaris continued. “In the semiconductor segment, we successfully introduced our dual-beam memory repair system and shipped our 500^th unit. Demand for our latest high-capacitance tester, the 3550, played a significant role in generating the strongest shipment and revenue levels since fiscal 2001 in the passive component segment. For interconnect and micro-machining, demand for new applications generated the highest annual order levels on record. In addition, we completed the acquisition of New Wave Research in our fiscal second quarter, which provided entry into attractive new markets.”

Balance Sheet and Cash Flow

Cash and investments were $161 million, down $21 million from the third quarter. During the quarter we completed our share repurchase program utilizing $12.7 million to repurchase approximately 778 thousand shares of stock at an average price of $16.36 per share. Cash used in operations was $2.5 million for the fourth quarter, driven by inventory increases of approximately $13 million, partially offset by operating income and other working capital items. Additionally, we recorded a reserve of 20%, or approximately $4 million against our auction rate securities as a temporary impairment through equity, consistent with recent industry practice due to the ongoing illiquidity of these securities.

Inventories increased in the fourth quarter primarily due to lower than expected demand and push out of some customer deliveries to future quarters. Although we are comfortable with the overall quality of our inventory, we are disappointed with our results and plan to reduce inventory as we go forward.

Fourth quarter deferred revenue was down $12 million from the prior quarter to $13 million. The decrease in deferred revenue was due to customer acceptance of new products and systems into production during the quarter. This decrease brings deferred revenue back into alignment with historical levels after several new product introductions earlier in the year.

Q1 2009 Outlook

Konidaris added, “As a result of the current market conditions, we expect our shipments and revenue to be approximately $55 to $65 million in the first quarter of fiscal 2009. Gross margin, excluding the impact of purchase accounting and stock compensation, is expected to be in the range of 43 to 44 percent, down sequentially due to lower revenue and production volumes. Operating expenses are expected to be down approximately $2.0 million, excluding the estimated impacts of purchase accounting and equity compensation of $2.2 million and additional restructuring expenses of approximately $1.0 million. We expect non-operating income to be approximately $1.3 million in the first quarter. As a result, non-GAAP earnings per share are expected to be between $0.05 to $0.10 per share.

“Despite the lower overall order levels experienced in the fourth quarter, we continued to see demand for new products as customers seek to improve production efficiencies and lower costs. This typical pattern for our industry during cyclical downturns reinforces our strategy to focus on the development of new products and applications to meet the on-going needs of our customers. At the same time, we will work to ensure that our operational model remains as efficient as possible. We believe our on-going commitment to growth and profitability will place ESI in a stronger position once the overall market conditions improve.”

The company will hold a conference call today at 5:00 p.m. Eastern Time. The session will include a review of the financial results, operational performance, business outlook, and a question and answer period.

The conference call can be accessed by calling 800-374-2470 (domestic participants) or 706-634-5108 (international participants). The conference ID number is 44049463. A live audio Web cast can be accessed at www.esi.com. Upon completion of the call, an audio replay will be accessible through May 22, 2008 at 800-642-1687 (domestic participants) or 706-645-9291 (international participants). The audio replay will also be available on the ESI Web site.

Discussion of Non-GAAP Financial Measures

In this press release, we have presented financial measures which have not been determined in accordance with generally accepted accounting principles (GAAP) and are therefore non-GAAP financial measures. Non-GAAP financial measures exclude the impact of restructuring, purchase accounting and equity compensation expenses. We believe that this presentation of non-GAAP financial measures provides investors with valuable information regarding the largely non-cash impact of purchase accounting amortization and equity based compensation and the non-recurring impact of restructuring and certain purchase accounting charges on our net income and net income per share. We have included a reconciliation of various non-GAAP financial measures to those measures reported in accordance with GAAP. Because our calculation of non-GAAP financial measures may differ from similar measures used by other companies, investors should be careful when comparing our non-GAAP financial measures to those of other companies.

About ESI

ESI is a pioneer and leading supplier of world-class production laser systems that help its microelectronics customers achieve compelling yield and productivity gains. The company’s industry-leading, application-specific products enhance electronic-device performance in three key sectors—semiconductors, components and electronic interconnect—by enabling precision fine-tuning of device micro-features in high-volume manufacturing environments. Founded in 1944, ESI is headquartered in Portland, Ore. More information is available at www.esi.com.

Forward-Looking Statements

This press release includes forward-looking statements concerning the markets we serve, shipments and revenue, gross margins, operating expenses, restructuring expenses, the impact of the NWR acquisition, non-operating income, tax rates and earnings per share. Actual results may differ materially from those in the forward-looking statements. Risks and uncertainties that may affect the forward-looking statements include: the relative strength and volatility of the electronics industry, including the impact of the current weakness in the memory market and cautious spending in the broader capital equipment markets we serve – which is dependent on many factors including component prices, global economic strength and political stability, and overall demand for electronic devices (such as capacitors, semiconductor memory devices and advanced electronic packages) used in wireless telecommunications equipment, computers and consumer and automotive electronics; the risk that customer orders may be canceled or delayed; the ability of the company to respond promptly to customer requirements; the ability of the company to develop, manufacture and successfully deliver new products and enhancements; the risk that customer acceptance of new or customized products may be delayed; the ability of the company to achieve anticipated cost reductions and savings; the company’s need to continue investing in research and development; the company’s ability to hire and retain key employees; the company’s ability to successfully integrate NWR; the risk of disruptions to the business of NWR resulting from the acquisition; the company’s ability to create and sustain intellectual property protection around its products; the company’s ability to utilize recorded deferred tax assets; taxes, interest or penalties resulting from tax audits; changes in tax laws or the interpretation of such tax laws, and future liquidity of auction rate securities.

Electro Scientific Industries, Inc.
FY 2008 Results
(In thousands, except per share data)
(Unaudited)
Operating Results:		Three Months Ended				Fiscal Year Ended
						(10 months)		(12 months)
		Mar. 29, 2008		Mar. 3, 2007		Mar. 29, 2008		Jun. 2, 2007
Net sales		$	70,590	$	59,411	$	247,155	$	250,824
Cost of sales			39,017		34,456		135,014		142,054
Gross profit			31,573		24,955		112,141		108,770
Operating expenses:
	Selling, service and administration		17,864		11,882		52,967		49,119
	Research, development and engineering		10,884		9,122		36,371		37,703
	Write-off of acquired in-process research & development		-		-		2,800		-
	Insurance recoveries		-		-		-		(2,287	)
	Total operating expenses		28,748		21,004		92,138		84,535
Operating income			2,825		3,951		20,003		24,235
Interest and other income, net			1,777		2,695		6,509		10,392
Income before income taxes			4,602		6,646		26,512		34,627
Provision for income taxes			1,623		1,012		9,923		11,103
	Net income	$	2,979	$	5,634	$	16,589	$	23,524
Net income per share - basic		$	0.11	$	0.19	$	0.59	$	0.81
Net income per share - diluted		$	0.11	$	0.19	$	0.59	$	0.80

Reconciliation of GAAP to Non-GAAP Financial Measures:
		Three Months Ended									Fiscal Year Ended
											(10 months)			(12 months)
		Mar. 29, 2008			Dec. 29, 2007			Mar. 3, 2007			Mar. 29, 2008			Jun. 2, 2007
Gross profit per GAAP		$	31,573		$	35,684		$	24,955		$	112,141		$	108,770
	Purchase accounting included in cost of sales		321			515			-			1,946			-
	Equity compensation included in cost of sales		211			169			114			538			509
	Subtotal - non-GAAP adjustments to gross profit		532			684			114			2,484			509
Non-GAAP gross profit		$	32,105		$	36,368		$	25,069		$	114,625		$	109,279
Non-GAAP gross margin			45.5	%		47.1	%		42.2	%		46.4	%		43.6	%
Operating expense per GAAP		$	28,748		$	27,486		$	21,004		$	92,138		$	84,535
Purchase accounting included in:
	Selling, service and administration		513			542			-			1,445			-
	Research, development and engineering		(18	)		(11	)		-			(42	)		-
	Write-off of acquired in-process research & development		-			-			-			2,800			-
	Subtotal - purchase accounting included in operating expense		495			531			-			4,203			-
Equity compensation included in:
	Selling, service and administration		809			685			373			2,320			1,666
	Research, development and engineering		338			284			176			877			710
	Subtotal - equity compensation included in operating expense		1,147			969			549			3,197			2,376
Restructuring charges included in:
	Selling, service and administration		705			-			-			705			-
	Research, development and engineering		267			-			-			267			-
	Subtotal - restructuring charges included in operating expense		972			-			-			972			-
	Total non-GAAP adjustments to operating expense		2,614			1,500			549			8,372			2,376
Non-GAAP operating Expense		$	26,134		$	25,986		$	20,455		$	83,766		$	82,159
Operating income per GAAP		$	2,825		$	8,198		$	3,951		$	20,003		$	24,235
	Non-GAAP adjustments to gross profit		532			684			114			2,484			509
	Non-GAAP adjustments to operating expense		2,614			1,500			549			8,372			2,376
	Non-GAAP operating income	$	5,971		$	10,382		$	4,614		$	30,859		$	27,120
Net income per GAAP		$	2,979			6,662		$	5,634		$	16,589		$	23,524
	Non-GAAP adjustments to gross profit		532			684			114			2,484			509
	Non-GAAP adjustments to operating expense		2,614			1,500			549			8,372			2,376
	Income tax effect of non-GAAP adjustments		(1,138	)		(790	)		(214	)		(3,925	)		(929	)
	Non-GAAP net income	$	4,987		$	8,056		$	6,083		$	23,520		$	25,480
Basic Non-GAAP net income per share		$	0.18		$	0.29		$	0.21		$	0.84		$	0.87
Diluted Non-GAAP net income per share		$	0.18		$	0.29		$	0.21		$	0.84		$	0.87

Electro Scientific Industries, Inc.
FY 2008 Results
(Amounts in thousands)
(Unaudited)
Financial Position As Of:			Mar. 29, 2008		Dec. 29, 2007		Jun. 2, 2007
Assets
Current assets:
	Cash and cash equivalents	$	141,059	$	152,997		100,462
	Marketable securities		2,011		7,584		124,607
	Total cash and securities		143,070		160,581		225,069
	Trade receivables, net		60,272		59,986		55,722
	Inventories		101,501		88,934		80,981
	Shipped systems pending acceptance		2,583		10,368		1,817
	Deferred income taxes, net		14,906		10,179		9,504
	Prepaid and other current assets		7,822		8,722		5,776
	Total current assets		330,154		338,770		378,869
Long-term marketable securities, net			17,835		21,727		3,622
Property, plant and equipment, net			47,962		45,792		43,859
Deferred income taxes, net			1,026		8,373		11,246
Goodwill			12,267		11,541		1,442
Acquired intangible assets, net			10,261		11,001		-
Other assets			36,107		35,938		26,630
	Total assets	$	455,612	$	473,142	$	465,668
Liabilities and shareholders' equity
Current liabilities:
	Accounts payable	$	17,604	$	12,215		13,826
	Accrued liabilities		25,300		26,307		25,465
	Deferred revenue		12,583		24,751		12,290
	Total current liabilities		55,487		63,273		51,581
Income tax liability			7,885		7,598		5,757
Shareholders' equity:
Preferred and common stock			131,417		142,612		162,719
Retained earnings			262,135		259,156		245,546
Accumulated other comprehensive income (loss)			(1,312)		503		65
	Total shareholders' equity		392,240		402,271		408,330
	Total liabilities and shareholders' equity	$	455,612	$	473,142	$	465,668
End of period shares outstanding			27,112		27,837		28,766
Total cash and investments		$	160,905	$	182,308	$	228,691

Electro Scientific Industries, Inc.
Analysis of FY 2008 Results
(Dollars and shares in thousands)
(Unaudited)
		Three Months Ended						Fiscal Year Ended
								(10 months)			(12 months)
		Mar. 29, 2008			Mar. 3, 2007			Mar. 29, 2008			Jun. 2, 2007
Sales detail:
	Semiconductor Group	$	23,723		$	33,891		$	109,156		$	145,381
	Passive Components Group		28,136			15,756			75,112			63,093
	Interconnect & Micro-machining Group		18,731			9,764			62,887			42,350
	Total	$	70,590		$	59,411		$	247,155		$	250,824
Gross margin %			45	%		42	%		45	%		43	%
Selling, service and administration expense % (a)			25	%		20	%		21	%		19	%
Research, development and engineering expense %			15	%		15	%		15	%		15	%
Operating income %			4	%		7	%		8	%		10	%
Effective tax rate %			35	%		15	%		37	%		32	%
Average shares outstanding - basic			27,599			29,185			27,929			29,125
Average shares outstanding - diluted			27,680			29,584			28,323			29,379
End of period employees			743			590			743			585
(a) Includes insurance recoveries.

Electro Scientific Industries, Inc.
FY 2008 Results
(Amounts in thousands)
(Unaudited)
Consolidated Statements of Cash Flows:		Fiscal Year Ended
		(10 months)			(12 months)
		Mar. 29, 2008			Jun. 2, 2007
CASH FLOWS FROM OPERATING ACTIVITIES
	Net income	$	16,589		$	23,524
Adjustments to reconcile net income to net cash
provided by operating activities:
	Depreciation		8,208			8,370
	Amortization of intangible assets		2,050			-
	Write-off of in-process research & development		2,800			-
	Stock-based compensation expense		3,721			2,884
	Provision for doubtful accounts		-			103
	Loss on disposal of property and equipment		115			2
	Insurance recovery on damaged equipment		-			(1,287	)
	Deferred income taxes		2,931			4,642
Changes in operating accounts:
	(Increase) decrease in trade receivables, net		696			(7,866	)
	Increase in inventories		(18,218	)		(16,331	)
	(Increase) decrease in shipped systems pending acceptance		(766	)		2,124
	Decrease in prepaid and other current assets		1,411			204
	Increase (decrease) in accounts payable and other liabilities		(2,986	)		8,146
	Decrease in deferred revenue		(1,310	)		(1,031	)
Net cash provided by operating activities			15,241			23,484
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment			(6,015	)		(8,387	)
Proceeds from the sale of property, plant and equipment			1			6
Cash paid for acquisition of New Wave Research, net of cash acquired			(36,159	)		-
Minority equity investments			(1,115	)		(11,000	)
Insurance recovery on damaged equipment			-			1,287
Change in investments, net			105,815			21,522
Increase in other assets			(2,589	)		(638	)
Net cash provided by investing activities			59,938			2,790
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options and stock plans			4,535			3,318
Tax benefit realized from share options exercise			85			488
Share repurchases			(40,270	)		(9,804	)
Net cash used in financing activities			(35,650	)		(5,998	)
Effect of exchange rate changes on cash			1,068			225
NET CHANGE IN CASH AND CASH EQUIVALENTS			40,597			20,501
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			100,462			79,961
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	141,059		$	100,462

CONTACT:
ESI
Chris Butterfield, 503-672-5760