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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended AUGUST 31, 1995 or
---------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file number 0-12853
ELECTRO SCIENTIFIC INDUSTRIES, INC.
Oregon 93-0370304
13900 N.W. Science Park Drive, Portland, Oregon
97229
(503) 641-4141
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-----
As of August 31, 1995 there were 8,626,021 shares of Common Stock of Electro
Scientific Industries, Inc. outstanding.
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Part I. Financial Information
PAGE NO.
-------
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets 3-4
August 31, 1995 and May 31, 1995
Consolidated Statements of Income 5
Three Months ended
August 31, 1995 and August 31, 1994
Consolidated Statements of Cash Flows 6-7
Three Months ended
August 31, 1995 and August 31, 1994
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial 11-12
Condition and Results of Operations
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 13
Signature 14
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
ASSETS August 31, 1995* May 31, 1995
- ------ ---------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 15,862 $ 11,385
Securities available for sale 16,962 17,011
Trade receivables, net 31,004 33,331
Inventories 27,226 25,478
Deferred income taxes 5,103 2,946
Other current assets 1,296 1,018
----- -----
Total current assets 97,453 91,169
------ ------
PROPERTY AND EQUIPMENT, AT COST 37,108 36,003
Less - Accumulated depreciation (21,590) (20,387)
------- -------
Net property and equipment 15,518 15,616
------ ------
OTHER ASSETS 4,751 3,813
----- -----
$117,722 $110,598
-------- --------
-------- --------
The accompanying notes are an integral part of these statements.
* Unaudited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
LIABILITIES AND
- ---------------
SHAREHOLDERS' EQUITY August 31, 1995* May 31, 1995
- -------------------- --------------- ------------
CURRENT LIABILITIES:
Accounts payable $ 5,859 $ 7,002
Accrued liabilities:
Payroll related 2,268 2,324
Income taxes 2,736 1,258
Other 5,126 3,464
----- -----
Total accrued liabilities 10,130 7,046
Deferred revenue 974 1,032
-------- -------
Total current liabilities 16,963 15,080
LONG-TERM LIABILITIES 1,041 1,074
----- -----
Total liabilities 18,004 16,154
------ ------
SHAREHOLDERS' EQUITY:
Preferred stock, without par value; 1,000,000
shares authorized, no shares issued -- --
Common stock, without par value; Authorized:
40,000,000 shares; Outstanding:
8,626,021, and 8,374,546 respectively 55,280 49,762
Retained earnings 44,438 44,682
------ ------
Total shareholders' equity 99,718 94,444
------ ------
$117,722 $110,598
-------- --------
-------- --------
The accompanying notes are an integral part of these statements.
* Unaudited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share)
Three Months Ended * Three Months Ended *
August 31, 1995 August 31, 1994
--------------- ---------------
Net sales $35,975 $21,006
Cost of sales 16,767 10,174
------ ------
Gross margin 19,208 10,832
------ ------
Operating expenses:
Selling, service and administrative 8,802 5,540
Research, development and engineering 3,907 2,157
Acquired in-process research and development 6,000 --
----- -----
Total operating expenses 18,709 7,697
Operating income 499 3,135
Interest income (expense) 273 (13)
Other income (expense) 85 (2)
--- ---
Income before income taxes 857 3,120
Provision for income taxes 317 920
----- -----
Net income $ 540 $ 2,200
-------- --------
-------- --------
Net income per share $ 0.06 $ 0.33
-------- ---------
-------- ---------
Weighted average number of shares
used in computing per share amounts 8,521 6,589
The accompanying notes are an integral part of these statements.
* Unaudited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of dollars)
Three Months Ended
August 31, 1995 August 31, 1994
--------------- ---------------
Cash Flows From Operating Activities:
Net income $540 $2,200
Adjustments to reconcile net income
to cash used in operating activities:
Acquired in-process research and development (1) 6,000 --
Depreciation and amortization 1,008 598
Deferred income taxes (1,989) (483)
Deferred revenue (58) 168
Changes in operating accounts:
Decrease (increase) in trade receivables 3,594 (6,738)
(Increase) decrease in inventories (163) 555
Increase in prepaid expenses (204) (100)
Increase in income taxes 1,478 835
(Decrease) increase in accounts payable, accrued
liabilities, and long-term liabilities (4,622) 986
------ ---
Net cash provided by (used in) operating activities: 5,584 (1,979)
----- -----
----- -----
Cash Flows From Investing Activities
Acquisition of XRL subsidiary (2) 104 --
Acquisition of Chicago Laser subsidiary, net of cash (3) -- (707)
Purchases of property and equipment (669) (334)
Purchase of securities (11,000) --
Proceeds from sales of securities and maturing securities 11,049 --
(Increase) decrease in other assets (490) 322
--- ---
Net cash used in investing activities: (1,006) (719)
----- ---
----- ---
Cash Flows From Financing Activities
(Reduction of) notes payable to banks (4) -- (360)
Proceeds from exercise of stock options and stock plans 301 41
--- --
Net cash, provided by (used in) financing activities: 301 (319)
--- ---
Effect Of Exchange Rates On Cash and Cash Equivalents (402) 986
Net Change In Cash And Cash Equivalents 4,477 (2,031)
Cash and Cash Equivalents at Beginning of Period 11,385 8,221
------ -----
Cash and Cash Equivalents at End of Period $15,862 $6,190
------- ------
------- ------
The accompanying notes are an integral part of these statements.
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Thousands of dollars)
(Unaudited)
Cash payments for interest were not significant for the three months ended
August 31, 1995 and August 31, 1994. Cash payments for income taxes were $871
and $642 for the three months ended August 31, 1995 and August 31, 1994,
respectively.
Notes:
(1) See Note 6 in Notes to Consolidated Financial Statements.
(2) Acquisition of XRL subsidiary:
Assets less liabilities acquired, net of cash $(5,113)
Issuance of Common Stock 5,217
-----
Cash acquired $(104)
-----
-----
(3) Acquisition of Chicago Laser subsidiary:
Assets less liabilities acquired, net of cash $(2,646)
Issuance of Common Stock 1,939
-----
Net cash used to acquire Chicago Laser subsidiary $(707)
-----
-----
(4) For the three months ended August 31, 1994, this includes debt acquired
related to the Chicago Laser acquisition which was subsequently paid off
in the same quarter.
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
Note 1 - Basis of Presentation
- ------------------------------
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in these interim statements. Management believes that the interim
statements include all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of results for the interim periods.
It is suggested that these consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's 1995 Annual Report.
Results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year.
Note 2 - Accounts Receivable
- ----------------------------
Accounts receivable are net of an allowance for doubtful accounts of $299 at
August 31, 1995 and at May 31, 1995.
Note 3 - Inventories
- --------------------
Inventories consist of the following (in thousands):
August 31, 1995 May 31, 1995 *
--------------- --------------
Raw materials and purchased parts $16,596 $15,566
Work-in-process 5,916 7,225
Finished goods 4,714 2,687
----- -----
$27,226 $25,478
------- -------
------- -------
Note 4 - Net Income Per Share
- -----------------------------
Net income per share is computed using the weighted average number of common
shares and common stock equivalents (stock options) outstanding.
*Audited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands)
(Unaudited)
Note 5 - Other Long Term Liabilities
- ------------------------------------
Other long-term liabilities represents a termination reserve for the employees
of the Company's Japanese subsidiary as mandated by Japanese law.
Note 6 - Acquisition of XRL, Inc.
- ---------------------------------
In July 1995, the Company acquired all of the outstanding stock of XRL, Inc., a
privately held company based in Canton, Massachusetts. XRL provides capital
equipment for semiconductor memory yield improvement. The purchase
consideration consisted of 206,867 shares of ESI stock. The shares are
restricted, subject to registration rights in December 1995 and March 1996. The
transaction was accounted for as a purchase.
The Company is still obtaining certain data related to the acquisition and,
accordingly, the purchase price allocation remains open. The Company recorded
the acquisition at the estimated fair value of the assets acquired and
liabilities assumed. In connection with the purchase price allocation, the
Company obtained an appraisal of the intangible assets which indicated that
substantially all of the acquired intangible assets consisted of research and
development projects in process. The development of these projects had not
reached technological feasibility and the technology has no alternative future
use. In accordance with generally accepted accounting principles, the acquired
in-process research and development of $6.0 million was charged to expense
during the first quarter ended August 31, 1995 and is reflected in the
accompanying Consolidated Statements of Income.
Pro-forma combined income statement data for the three months ended August 31,
1995 and 1994 was not materially different from results presented in the
accompanying Consolidated Statements of Income.
Note 7 - Acquisition of Chicago Laser Systems, Inc.
- --------------------------------------------------
On August 12, 1994, the Company acquired the stock of Chicago Laser
Systems, Inc. ("Chicago Laser"), a privately held company based in Des Plaines,
Illinois. The purchase consideration consisted of approximately $1,280 in cash
and 333,000 shares of ESI stock. The shares are restricted, subject to
Securities and Exchange Commission Rule 144. The transaction was accounted for
as a purchase.
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands)
(Unaudited)
The Company recorded the acquisition at the estimated fair value of the assets
acquired and liabilities assumed. The following pro-forma combined income
statement data for the three months ended August 31, 1994 was prepared as if the
acquisition had occurred at the beginning of the period.
Pro-forma
Combined Income Statement Data
------------------------------
Three months ended
August 31, 1994
---------------
Net sales $24,067
Net income $1,777
Net income per share $0.26
Note 8 - Income Taxes
- ---------------------
The effective income tax rate for the interim period is based on estimates of
annual amounts of taxable income, tax credits and other factors.
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
Results of Operations
Net sales for the quarter ended August 31, 1995 increased 71.3% or $15.0 million
over the same period of the prior year as a result of increased unit sales of
memory repair systems and miniature capacitor test and production systems. XRL
Inc., acquired in July 1995, contributed $1.8 million toward the increase in
memory repair systems sales. In addition, Chicago Laser, acquired in August
1994, increased laser trimming unit sales.
Gross margin for the three months ended August 31, 1995 of 53.4%, increased from
51.6% reported for the quarter ended August 31, 1994 as a result of reduced
material costs associated with increased sales volumes of ESI's miniature
capacitor test and production systems.
Selling, service and administrative expenses for the three months ended August
31, 1995 increased $3.3 million over the same period of the prior year as a
result of increased selling commissions associated with higher sales volumes,
increases in base compensation, as well as expenses associated with Chicago
Laser and XRL. As a percentage of sales, these expenses have decreased from
26.4% for the three month ended August 31, 1994 to 24.5% for the three month
ended August 31, 1995.
Research, development and engineering expenses for the current quarter increased
$1.8 million over the same period of the prior year due to compensation
increases as well as salaries and additional engineering costs associated with
Chicago Laser and XRL. Research, development and engineering costs, remained
relatively constant at 10.9% of net sales for the three months ended August 31,
1995, compared to 10.3% for the same period of the prior year.
In connection with the purchase price allocation of XRL, the Company obtained an
appraisal of the intangible assets which indicated that substantially all of the
acquired intangible assets consisted of research and development in process. In
accordance with generally accepted accounting principles, the acquired in-
process research and development of $6.0 million was expensed for the three
months ended August 31, 1995.
Interest income (expense) for the three months ended August 31, 1995 increased
over the comparable period of the prior year as a result of interest earned on
the proceeds from the November 1994 stock offering and repaying all bank and
long-term debt during the second quarter of fiscal 1994.
The effective tax rate of 37.0% for the three months ended August 31, 1995
increased from 29.5% for the comparable period of the prior year as a result of
higher pretax earnings in the United States and Japan.
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (continued)
Results of Operations
Net income for the quarter ended August 31, 1995, after the effect of the
acquired in-process research and development charge of $6.0 million, was
$540,000 or $0.06 per share. Net income, excluding the acquired in-process
research and development charge, was $4.3 million or $0.51 per share which
represents a 96.4% increase over the same period of the prior year of $2.2
million or $0.33 per share.
Incoming orders exceeded $40.0 million and ending backlog on August 31, 1995 was
$38.0 million which represents a 46.0% increase from May 31, 1995.
Liquidity, Capital Resources and Business Environment
The Company's principal sources of liquidity are operating earnings, existing
cash and cash equivalents and marketable debt securities of $32.8 million,
accounts receivable of $31.0 million, and a $7.0 million line of credit, none of
which was outstanding at August 31, 1995. ESI has no debt and a current ratio
of 5.7:1. The decrease in current ratio from 6.1:1 at May 31, 1995, results
from the acquisition of XRL, Inc. in July 1995. Working capital increased to
$80.5 million at August 31, 1995, from $76.1 million at May 31, 1995, as a
result of the increased level of sales.
The Company's business depends in large part upon the capital expenditures of
manufacturers of electronic devices, including miniature capacitors and DRAMs,
and circuits used in wireless telecommunications equipment. 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.
There is no assurance that these markets will not experience downturns in the
future or that such downturns would not have a material adverse effect on the
Company's operating results.
ESI's business success depends on: accurate identification of viable markets;
timely development of technologically superior products; and providing excellent
service to a small number of customers located throughout the world. Several
large, multinational companies represent a substantial portion of the Company's
sales and the loss of any one of these customers would be significant.
The cost of product development requires the Company to make large investments
in relation to its ability to recover from unforeseen market shifts. A
significant portion of future revenues are expected from new products. However,
a number of uncertainties exist, including ESI's product performance and
pricing, compared to competitors, and uncertain worldwide conditions.
Therefore, the Company can not predict the ultimate effect new products will
have on sales or net income. The combination of these factors can result in
large swings in working capital and results of operations from year to year.
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Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The 1995 Annual Meeting of Shareholders was held on Friday, September 22, 1995.
The following items were approved by the vote indicated:
1. Larry L. Hansen, Vernon B. Ryles, Jr. and Donald R. VanLuvanee were re-
elected to the Board of Directors for a three year term. David F.
Bolender, Dr. W. Arthur Porter, Douglas C. Strain and Keith L. Thomson
continue as directors.
For 6,989,550
Against 0
Abstain 352,900
2. Amendment of the 1989 Stock Option Plan was approved: the shares reserved
for issuance was increased by 300,000 to a total of 1,300,000 shares. In
addition, no employee may be granted options for more than 250,000 shares
in any fiscal year, and non-employee directors will receive an option of
1,000 shares on July 31 of each year. The minimum exercise price for all
options was increased to 100% of the fair market value of the common
stock on the date the option is granted. The option plan will remain in
effect indefinitely until all shares have been granted and exercised.
Also, the prohibition of vesting options during the first year of grant
was eliminated.
For 5,547,641
Against 1,779,363
Abstain 15,446
3. Approval of Arthur Andersen LLP as independent auditors for the Company.
For 7,332,320
Against 1,741
Abstain 8,389
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
ELECTRO SCIENTIFIC INDUSTRIES, INC.
Dated: October 10, 1995 By /s/ Barry L. Harmon
------------------------------------------
Barry L. Harmon, Senior Vice President and
Chief Financial Officer