-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K3O7bvHK2D0Pm/JvS4DePu/CraqZoyzT42YyYTmh1Ln5AKJZzidwGK/iN50iI3s4 n5fRGI0rSHmm0v6BwhOtCA== 0000912057-00-017424.txt : 20000412 0000912057-00-017424.hdr.sgml : 20000412 ACCESSION NUMBER: 0000912057-00-017424 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000226 FILED AS OF DATE: 20000411 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTRO SCIENTIFIC INDUSTRIES INC CENTRAL INDEX KEY: 0000726514 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 930370304 STATE OF INCORPORATION: OR FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12853 FILM NUMBER: 598637 BUSINESS ADDRESS: STREET 1: 13900 NW SCIENCE PARK DR CITY: PORTLAND STATE: OR ZIP: 97229 BUSINESS PHONE: 5036414141 MAIL ADDRESS: STREET 1: 13900 NW SCIENCE PARK DRIVE CITY: PORTLAND STATE: OR ZIP: 97229-5497 10-Q 1 10-Q Page 1/22 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2000 OR ----------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________ COMMISSION FILE NUMBER 0-12853 ELECTRO SCIENTIFIC INDUSTRIES, INC. OREGON 93-0370304 13900 N.W. SCIENCE PARK DRIVE, PORTLAND, OREGON 97229 0 (503) 641-4141 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- AS OF FEBRUARY 26, 2000 THERE WERE 26,670,996 SHARES OF COMMON STOCK OF ELECTRO SCIENTIFIC INDUSTRIES, INC. OUTSTANDING. Page 2/22 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 February 26, 2000 and May 31, 1999 Consolidated Statements of Income 5 Three Months and Nine Months ended February 26, 2000 and February 28, 1999 Consolidated Statements of Cash Flows 6-7 Nine Months ended February 26, 2000 and February 28, 1999 Notes to Consolidated Financial Statements 8-13 Item 2. Management's Discussion and Analysis of Financial 14-19 Condition and Results of Operations Part II. Other Information Item 1. Legal Proceedings 20-21 Item 6. Exhibits and Reports on Form 8K 22 Signature 23
Page 3/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
ASSETS February 26, 2000* May 31, 1999 - ------ ------------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 19,334 $ 7,793 Securities available for sale 39,964 24,865 ------ ------ Total cash and securities 59,298 32,658 Trade receivables, net 83,518 78,998 Income tax refund receivable 4,664 2,835 Inventories 53,218 51,313 Deferred income taxes 6,779 6,699 Other current assets 2,794 1,198 ----- ------- Total current assets 210,271 173,701 ------- ------- PROPERTY AND EQUIPMENT, AT COST 75,554 70,047 Less - Accumulated depreciation (41,409) (36,585) -------- -------- Net property and equipment 34,145 33,462 ------ ------ DEFERRED INCOME TAXES 2,539 2,455 OTHER ASSETS 13,972 12,205 ------ ------ Total assets $260,927 $221,823 ======== ========
The accompanying notes are an integral part of these statements. * Unaudited Page 4/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY February 26, 2000* May 31, 1999 - -------------------- ------------------ ------------ CURRENT LIABILITIES: Accounts payable $ 10,975 $ 6,698 Accrued liabilities: Payroll related 7,533 4,478 Commissions 4,288 5,340 Warranty 2,301 2,103 Other 1,875 1,603 -------- -------- Total accrued liabilities 15,997 13,524 Deferred revenue 518 340 -------- -------- Total current liabilities 27,490 20,562 ------ ------ SHAREHOLDERS' EQUITY: Preferred stock, without par value 1,000 shares authorized; no shares issued -- -- Common stock, without par value; Authorized: 40,000 shares; Outstanding: 26,670 and 26,094 respectively 114,701 107,206 Retained earnings 120,200 96,545 Accumulated other comprehensive income (loss) (1,464) (2,490) ------- ------- Total shareholders' equity 233,437 201,261 ------- ------- Total liabilities and shareholders' equity $260,927 $221,823 ======== ========
The accompanying notes are an integral part of these statements. *Unaudited Page 5/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share) (unaudited)
Three Months Ended Nine Months Ended ------------------ ----------------- Feb. 26, 2000 Feb. 28, 1999 Feb. 26, 2000 Feb. 28, 1999 ------------- ----------------- ------------- ------------------- Net Sales $ 82,081 $ 51,506 $207,990 $148,965 Cost of sales 36,182 25,415 95,182 74,118 ------ ------ ------ ------ Gross margin 45,899 26,091 112,808 74,847 Operating expenses: Selling, service and administrative 21,584 14,331 57,322 42,964 Research, development and engineering 7,738 7,340 22,267 22,908 Non-recurring operating expenses -- 2,773 - 2,773 -- ----- - ----- Total operating expenses 29,322 24,444 79,589 68,645 ------ ------ ------ ------ Operating income 16,577 1,647 33,219 6,202 Interest income 828 304 1,405 907 Other income, net 158 84 163 190 -------- -------- --------- ------- Income before income taxes 17,563 2,035 34,787 7,299 Provision for income taxes 5,620 1,115 11,132 2,707 ----- ----- ------ ----- Net income $ 11,943 $ 920 $ 23,655 $ 4,592 ======== ===== ======== ======= Net income per share: (1) Basic $ 0.45 $ 0.04 $ 0.90 $ .18 ======== ======== ======== ======== Diluted $ 0.43 $ 0.03 $ 0.87 $ .17 ======== ======== ======== ======== Weighted average number of shares: (1) Basic 26,329 25,886 26,208 25,790 Diluted 27,489 26,688 27,094 26,360
(1) Share and per share amounts for all periods presented have been restated to reflect a two-for-one stock split in February 2000. See note 3 to the consolidated financial statements. Page 6/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Months Ended Feb. 26, 2000 Feb. 28, 1999 ------------- ------------- Cash Flows From Operating Activities: Net income $ 23,655 $ 4,592 Adjustments to reconcile net income to cash provided by (used in) operating activities: Non-recurring operating expenses -- 2,773 Depreciation and amortization 6,861 4,907 Deferred income taxes (165) -- Changes in operating accounts: Increase in trade receivables (3,289) (12,806) Increase in inventories (4,255) (1,610) (Increase) Decrease in other current assets (3,155) 1,313 Increase (Decrease) in current liabilities 6,228 (3,890) ----- ------- Net cash provided by (used in) operating activities 25,880 (4,721) ------ ------- Cash Flows From Investing Activities: Purchases of property and equipment (6,229) (5,998) Purchase of securities (28,301) (16,330) Proceeds from sales of securities and maturing securities 13,164 18,745 Increase in other assets (468) (1,213) -------- ----------- Net cash used in investing activities (21,834) (4,796) -------- ------- Cash Flows From Financing Activities: Distributions to shareholders -- (573) Proceeds from exercise of stock options and stock plans 7,495 2,912 ------ ------- Net cash provided by financing activities 7,495 2,339 ------ ------ Net Change in Cash and Cash Equivalents 11,541 (7,178) Cash and Cash Equivalents at Beginning of Period 7,793 10,034 ----- ------ Cash and Cash Equivalents at End of Period $ 19,334 $ 2,856 =========== ==========
The accompanying notes are an integral part of these statements. Page 7/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands) (unaudited) Cash payments for interest were not significant for the nine months ended February 26, 2000 and February 28, 1999. Cash payments for income taxes were $11,683 and $2,839 for the nine months ended February 26, 2000 and February 28, 1999, respectively. Page 8/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except per share data) (unaudited) NOTE 1 - BASIS OF PRESENTATION The condensed, consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in these interim statements. Management believes that the interim statements include all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of results for the interim periods. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 1999 Annual Report filed on Form 10-K. Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. NOTE 2 - INVENTORIES Inventories consist of the following:
February 26, 2000 May 31, 1999* ----------------- ------------- Raw materials and purchased parts $ 27,645 $32,419 Work-in-process 12,646 8,575 Finished goods 12,927 10,319 ------ -------- Total inventories $ 53,218 $51,313 ======= =======
*Audited Page 9/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands except per share data) (unaudited) NOTE 3 - STOCK SPLIT The Company's Board of Directors approved a two-for-one stock split to shareholders of record at the close of business February 23, 2000, effective February 24, 2000. All per share and share data in the Consolidated Financial Statements and Notes to Consolidated Financial Statements have been retroactively restated to reflect the stock split. NOTE 4- NET INCOME PER SHARE The Company computes net income per share in accordance with Statement of Financial Accounting Standards 128, "Earnings Per Share" (SFAS 128). All earnings per share amounts in the following table are presented to conform to the SFAS 128 requirements.
Three Months Ended Nine Months Ended Feb 26, 2000 Feb. 28,1999 Feb 26, 2000 Feb. 28,1999 ------------ ------------ ------------ ------------ Net income $11,943 $920 $23,655 $4,592 Weighted average number of shares of common stock and common stock equivalents outstanding: Weighted average number of shares outstanding for computing basic net income per share 26,329 25,886 26,208 25,790 Dilutive effect of employee stock plans 1,160 802 886 570 ----- --- --- --- Weighted average number of shares outstanding for computing diluted net income per share 27,489 26,688 27,094 26,360 ====== ====== ====== ====== Net income per share - basic $ 0.45 $ 0.04 $ 0.90 $ 0.18 ====== ====== ====== ====== Net income per share - diluted $ 0.43 $ 0.03 $ 0.87 $ 0.17 ====== ====== ====== ======
Page 10/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands except per share data) (unaudited) NOTE 4- CONT. For purposes of computing diluted earnings per share, weighted average common share equivalents do not include the following stock options because inclusion would have an anti-dilutive effect on the earnings per share calculation. The following shares have not been recalculated using the treasury stock method.
Three Months Ended Nine Months Ended Feb. 26, 2000 Feb. 28, 1999 Feb. 26, 2000 Feb. 28, 1999 ------------- ------------- ------------- ------------- Number of Employee Stock Option 5 252 9 524
NOTE 5- ACQUISITIONS MICROVISION, INC. On January 29, 1999, the Company completed the acquisition of MicroVision, a provider of integrated, vision-based inspection and automation solutions for use in semiconductor front-end and back-end applications, located in Chanhassen, Minnesota. The acquisition consideration consisted of 2,037 shares of ESI stock. The transaction has been accounted for as a pooling-of-interests and, accordingly, all data included in the Consolidated Financial Statements has been restated. TESTEC, INC. On December 21, 1998, the Company completed the acquisition of Testec, a provider of electrical test systems for the passive component marketplace, located in Phoenix, Arizona. The acquisition consideration consisted of 1,000 shares of ESI common stock. The transaction has been accounted for as a pooling-of-interests and, accordingly, all data included in the Consolidated Financial Statements has been restated. Page 11/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands except per share data) (unaudited) NOTE 5 CONT. A reconciliation of amounts prior to these acquisitions to amounts included in the financial statements is as follows:
Three Months Ended Nine Months Ended ------------------ ----------------- Feb. 28, 1999 Feb. 28, 1999 ------------- ------------- Revenue: ESI $ 48,917 $ 139,458 MicroVision 1,772 6,920 Testec 817 2,587 -------- --------- As Restated $ 51,506 $ 148,965 Net Income: (Loss) ESI $ 827 $ 3,917 MicroVision (122) 335 Testec 215 340 -------- --------- As Restated $ 920 $ 4,592
NOTE 6- INCOME TAXES The effective income tax rate for the interim period is based on estimates of annual amounts of taxable income, tax credits and other factors. Page 12/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands except share data) (unaudited) NOTE 7 NEW ACCOUNTING PRONOUNCEMENTS REVENUE RECOGNITION The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," in December 1999. SAB 101 provides guidance for applying Generally Accepted Accounting Principles (GAAP) to revenue recognition in financial statements filed with the SEC. Specifically, SAB 101 addresses recognizing revenue upon acceptance versus shipment. The Company currently recognizes revenue generally upon shipment. Although the Company believes its revenue recognition policies are in accordance with GAAP, the Company is currently studying SAB 101 to determine its impact on the Company's financial statements. The Company is required to adopt SAB 101 in the first quarter of FY2001 ended August 2000. HEDGING ACTIVITIES The Financial Accounting Standards Board issued "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), in June 1998. SFAS 133 requires the company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The change in the derivative's fair value related to the ineffective portion of a hedge, if any, will be immediately recognized in earnings. The Company expects to adopt this Standard as of the beginning of its fiscal year 2002. The effect of adopting this standard is currently being evaluated, but is not expected to have a material effect on the Company's financial position or its results of operations. NOTE 8 - EMPLOYEE BENEFIT PLANS The Company has an employee savings plan under the provisions of section 401(k) of the Internal Revenue Code. Effective January 2000, the Company increased its contribution to 6% from 5% in 1999. This increase is not expected to have a material effect on the Company's financial position or its results of operations. Page 13/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands except share data) (unaudited) NOTE 9 - SUBSEQUENT EVENTS ESI initiated litigation against Dynamic Details, Inc. and GSI Lumonics, Inc. for patent infringement in March 2000 in the U.S. District Court of California. The complaint alleges that Dynamic Details and Lumonics are violating ESI's U.S. patent 5,847,960 entitled "Multi-Tool Positioning System." The complaint alleges that Dynamic Details infringes ESI's patent 5,847,960 and that GSI Lumonics has actively induced infringement of, and contributorily infringed, ESI's patent 5,857,960. Page 14/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS Results of Operations Revenue of $82.1 million for the quarter ended February 26, 2000 was $30.6 million or 59.4% higher than in the third quarter of fiscal 1999, and was $15.1 million or 22.6% higher than in the quarter ended November 27, 1999. Revenue of $208.0 million for the nine months ended February 26, 2000 was $59.0 million or 39.6% higher as compared to the nine months ended February 28, 1999. Higher revenues for the three month period ended February 26, 2000 over both the prior year and prior quarter were to due increased sales in all product lines due mainly to an increase in units shipped. These increases are tied to general growth in our markets. Electronic Component Systems represented the largest increase in sales, increasing by 130.5% over the prior year and 35.6% over the prior quarter and represented 37.2% of sales for the quarter. Vision and Inspection product sales increased for the three-month period over both the prior year and prior quarter by 102.7% and 27.6%, respectively, and represented 15.9% of total sales for the quarter. Circuit Fine Tuning sales increased over both the prior year and prior quarter by 52.4% and 24.8%, respectively, and represented 9.9% of total sales for the quarter. Memory Yield Improvement system sales increased over the prior year and prior quarter by 19.7% and 13.3%, respectively, and represented 24.9% of total sales for the quarter. Advanced Electronic Packaging system sales increased over the prior year and prior quarter by 5.7% and 3.1%, respectively, and represented 12.1% of total sales for the quarter. Higher revenues for the nine-month period ended February 26, 2000 over the prior year were due to higher sales in all product lines except Advanced Electronic Packaging systems. The largest percentage increase in sales was due to Electronic Component Systems, which increased 114.8% over the prior year and represented 33.9% of year to date sales. Vision and Inspection products increased 68.9% over the prior year and represented 15.3% of year to date sales. Memory Yield Improvement system sales increased 19.6% over the prior year and represented 26.8% of year to date sales. Circuit Fine Tuning system sales increased 11.6% over the prior year and represented 9.9% of total year to date sales. Advanced Electronic Packaging systems sales decreased 8.9% from the prior year, and represented 14.1% of total year to date sales. Revenue growth rates for most product lines are expected to remain in the mid-teens in the near term. However, a change in general economic conditions or in business conditions in the electronic industry could cause revenue growth to vary materially from these expectations. Gross margin for the three months ended February 26, 2000 increased substantially to 55.9% from 50.7% for the same period in the prior year. Gross margin for the nine months ended February 26, 2000 increased to 54.2% from 50.2% for the same period in the prior year. Gross margin was up about 1.7% compared to the prior quarter. Page 15/22 Higher margins were the result of a shift in product mix, and a higher level of absorption of fixed manufacturing costs. Selling, service and administrative expenses for the three months ended February 26, 2000 were $7.3 million higher in the current quarter as compared to the third quarter of fiscal 1999, but decreased as a percentage of sales from 27.8% to 26.3%. Year to date, selling, service and administrative expenses were $14.4 million higher as compared to the nine months ended February 28, 1999. A higher volume of business for both the current quarter and year to date resulted in increased payroll and commission expense as compared to prior year levels. Expenses for sales, services and administration increased about $2.4 million from the prior quarter as a result of increased sales volume and increased profits, as well as a shift in the geography of shipments. These factors resulted in an increase in commission expense and in the profit sharing accrual. ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (continued) Results of Operations Expenses associated with research, development and engineering for the three months ended February 26, 2000 increased by $.4 million compared to the same period in the prior year and the prior quarter. Research, development and engineering expenses for the nine months ended February 26, 2000 were $.6 million lower compared to the same period in the prior year. The decrease over prior year levels is attributable to lower spending on engineering project material. Research, development and engineering spending typically fluctuates from quarter to quarter as engineering projects move through their life cycles. Merger related expenses for fiscal 1999 principally include one-time transaction costs associated with the acquisitions referred to in Note 5 to the financial statements. Such costs include investment banking, legal, and accounting costs as well as certain one-time costs incurred to consolidate the operations of these acquisition entities. The Company's effective tax rate for the three and nine months ended February 26, 2000 was 32% compared to a tax rate of 34% for the same periods in the prior year. The decrease in the effective tax rate for both the six and nine months ended February 26, 2000 over the prior year was due to a decrease in the valuation allowance related to tax loss and credit carryforwards. On February 23, 2000, the World Trade Organization (WTO) ruled that Foreign Sales Corporations (FSC) provisions violated U.S. obligations under the General Agreement on Tariffs and Trade (GATT). As a result, the Company is required to discontinue use of its FSC by October 1, 2000. The Company is currently studying the effects of this ruling on its financial statements. Negotiations may take place, which will change the deadline. Additionally, legislation for an alternative to the FSC may be forthcoming. However, without such alternatives, the Company believes that the WTO ruling will significantly increase its effective rate. Net income for the quarter ended February 26, 2000 was $11.9 million or $0.45 per basic share. This represents an increase of $8.8 million or 276.4% from the third quarter of fiscal 1999, when earnings, excluding merger related expenses, were $3.2 million or $0.12 per basic share. Net income for the nine months ended February 26, 2000 was $23.7 million or $0.90 per basic share. This represents an increase of $17.0 million or 256.0% from the year to date ended February 28, 1999, when earnings, excluding merger related expenses, were $6.6 million or $0.26 per basic share. Ending backlog on February 26, 2000 was $96.2 million as compared to $57.1 million for November 27, 1999. Page 16/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (continued) Liquidity, Capital Resources and Business Environment The Company's principal sources of liquidity are existing cash and cash equivalents and marketable debt securities of $59.3 million, accounts receivable of $83.5 million, and a $7.0 million line of credit, none of which was outstanding at February 26, 2000. Accounts receivable was significantly higher than on May 31, 1999, but the increase is a function of increased revenues and does not include a significant increase in past due receivables. ESI has a current ratio of 7.6:1 and no long-term debt. Working capital increased to $182.8 million at February 26, 2000 versus $153.1 million at May 31, 1999. Inventory increased by $1.9 million over May 31, 1999 due mainly to the Company's increase in production. This increase is mainly in work in process inventories and finished goods. The Company's business depends in large part upon the capital expenditures of manufacturers of electronic devices, including miniature capacitors and semiconductor memory devices, and circuits used in wireless telecommunications equipment, such as pagers, cellular phones, automotive electronics and computers. The markets for products manufactured by the Company's customers are cyclical and have historically experienced periodic downturns, which often have had a negative effect on the demand for capital equipment such as that sold by the Company. Several large, multinational electronics companies constituted 26.9% of the Company's fiscal 1999 sales and are expected to comprise a similar ratio in fiscal 2000. The loss of any of these customers would be significant. The market for the Company's products is characterized by rapidly changing technology and evolving industry standards. The Company believes that its future success will depend on its ability to develop and manufacture new products and product enhancements, to introduce them successfully into the market and to create and sustain intellectual property protection for these new products. Failure to do so in a timely fashion could harm the Company's competitive position. The announcements or introductions of new products by the Company or its competitors may adversely affect the Company's operating results, as these announcements may cause customers to defer or forego ordering products from the Company's existing product lines. Page 17/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (continued) Liquidity, Capital Resources and Business Environment International shipments have accounted for 71% of year-to-date sales for fiscal 2000 as compared to 56% for the fiscal year 1999. Japan, Asia, Europe and North America accounted for 23%, 43%, 11%, and 23% of current quarter sales, respectively. Year to date, Japan, Asia, Europe and North America accounted for 21%, 41%, 9% and 29% of total sales, respectively. For the nine months ended February 28, 1999, sales to Japan, Asia, Europe and North America accounted for 14%, 31%, 11% and 44% of total sales, respectively. Several countries in this region, notably South Korea, Japan and Taiwan, have experienced currency devaluation and/or difficulties in financing short-term obligations. The Company's customers in these countries have continued to purchase and pay for products within agreed upon terms. In addition, a majority of Asian end customer receivables are secured by letter of credit. There can be no assurance that any residual difficulties in Asian economies will not adversely affect the demand for the Company's products in that region or elsewhere. The Company expects that international shipments will continue to represent a significant percentage of net sales in the future. As a result, a significant portion of the Company's net sales will be subject to certain risks. These risks include changes in demand resulting from fluctuations in interest and currency exchange rates, as well as factors such as government financed competition, changes in trade policies, tariff regulations, difficulties in obtaining U.S. export licenses and the difficulties of staffing and managing foreign operations. Most of the Company's sales are transacted in dollars and the Company's products are made in the United States. Many Japanese customers pay us in yen, and the Company hedges these sales transactions to mitigate currency risks. The European and Asian sales subsidiaries' operating expenses are denominated in their respective local currencies. These transactions represent approximately 9.0% of total consolidated operating expenses with about 54% attributable to Europe and 46% to Asia. Changes in the value of the local currency, as measured in US dollars, will commensurably increase or decrease operating expenses. Page 18/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (CONT.) Year 2000 The Company created a task force to prepare for Year 2000 (Y2K) issues. The Vice President and Chief Technology Officer continues to serve as the Y2K coordinator and has overall responsibility for organizing and managing the Company's Y2K program. The coordinator reports to the President and CEO. As of the end of the calendar year, The Company had completed its evaluation of its technology and data used in the creation and delivery of its products and services and in its internal operations, and had identified Y2K issues related to its customers and suppliers. To date, there have been no significant issues attributable to Y2K. The Company has incurred costs associated with assessing the Y2K issue and implementing its Y2K plan. These costs have included consultants, software upgrades, and security system upgrades. The Company estimates it has incurred substantially all of its total expected Y2K costs. Total costs of assessing and implementing the Company's Y2K plan have not had and are not expected to have a material effect on the Company's consolidated financial position or the results of its operations. The Company believes implementation of the plan has been successful after each key rollover date. The Company believes it will have no material business risk from any additional Y2K issues. However, there can be no assurances that third parties, over which the company has no control, will successfully address any remaining Y2K issues. New Accounting Pronouncements The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," in December 1999. SAB 101 provides guidance for applying Generally Accepted Accounting Principles (GAAP) to revenue recognition in financial statements filed with the SEC. Specifically, SAB 101 addresses recognizing revenue upon acceptance versus shipment. The Company currently recognizes revenue generally upon shipment. Although the Company believes its revenue recognition policies are in accordance with GAAP, the Company is currently studying SAB 101 to determine its impact on the Company's financial statements. The Company is required to adopt SAB 101 in the first quarter of FY2001 ended August 2000. Information in the Management Discussion and Analysis regarding expectations for future product demand, customers, international shipments and future product offerings and resources constitute forward-looking statements that involve a number of risks and uncertainties. In addition, the Company may from time to time issue other forward-looking statements. The following factors could cause actual results to differ materially from the forward-looking statements: general economic conditions, including their impact on capital expenditures; business conditions in the electronics industry, including the cyclical nature of the market for the Company's products; rapidly changing technology and evolving industry standards; availability and continued validity of intellectual property protection; competitive factors, including increased competition, new product offerings by competitors and price pressures; availability of supplies from third party suppliers on a timely basis and at reasonable prices; and international business conditions, including fluctuations in interest and currency exchange rates, government financed competition, changes in trade policies, tariff regulations, and the difficulties of staffing and managing foreign operations. The forward-looking statements should be considered in light of these factors. Page 19/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES Part II. Other Information Item 1. Legal Proceedings ESI initiated litigation against General Scanning Inc. for patent infringement in December 1996 in the U.S District Court for the Northern District of California (Electro Scientific Industries, Inc. v. General Scanning Inc., No. C-96-4268 SBA). On April 2, 1999 a federal court jury issued a verdict upholding the validity of ESI's link blowing patent, U.S. patent 5,265,114 entitled "System and Method for Selectively Laser Processing a Target Structure of One or More Materials of a Multimaterial, Multilayer Device". The jury found U.S. patent 5,473,624 entitled "Laser System and Method for Selectively Serving Links" invalid for reasons of obviousness. On April 8, 1999 the same federal court jury awarded ESI $13,133,170 in damages, and also concluded that General Scanning's infringement was willful. On July 8, 1999 the court issued orders denying General Scanning's motions for a new trial and to set aside the jury verdict. The court also entered a permanent injunction, prohibiting General Scanning from making, using, selling, or offering for sale in the United States memory repair systems and upgrade kits equipped with 1.3 micron lasers. General Scanning has filed an appeal of the U.S. District Court judgement with the U.S. Court of Appeals for the Federal Circuit. Separately, the U.S. Patent and Trademark Office has issued an order granting a request to re-examine ESI's patent 5,265,114. ESI has not reflected this award in its financial results. However, ESI continues to record legal expenses related to this litigation as these expenses are incurred. In July 1999, ESI announced a settlement with GSI Lumonics Inc. and General Scanning Inc. in ESI's laser trimming patent infringement suit. ESI initiated the suit against General Scanning in October 1998 in the United States District Court for the Northern District of California. The complaint alleged that General Scanning violated the following ESI's patents: 5,569,398 entitled "Laser System and Method for Selectively Trimming Films" issued on October 29, 1996; 5,685,995 entitled "Method for Laser Functional Trimming of Films and Devices" issued on November 11, 1997; and 5,808,272 entitled "Laser System for Functional Trimming of Films and Devices" issued on September 15, 1998. GSI is not making, using, selling or offering to sell any laser trim systems operating at a wavelength between 1.2 and 3.0 microns, or any kit for converting a laser trim system to operate at a wavelength between 1.2 and 3.0 microns. The terms of the settlement agreement are confidential. ESI initiated litigation against Dynamic Details, Inc. and GSI Lumonics, Inc. for patent infringement in March 2000 in the U.S. District Court of California. The complaint alleges that Dynamic Details and Lumonics are violating ESI's U.S. patent 5,847,960 entitled "Multi-Tool Positioning System." The complaint alleges that Dynamic Details infringes ESI's patent 5,847,960 and that GSI Lumonics has actively induced infringement of, and contributorily infringed, ESI's patent 5,857,960. Page 20/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES Item 1. Legal Proceedings (Cont.) Numerous users of the Company's products have received notice of patent infringement from the Lemelson Medical, Educational & Research Foundation Limited Partnership ("Partnership") alleging that their use of the Company's products infringes certain patents transferred to the Partnership by the late Jerome H. Lemelson. Certain of these users have notified the Company that, in the event it is subsequently determined that their use of the Company's products infringes any of the Partnership's patents, they may seek indemnification from the Company for damages or expenses resulting from this matter. Page 21/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES Item 6. Exhibits and Reports on Form 8-K (a). Exhibits 27. Financial Data Schedule (b). Reports on Form 8-K. - A form 8-K was filed on October 14, 1999. On September 30, 1999, Electro Scientific Industries, Inc. (the "Company") decided to change its fiscal quarters to correspond with a four week, five week, four week quarter, which means each quarter will end on a Saturday. Previously, the quarters ended on the last day of the calendar month. There is no change in the month in which each of the four quarters ends. However, this does translate to a change in fiscal year end. Previously, the Company's fiscal year end was May 31. Upon implementing this change, the fiscal year will end on the Saturday following or directly preceding May 31; whichever Saturday is the fewest number of days from May 31. In addition, depending on which Saturday is used; the Company may have either a 52 or 53 week fiscal year. There will be no report filed covering the transition period, as activity during the transition period is deemed to be immaterial. Page 22/22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. ELECTRO SCIENTIFIC INDUSTRIES, INC. Dated: April 11, 2000 /s/ Donald R. VanLuvanee ----------------------------------- Donald R. VanLuvanee, President and Chief Executive Officer EX-27.1 2 EXHIBIT 27.1
5 1,000 3-MOS JUN-03-2000 MAY-31-1999 FEB-26-2000 19,334 39,964 85,072 1,554 53,218 210,271 75,554 41,409 260,927 27,490 0 0 0 114,805 118,632 260,927 82,081 82,081 36,182 36,182 29,332 0 0 17,563 5,620 11,943 0 0 0 11,943 0.45 0.43
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