10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 29, 2012

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
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
13900 N.W. Science Park Drive, Portland, Oregon	97229
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number: (503) 641-4141

Registrant’s web address: www.esi.com

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller Reporting Company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the Registrant’s Common Stock at January 30, 2013 was 29,502,808 shares.

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets— at December 29, 2012 and March 31, 2012		1
	Condensed Consolidated Statements of Operations— for the fiscal quarters ended December 29, 2012 and December 31, 2011		2
	Condensed Consolidated Statements of Comprehensive Income (Loss)— for the fiscal quarters ended December 29, 2012 and December 31, 2011		2
	Condensed Consolidated Statements of Cash Flows— for the fiscal quarters ended December 29, 2012 and December 31, 2011		3
	Notes to Condensed Consolidated Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22
Item 4.	Controls and Procedures		22
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		22
Item 1A.	Risk Factors		23
Item 4.	Mine Safety Disclosures		31
Item 6.	Exhibits		32
SIGNATURES			33

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)	Dec 29, 2012		Mar 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	47,240	$	69,780
Restricted cash		22,269		22,269
Short-term investments		95,364		106,674
Trade receivables, net of allowances of $452 and $390		18,614		32,744
Inventories		80,224		68,055
Shipped systems pending acceptance		359		1,360
Deferred income taxes, net		9,048		10,021
Other current assets		4,563		4,060
Total current assets		277,681		314,963
Non-current investments		6,253		23,046
Property, plant and equipment, net of accumulated depreciation of $106,815 and $101,716		30,253		32,103
Non-current deferred income taxes, net		32,880		36,489
Goodwill		7,889		4,014
Acquired intangible assets, net of accumulated amortization of $12,422 and $10,609		12,059		8,332
Other assets		14,865		14,263
Total assets	$	381,880	$	433,210
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,511	$	13,045
Accrued liabilities		23,340		21,635
Deferred revenue		6,520		10,751
Total current liabilities		42,371		45,431
Non-current income taxes payable		9,521		9,109
Commitments and contingencies
Shareholders’ equity:
Preferred stock, without par value; 1,000 shares authorized; no shares issued		—		—
Common stock, without par value; 100,000 shares authorized; 29,497 and 28,970 issued and outstanding		174,113		168,143
Retained earnings		155,333		210,021
Accumulated other comprehensive income		542		506
Total shareholders’ equity		329,988		378,670
Total liabilities and shareholders’ equity	$	381,880	$	433,210

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

1

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Fiscal quarter ended						Three fiscal quarters ended
(In thousands, except per share amounts)	Dec 29, 2012			Dec 31, 2011			Dec 29, 2012			Dec 31, 2011
Net sales	$	37,930		$	49,807		$	177,051		$	208,737
Cost of sales		24,697			28,646			106,645			117,875
Gross profit		13,233			21,161			70,406			90,862
Operating expenses:
Selling, service and administration		11,696			13,944			42,473			45,322
Research, development and engineering		8,730			10,480			28,791			32,456
Legal settlement (proceeds) costs, net		(15,365	)		—			(15,365	)		550
(Gain) loss on sale of property and equipment, net		(1,226	)		—			(1,226	)		2
Restructuring costs		—			861			—			861
Net operating expenses		3,835			25,285			54,673			79,191
Operating income (loss)		9,398			(4,124	)		15,733			11,671
Non-operating (expense) income:
Gain on sale of previously impaired auction rate securities		—			—			—			2,729
Interest and other (expense) income, net		(5	)		47			(64	)		(496	)
Total non-operating (expense) income		(5	)		47			(64	)		2,233
Income (loss) before income taxes		9,393			(4,077	)		15,669			13,904
Provision for (benefit from) income taxes		2,625			(2,196	)		4,634			1,335
Net income (loss)	$	6,768		$	(1,881	)	$	11,035		$	12,569
Net income (loss) per share – basic	$	0.23		$	(0.07	)	$	0.38		$	0.44
Net income (loss) per share – diluted	$	0.23		$	(0.07	)	$	0.37		$	0.43
Weighted average number of shares – basic		29,434			28,849			29,296			28,689
Weighted average number of shares – diluted		30,043			28,849			29,954			29,384
Cash dividends paid per common share	$	2.08		$	—		$	2.24		$	—

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Fiscal quarter ended						Three fiscal quarters ended
(In thousands)	Dec 29, 2012			Dec 31, 2011			Dec 29, 2012			Dec 31, 2011
Net income (loss)	$	6,768		$	(1,881	)	$	11,035		$	12,569
Other comprehensive income:
Foreign currency translation adjustment, net of taxes of ($134), $68, $19 and $56		(239	)		121			37			401
Reclassification of unrealized gain on auction rate securities		—			—			—			(1,445	)
Accumulated other comprehensive income related to benefit plan obligation, net of taxes of $1, $1, $4 and $4		3			2			8			6
Net unrealized (loss) gain on available-for-sale securities, net of taxes of ($8), $24, ($5), and $9		(15	)		42			(9	)		15
Comprehensive income (loss)	$	6,517		$	(1,716	)	$	11,071		$	11,546

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

2

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three fiscal quarters ended
(In thousands)	Dec 29, 2012			Dec 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	11,035		$	12,569
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		6,867			8,130
Amortization of acquired intangible assets		1,810			1,307
Share-based compensation expense		6,132			9,546
Provision for doubtful accounts		—			50
(Gain) loss on sale of property and equipment, net		(1,226	)		2
Gain on sale of previously impaired auction rate securities		—			(2,729	)
Deferred income taxes		4,537			(2,109	)
Changes in operating accounts:
Decrease in trade receivables, net		14,315			18,502
Increase in inventories		(11,744	)		(6,432	)
Decrease in shipped systems pending acceptance		1,002			4,050
Decrease in other current assets		61			2,937
Decrease in accounts payable and accrued liabilities		(912	)		(21,219	)
Decrease in deferred revenue		(4,343	)		(7,660	)
Net cash provided by operating activities		27,534			16,944
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments		(857,435	)		(720,961	)
Proceeds from sales and maturities of investments		885,818			660,707
Proceeds from sale of auction rate securities		—			6,450
Increase in restricted cash		—			(11,500	)
Purchase of property, plant and equipment		(5,127	)		(4,198	)
Proceeds from the sale of property, plant and equipment		2,020			—
Cash paid for acquisition of Eolite Systems, net of cash acquired		(9,466	)		—
Decrease in other assets		403			174
Net cash provided by (used in) investing activities		16,213			(69,328	)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid to shareholders		(65,723	)		—
Stock plan activity, net		73			2,345
Excess tax benefit of share-based compensation		71			519
Net cash (used in) provided by financing activities		(65,579	)		2,864
Effect of exchange rate changes on cash		(708	)		665
NET CHANGE IN CASH AND CASH EQUIVALENTS		(22,540	)		(48,855	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		69,780			116,412
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	47,240		$	67,557
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes	$	(1,174	)	$	(4,268	)
Income tax refunds received	$	651		$	132
Dividends declared but not paid	$	—		$	2,311

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

3

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

These unaudited interim condensed consolidated financial statements have been prepared 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 U.S. generally accepted accounting principles have been condensed or omitted in these interim statements. Accordingly, these condensed consolidated financial statements are to be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for its fiscal year ended March 31, 2012. These interim statements include all adjustments (consisting of only normal recurring adjustments and accruals) necessary for a fair presentation of results for the interim periods presented. The results for interim periods are not necessarily indicative of the results of operations for the entire year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates.

Management believes that the estimates used are reasonable. Significant estimates made by management include: revenue recognition; inventory valuation; product warranty reserves; allowance for doubtful accounts; accrued restructuring costs; share-based compensation; income taxes including the valuation of deferred tax assets; fair value measurements; valuation of cost method equity investments; valuation of long-lived assets; and valuation of goodwill.

There have been no significant changes to the Company’s significant accounting policies from those presented in Note 2 “Summary of Significant Accounting Policies” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for its fiscal year ended March 31, 2012. All references to years or quarters relate to fiscal years or fiscal quarters unless otherwise noted.

2. Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the quarter ended December 29, 2012 that are of significance to the Company.

3. Restricted Cash

As of December 29, 2012, the Company had restricted cash of $22.3 million, which collateralized commercial letters of credit substituted for the cash bond previously held by the Kaohsiung District Court of Taiwan. The total restricted cash balance of $22.3 million was included in Restricted cash on the Condensed Consolidated Balance Sheets at December 29, 2012 as a current asset. The related litigation was settled in the Company’s favor on November 29, 2012 and cancellation of the letters of credit had not yet been completed as of December 29, 2012. See Note 15 “Legal Proceedings” below for further discussion.

4. Share-Based Compensation

The Company recognizes expense related to the fair value of its share-based compensation awards using the Black-Scholes model to estimate the fair value of awards on the date of grant, except for unvested restricted stock unit awards which are valued at the fair value of the Company’s stock on the date of award. The Company recognizes compensation expense for all share-based compensation awards on a straight-line basis over the requisite service period of the award.

Stock-settled stock appreciation rights (SARs) grant the right to receive shares of the Company’s stock equivalent to the increase in stock value of a specified number of shares over a specified period of time, divided by the stock price at the time of exercise. The Company uses the Black-Scholes model to estimate the fair value of SARs. Similar to options, SARs are recorded at the fair value of the award at grant date and the expense is recognized on a straight-line basis over the requisite service period of the award.

4

The Company granted a total of 552,500 restricted stock unit awards and 5,000 stock options but did not grant any SARs during the first three quarters of 2013. The Company granted a total of 468,900 restricted stock unit awards and 194,000 SARs during the first three quarters of 2012, but did not grant any stock options in that period.

Share-based compensation expense was included in the Company’s Condensed Consolidated Statements of Operations as follows:

	Fiscal quarter ended				Three fiscal quarters ended
(In thousands)	Dec 29, 2012		Dec 31, 2011		Dec 29, 2012		Dec 31, 2011
Cost of sales	$	202	$	302	$	635	$	859
Selling, service and administration		867		1,557		4,145		7,094
Research, development and engineering		413		534		1,579		1,617
Total share-based compensation expense	$	1,482	$	2,393	$	6,359	$	9,570

As of December 29, 2012, no share-based compensation expense was capitalized. The Company has $10.4 million of total unrecognized share-based compensation costs, net of estimated forfeitures, which are expected to be recognized over a weighted-average period of 1.9 years.

5. Fair Value Measurements

Financial Assets Measured at Fair Value

ASC Topic 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include the following:

• Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;

• Level 2, defined as inputs that are observable either directly or indirectly such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and other inputs that can be corroborated by observable market data; and

• Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of December 29, 2012 and March 31, 2012 was as follows (in thousands):

December 29, 2012	Level 1		Level 2			Level 3		Total
Money market securities	$	2,712	$	—		$	—	$	2,712
Government agencies		—		48,200			—		48,200
Commercial paper		—		44,266			—		44,266
Corporate bonds		—		18,090			—		18,090
Municipal bonds		—		1,048			—		1,048
Forward purchase or (sale) contracts:
Japanese Yen		—		429			—		429
New Taiwan Dollar		—		(2	)		—		(2	)
Korean Won		—		26			—		26
Euro		—		(67	)		—		(67	)
British Pound		—		28			—		28
Chinese Renminbi		—		(32	)		—		(32	)
Singapore Dollar		—		(2	)		—		(2	)

5

March 31, 2012	Level 1		Level 2			Level 3		Total
Money market securities	$	5,244	$	—		$	—	$	5,244
Commercial paper		—		83,645			—		83,645
Government agencies		—		67,261			—		67,261
Corporate Bonds		—		20,121			—		20,121
Forward purchase or (sale) contracts:
Japanese Yen		—		202			—		202
New Taiwan Dollar		—		(5	)		—		(5	)
Korean Won		—		(17	)		—		(17	)
Euro		—		(1	)		—		(1	)
British Pound		—		20			—		20
Chinese Renminbi		—		(1	)		—		(1	)

For Level 1 assets, the Company utilized quoted prices in active markets for identical assets.

For Level 2 assets, exclusive of forward contracts, the Company utilized quoted prices in active markets for similar assets. For forward contracts, spot prices at December 28, 2012 and March 30, 2012 were utilized to calculate unrealized gain/loss.

During the third quarter of 2013, there were no transfers between Level 1 and Level 2 assets. As of December 29, 2012, the Company did not hold any auction rate securities (ARS) investments. In the first quarter of 2012, the Company sold all of its remaining ARS for approximately $6.0 million and all of its related preferred stock for approximately $0.5 million. These ARS had a total estimated fair value of $5.2 million as of April 2, 2011, which consisted of $10.7 million par value ARS and $4.0 million par value ARS which were converted by the bond issuer to its preferred stock in 2009. The Company recorded a gain of $2.7 million in the first quarter of 2012, which included $1.4 million in reclassification of previously recorded unrealized gain out of accumulated other comprehensive income.

As of December 29, 2012, the Company had $6.0 million invested in Series D Preferred Stock and $3.0 million invested in Series E Preferred Stock of OmniGuide, Inc., representing an 11% interest. At each reporting period end, the Company determines whether events or circumstances have occurred that are likely to have a significant adverse effect on the fair value of these investments. If there are no events or circumstances identified that would adversely affect the fair value of the investments, the fair values of the investments are not calculated as it is not practicable to do so. As of December 29, 2012 and March 31, 2012, management had not identified events or circumstances that indicated the investments were impaired; therefore, as presented in Note 8 “Other Assets”, the full carrying value of $9.0 million was included in Other assets on the Consolidated Balance Sheets at December 29, 2012 and March 31, 2012.

Investments

Certain information regarding the Company’s investments at December 29, 2012 and March 31, 2012 was as follows (in thousands):

December 29, 2012			Unrealized
	Cost		Gain		Loss		Fair Value
Available-for-sale securities (current):
Commercial paper	$	44,265	$	1		—	$	44,266
Government agencies		43,185		14		—		43,199
Corporate bonds		16,827		12		—		16,839
Municipal bonds		1,048		—		—		1,048
	$	105,325	$	27	$	—	$	105,352
Available-for-sale securities (non-current):
Government agencies		4,997		4		—		5,001
Corporate bonds		1,252		—		—		1,252
	$	6,249	$	4	$	—	$	6,253

6

March 31, 2012			Unrealized
	Cost		Gain		Loss			Fair Value
Available-for-sale securities (current):
Commercial paper	$	83,645	$	—	$	—		$	83,645
Government agencies		46,293		5		—			46,298
Corporate Bonds		17,987		51		—			18,038
	$	147,925	$	56	$	—		$	147,981
Available-for-sale securities (non-current):
Government agencies	$	20,989	$	—	$	(26	)	$	20,963
Corporate Bonds		2,070		13		—			2,083
	$	23,059	$	13	$	(26	)	$	23,046

For purposes of determining gross realized gains and losses, and reclassification out of accumulated other comprehensive income, the cost of securities sold is based on specific identification. Net unrealized holding gains and losses on current available-for-sale securities included in accumulated other comprehensive income were insignificant as of December 29, 2012 and March 31, 2012.

Underlying maturities of investments at December 29, 2012 were $105.3 million within one year and $6.3 million between one to five years.

6. Inventories

Inventories are principally valued at standard costs, which approximate the lower of cost (first-in, first-out) or market. Components of inventories were as follows:

(In thousands)	Dec 29, 2012		Mar 31, 2012
Raw materials and purchased parts	$	54,220	$	48,126
Work-in-process		13,116		10,511
Finished goods		12,888		9,418
	$	80,224	$	68,055

7. Other Current Assets

Other current assets consisted of the following:

(In thousands)	Dec 29, 2012		Mar 31, 2012
Prepaid expenses	$	2,620	$	2,687
Value added tax receivable		784		1,055
Other		1,159		318
	$	4,563	$	4,060

8. Other Assets

Other assets consisted of the following:

(In thousands)	Dec 29, 2012		Mar 31, 2012
Minority equity investment	$	8,966	$	8,966
Consignment and demo equipment, net		4,459		4,394
Other		1,440		903
	$	14,865	$	14,263

7

9. Business Acquisitions

On June 14, 2012, the Company acquired Eolite Systems (Eolite), a designer and manufacturer of unique fiber lasers, for $9.7 million in cash for all their outstanding shares. During the first three quarters of 2013, the Company also incurred approximately $0.9 million in acquisition-related costs which are included in Selling, service and administration expenses in the Condensed Consolidated Statements of Operations. The purchase price was allocated to the underlying assets acquired and liabilities assumed based on their fair values. Analyses supporting the purchase price allocation included a valuation of assets and liabilities as of the closing date, an analysis of intangible assets and a detailed review of the opening balance sheet to determine other significant adjustments required to recognize assets and liabilities at fair value.

The following table presents the allocation of the purchase price of $9.5 million, net of cash acquired, to the assets acquired and liabilities assumed based on their fair values (in thousands):

Investments	$	285
Accounts receivable		113
Inventory		1,554
Prepaid expense and other assets		824
Property, plant and equipment		227
Acquired intangibles		5,539
Goodwill		3,875
Accounts payable and accrued liabilities		(1,157	)
Short term debt		(1,794	)
Total purchase price, net of cash acquired	$	9,466

The acquisition provides the Company with direct access to differentiated, higher power laser technology which can be used in a broad set of microfabrication applications. The Company has allocated $3.9 million of the purchase price to goodwill. The premium paid over the fair value of the individual assets acquired and liabilities assumed reflects the Company’s view that this acquisition will increase the Company’s ability to customize lasers to specific customer applications with differentiated capability. None of the goodwill is deductible for tax purposes.

As a result of the acquisition, the Company recorded $5.5 million of identifiable intangible assets including approximately $5.0 million of developed technology, $0.4 million in customer relationships, $0.1 million in trademarks and backlog. The acquired intangibles will be amortized over their useful lives which range from one to nine years.

The operating results of this acquisition are included in the Company’s results of operations since the date of acquisition. Pro forma financial information has not been provided for the acquisition of Eolite as it was not material to the Company’s overall financial position.

8

10. Accrued Liabilities

Accrued liabilities consisted of the following:

(In thousands)	Dec 29, 2012		Mar 31, 2012
Payroll-related liabilities	$	8,097	$	6,446
Product warranty accrual		5,790		4,187
Pension benefit liabilities		2,049		2,110
Professional fees payable		1,907		2,011
Freight accrual		1,680		1,119
Income taxes payable		1,356		1,730
Purchase order commitments and receipts		847		1,473
Value added taxes payable		332		260
Customer deposits		272		385
Restructuring costs payable		10		1,048
Other		1,000		866
	$	23,340	$	21,635

11. Product Warranty Accrual

The following is a reconciliation of the change in the aggregate accrual for product warranty:

	Fiscal quarter ended						Three fiscal quarters ended
(In thousands)	Dec 29, 2012			Dec 31, 2011			Dec 29, 2012			Dec 31, 2011
Product warranty accrual, beginning	$	6,096		$	5,117		$	4,187		$	4,415
Warranty charges incurred, net		(1,603	)		(1,248	)		(5,513	)		(5,199	)
Provision for warranty charges		1,297			768			7,116			5,421
Product warranty accrual, ending	$	5,790		$	4,637		$	5,790		$	4,637

Net warranty charges incurred include labor charges and costs of replacement parts for system repairs under warranty. These costs are recorded net of any estimated cost recoveries resulting from either successful repair of damaged parts or from warranties offered by the Company’s suppliers for defective components. The provision for warranty charges reflects the estimate of future anticipated net warranty costs to be incurred for all products under warranty at quarter end and is recorded to cost of sales.

12. Deferred Revenue

Generally, revenue is recognized upon fulfillment of acceptance criteria at the Company’s factory and title transfer which frequently occurs at the time of delivery to a common carrier. Revenue is deferred whenever title transfer is pending and/or acceptance criteria have not yet been fulfilled. Deferred revenue occurrences include sales to Japanese customers, shipments of substantially new products and shipments with custom specifications and acceptance criteria. In sales involving multiple element arrangements, the relative selling price of any undelivered elements, including installation services, is deferred until the elements are delivered and acceptance criteria are met. Revenue related to maintenance and service contracts is deferred and recognized ratably over the duration of the contracts.

The following is a reconciliation of the changes in deferred revenue:

	Fiscal quarter ended						Three fiscal quarters ended
(In thousands)	Dec 29, 2012			Dec 31, 2011			Dec 29, 2012			Dec 31, 2011
Deferred revenue, beginning	$	9,456		$	9,363		$	10,751		$	16,039
Revenue deferred		5,394			4,267			43,340			33,304
Revenue recognized		(8,330	)		(5,246	)		(47,571	)		(40,959	)
Deferred revenue, ending	$	6,520		$	8,384		$	6,520		$	8,384

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13. Earnings Per Share

The following is a reconciliation of weighted average shares outstanding used in the calculation of basic and diluted earnings per share:

	Fiscal quarter ended					Three fiscal quarters ended
(In thousands, except per share data)	Dec 29, 2012		Dec 31, 2011			Dec 29, 2012		Dec 31, 2011
Net income (loss)	$	6,768	$	(1,881	)	$	11,035	$	12,569
Weighted average shares used for basic earnings per share		29,434		28,849			29,296		28,689
Incremental diluted shares		609		—			658		695
Weighted average shares used for diluted earnings per share		30,043		28,849			29,954		29,384
Net income (loss) per share:
Net income (loss) – basic	$	0.23	$	(0.07	)	$	0.38	$	0.44
Net income (loss) – diluted	$	0.23	$	(0.07	)	$	0.37	$	0.43

Awards of options, stock-settled stock appreciation rights (SARs), unvested restricted stock units (RSUs) and shares associated with the Company’s Employee Stock Purchase Plan (ESPP) representing an additional 2.5 million and 4.2 million shares for the third quarter ended December 29, 2012 and December 31, 2011, respectively, were not included in the calculation of diluted net earnings per share because their effect would have been antidilutive.

For the three quarters ended December 29, 2012 and December 31, 2011, awards of options, SARs, unvested RSUs and ESPP shares representing an additional 2.3 million and 2.8 million shares, respectively, were not included in the calculation of diluted net earnings per share because their effect would have been antidilutive.

14. Product and Geographic Information

Net sales by product type were as follows:

	Fiscal quarter ended				Three fiscal quarters ended
(In thousands)	Dec 29, 2012		Dec 31, 2011		Dec 29, 2012		Dec 31, 2011
Interconnect & Microfabrication Group (IMG)	$	30,537	$	35,318	$	147,506	$	134,757
Components Group (CG)		4,071		6,054		19,607		23,349
Semiconductor Group (SG)		3,322		8,435		9,938		50,631
	$	37,930	$	49,807	$	177,051	$	208,737

Net sales by geographic area, based on the location of the end user, were as follows:

	Fiscal quarter ended				Three fiscal quarters ended
(In thousands)	Dec 29, 2012		Dec 31, 2011		Dec 29, 2012		Dec 31, 2011
Asia	$	28,928	$	42,731	$	154,962	$	185,550
Americas		6,990		4,515		15,696		14,375
Europe		2,012		2,561		6,393		8,812
	$	37,930	$	49,807	$	177,051	$	208,737

15. Legal Proceedings

All Ring Patent Infringement Prosecution

The Company’s proceedings against All Ring Tech Co., Ltd (All Ring) in Taiwan for alleged patent infringement were settled in the Company’s favor on November 29, 2012. All Ring paid the Company $475 million New Taiwan Dollars, representing approximately $16.3 million to settle the case, and the case was dismissed. This gain was partially offset by court and legal fees associated with the All Ring litigation and other non-recurring legal matters.

10

As a part of these proceedings, the Company established three letters of credit for approximately $19.5 million in July 2009, September 2009 and June 2011, which were collateralized by $22.3 million of restricted cash. The total restricted cash balance was included in Restricted cash on the Condensed Consolidated Balance Sheets as of March 31, 2012 and December 29, 2012. The settlement of the proceedings eliminated the need for the Company to maintain the letters of credit, and the Company began the process of closing the letters of credit in December 2012.

In the ordinary course of business, the Company is involved in various other legal matters, either asserted or unasserted, and investigations. In the opinion of management, ultimate resolution of these matters will not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

16. Restructuring and Cost Management Plans

In 2012, the Company continued its efforts to reduce its worldwide cost structure through transition of certain procurement and manufacturing activities to Asia and additionally identified and initiated other cost reduction actions. The Company completed these actions as of December 29, 2012. See the Company’s Form 10-K for the year ended March 31, 2012 for additional information related to restructuring and cost management plans.

During the first three quarters of 2013, no additional restructuring costs were incurred. At December 29, 2012, the amount of unpaid restructuring costs is included in Accrued liabilities on the Condensed Consolidated Balance Sheet.

The following table presents the amounts related to restructuring costs payable (in thousands):

Restructuring costs payable balance as of March 31, 2012	$	1,048
Employee severance and related benefits:
Costs incurred and other adjustments		(92	)
Cash payments		(946	)
Restructuring costs payable balance as of December 29, 2012	$	10

17. Shareholders’ Equity

Share Repurchase Program

On May 15, 2008, the Board of Directors authorized a share repurchase program totaling $20.0 million to acquire shares of the Company’s outstanding common stock primarily to offset dilution from equity compensation programs. On December 9, 2011, the Board of Directors terminated the 2008 repurchase program and authorized a new share repurchase program totaling $20.0 million to acquire shares of the Company’s outstanding common stock. The repurchases are to be made at management’s discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and other factors. The Company did not repurchase any shares under this program in either the first three quarters of 2013 or in 2012. There is no fixed completion date for the repurchase program. See the Company’s Form 10-K for the year ended March 31, 2012 for additional information related to these share repurchase programs.

Dividends

On December 9, 2011, the Board of Directors adopted a dividend policy under which the Company intends to pay quarterly cash dividends. The following table summarizes the dividends declared and paid by the Company since adoption of the dividend policy:

Date Declared	Record Date	Payment Date	Amount per Share
November 8, 2012	November 21, 2012	December 5, 2012	$	0.08
August 9, 2012	August 24, 2012	September 10, 2012	$	0.08
May 10, 2012	June 4, 2012	June 18, 2012	$	0.08
December 9, 2011	January 27, 2012	February 17, 2012	$	0.08

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A special dividend of $2.00 per share was declared by the Board of Directors on December 3, 2012 after the successful patent settlement. The special dividend should not be considered a recurring event. See Note 15 “Legal Proceedings” above for further discussion.

During the first three quarters of 2013, the Company paid aggregate dividends of $65.7 million.

The Company currently anticipates that it will continue to pay cash dividends on a quarterly basis in the future, although the declaration, timing and amount of any future cash dividends are at the discretion of the Board of Directors and will depend on the Company’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination that cash dividends are in the best interest of the shareholders.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The statements contained in this report that are not statements of historical fact, including without limitation, statements containing the words “believes,” “expects,” “anticipates” and similar words, constitute forward-looking statements that are subject to a number of risks and uncertainties. From time to time we may make other forward-looking statements. Investors are cautioned that such forward-looking statements are subject to an inherent risk that actual results may materially differ as a result of many factors, including the risks described in Part II, Item 1A “Risk Factors.”

Business Overview

Electro Scientific Industries, Inc. and its subsidiaries (ESI) is a leading supplier of innovative laser-based manufacturing solutions for the microtechnology industry. Our advanced laser systems enable precise structuring of micron to submicron features in components and devices which are used in a wide variety of end products in the consumer electronics, computer, communications and other industries. These features enable our customers to achieve functionality, or improve yield and productivity in their manufacturing processes that can be critical to their profitability. Founded in 1944, ESI is headquartered in Portland, Oregon, with global operations and subsidiaries in Asia, Canada, Europe and the United States.

Our advanced laser microfabrication systems allow microelectronics, semiconductor, and other microtechnology manufacturers to physically alter select device features during high-volume production in order to increase performance and improve production yields. Laser microfabrication comprises a set of precise micron-level processes, including via drilling, wafer scribing and dicing, material ablation, semiconductor memory-link cutting, electronic device trimming, and nano-level structuring to alter material characteristics such as color and texture. These processes require application-specific laser systems able to meet our customers’ exacting performance and productivity requirements. Our laser-based systems improve production yields or enable improved performance for flexible interconnect material, semiconductor devices, light emitting diodes (LEDs), high-density interconnect (HDI) circuits, advanced semiconductor packaging, flat panel liquid crystal displays (LCDs) and other high value components.

Additionally, we produce high-capacity test and inspection equipment that is critical to the quality control process during the production of multilayer ceramic capacitors (MLCCs). Our equipment ensures that each component meets the electrical and physical tolerances required to perform properly.

During the quarter, we decided to discontinue our investment in LED package test products as a result of ongoing overcapacity and commodization of the market.

Summary of Sequential Quarterly Results

The financial results of the quarter ended December 29, 2012, which represented the third quarter of 2013, reflected a sequential decline in sales as a result of on-going challenges in many of our markets and timing of design wins in our micromachining business. Revenue decreased to $37.9 million from $80.2 million in the second quarter of 2013 which ended September 29, 2012. Total order volume for the third quarter of 2013 declined to $26.3 million from $35.0 million in the second quarter, primarily driven by the on-going unfavorable macro-economic environment, continued absorption of capacity of flex products ordered earlier in the year, and lower follow on orders related to consumer electronics. In addition, continued overcapacity led to low demand in our memory repair, LED and passive component businesses.

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Net sales of $37.9 million for the third quarter of 2013 decreased $42.3 million compared to $80.2 million for the prior quarter. Sales for our Interconnect & Microfabrication Group (IMG) products decreased $38.6 million due to our microfabrication customers absorbing capacity shipped in the first half of 2013. Components Group (CG) decreased $3.8 million as our MLCC customers utilize existing capacity. Semiconductor Group (SG) sales levels remained consistent with the previous quarter.

Gross margin was 34.9% on net sales of $37.9 million for the third quarter of 2013 compared to 41.8% on net sales of $80.2 million for the prior quarter. The decrease was driven by lower production levels and write down of inventory related to discontinuance of our 3800 LED Test platform, partially offset by more favorable product mix.

Net operating expenses of $3.8 million in the third quarter of 2013 decreased $21.8 million compared to the prior quarter. The decrease was due to net legal settlement proceeds of $15.4 million, gain on sale of property and equipment of $1.2 million, a decrease of $1.8 million in research, development and engineering (RD&E), and a decrease of $3.4 million in selling, service and administration (SS&A). RD&E expenses decreased from the prior quarter due to lower variable and share-based compensation expenses and to a lesser extent, lower project materials. SS&A expense decreased primarily due to reduced compensation, professional fees and other variable expenses based on lower business volumes.

Operating income was $9.4 million in the third quarter of 2013, an increase of $1.5 million compared to operating income of $7.9 million in the prior quarter. The increase was primarily due to the legal settlement proceeds and gain on sale of property and equipment offset by lower sales volumes and gross profit as discussed above.

The effective tax rate was 27.9% for the third quarter of 2013, resulting from an income tax provision of $2.6 million, compared to an effective rate of 34.6% for the prior quarter that resulted from an income tax provision of $2.8 million. The decrease in the effective tax rate was primarily due to the fluctuation in quarterly net income between the second and third quarters of 2013, the mix of income and relative tax rates between jurisdictions, the utilization of various tax credits associated with higher income, and a decrease in valuation allowance against state net operating losses.

Net income for the third quarter of 2013 was $6.8 million compared to net income of $5.2 million in the prior quarter. However, income for the quarter was primarily the result of the legal settlement proceeds and gain on sale of property and equipment. Excluding these items, underlying business results would have resulted in an operating loss. Given the underlying results of the quarter, we considered if a triggering event had occurred requiring consideration of impairment of our goodwill, long lived assets and deferred tax assets. We concluded it had not, however our current market capitalization does not substantially exceed our carrying value. These factors have the possibility to lead to impairment in future periods if operating result trends do not improve.

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Quarter Ended December 29, 2012 Compared to Quarter Ended December 31, 2011

Results of Operations

The following table presents results of operations data as a percentage of net sales:

	Fiscal quarter ended
	Dec 29, 2012			Dec 31, 2011
Net sales		100.0	%		100.0	%
Cost of sales		65.1			57.5
Gross margin		34.9			42.5
Selling, service and administration		30.8			28.0
Research, development and engineering		23.0			21.1
Legal settlement proceeds, net		(40.5	)		—
Gain on sale of property and equipment, net		(3.2	)		—
Restructuring costs		—			1.7
Operating income (loss)		24.8			(8.3	)
Interest and other (expense) income, net		—			0.1
Income (loss) before income taxes		24.8			(8.2	)
Provision for (benefit from) income taxes		7.0			(4.4	)
Net income (loss)		17.8	%		(3.8	)%

Net Sales

Net sales were $37.9 million for the third quarter of 2013, a decrease of $11.9 million or 24% compared to net sales of $49.8 million for the third quarter of 2012. The decrease in revenue was a combination of microfabrication customers absorbing capacity shipped in the first half of 2013 and slow demand for memory repair and LED scribing products.

The following table presents net sales information by product group:

	Fiscal quarter ended
(In thousands, except percentages)	Dec 29, 2012					Dec 31, 2011
	Net Sales		% of Net Sales			Net Sales		% of Net Sales
Interconnect & Microfabrication Group (IMG)	$	30,537		80.5	%	$	35,318		70.9	%
Components Group (CG)		4,071		10.7			6,054		12.2
Semiconductor Group (SG)		3,322		8.8			8,435		16.9
	$	37,930		100.0	%	$	49,807		100.0	%

IMG sales in the third quarter of 2013 decreased $4.8 million or 14% compared to the third quarter of 2012. The decrease was primarily driven by lower year over year demand from our advanced micromachining and flex-circuit customers.

CG sales in the third quarter of 2013 decreased $2.0 million or 33% compared to the third quarter of 2012. The decrease stems from MLCC customers’ continued utilization of existing capacity.

SG sales in the third quarter of 2013 decreased $5.1 million or 61% compared to the third quarter of 2012. The decrease was driven by lower demand for memory repair as customers continue to defer capacity additions. In addition, revenue declined in LED as a result of a continued overcapacity in the industry, especially for makers of LED backlights for display.

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The following table presents net sales information by geographic region:

	Fiscal quarter ended
(In thousands, except percentages)	Dec 29, 2012					Dec 31, 2011
	Net Sales		% of Net Sales			Net Sales		% of Net Sales
Asia	$	28,928		76.3	%	$	42,731		85.8	%
Americas		6,990		18.4			4,515		9.1
Europe		2,012		5.3			2,561		5.1
	$	37,930		100.0	%	$	49,807		100.0	%

Compared to the third quarter of 2012, net sales for the third quarter of 2013 decreased $13.8 million in Asia, increased $2.5 million in the Americas and decreased $0.6 million in Europe. The majority of our systems are sold into Asia as our customers’ manufacturing facilities primarily reside in that region. The decrease in Asia was driven by lower demand for memory repair and LED scribing systems coupled with capacity absorption from our advanced microfabrication and flex interconnect products. Net sales in the Americas and Europe remain a lower percentage of total sales as purchases in these regions are primarily for specialized uses or research and development purposes, as compared to the trend by our Asian customers to source their high-volume manufacturing in that region.

Gross Profit

The following table presents gross profit information:

	Fiscal quarter ended
(In thousands, except percentages)	Dec 29, 2012					Dec 31, 2011
	Gross Profit		% of Net Sales			Gross Profit		% of Net Sales
Gross Profit	$	13,233		34.9	%	$	21,161		42.5	%

Gross profit for the third quarter of 2013 was $13.2 million, a decrease of $8.0 million compared to gross profit of $21.2 million for the third quarter of 2012. Gross profit as a percentage of net sales decreased to 34.9% for the third quarter of 2013 from 42.5% for the third quarter of 2012. The decreases were primarily related to lower volumes, timing of laser repair activities, and write down of inventory related to our 3800 LED Test platform, offset partially by more favorable product mix.

Operating Expenses

The following table presents operating expense information:

	Fiscal quarter ended
(In thousands, except percentages)	Dec 29, 2012						Dec 31, 2011
	Expense			% of Net Sales			Expense		% of Net Sales
Selling, service and administration	$	11,696			30.8	%	$	13,944		28.0	%
Research, development and engineering		8,730			23.0			10,480		21.1
Legal settlement proceeds, net		(15,365	)		(40.5	)		—		—
Gain on sale of property and equipment, net		(1,226	)		(3.2	)		—		—
Restructuring costs		—			—			861		1.7
	$	3,835			10.1	%	$	25,285		50.8	%

Selling, Service and Administration

Selling, service and administration (SS&A) expenses primarily consist of labor and other employee-related expenses including share-based compensation expense, travel expenses, professional fees, sales commissions and facilities costs.

SS&A expenses were $11.7 million for the third quarter of 2013, down from $13.9 million in the third quarter of 2012. This decrease was primarily attributable to variable expenses due to lower business volumes, labor costs, professional fees, and share-based compensation expense. The decrease in share-based compensation expense is primarily due to lower attainment rate on performance based restricted stock units and the lower grant date fair value for new awards granted in 2013.

15

Research, Development and Engineering

Research, development and engineering (RD&E) expenses are primarily comprised of labor and other employee-related expenses, professional fees, project materials, equipment costs and facilities costs. RD&E expenses totaled $8.7 million for the third quarter of 2013, a decrease of $1.8 million compared to the third quarter of 2012. This decrease was primarily due to lower labor costs, professional fees, project materials and other new product development costs, partially offset by the addition of Eolite expenses.

Legal Settlement Proceeds and Costs, net

Legal settlement proceeds and costs, net for the third quarter of 2013 were $15.4 million, which consisted of the All Ring litigation legal settlement proceeds of $16.3 million partially offset by court and legal fees associated with the All Ring litigation and other non-recurring legal matters.

Gain on Sale of Property and Equipment, net

During the third quarter of 2013, we sold a facility located in China, for $2.0 million, resulting in a pre-tax gain of $1.3 million partially offset by loss on disposal of certain fixed assets primarily used in testing and development.

Restructuring Costs

During the third quarter of 2012, we initiated restructuring plans to reduce our worldwide cost structure through transition of certain procurement and manufacturing activities to Asia and additionally identified and initiated other cost reduction actions. As a result of the actions, we recognized $0.9 million of restructuring costs during the third quarter of 2012 which consisted primarily of employee severance and related benefits.

Non-operating Income and Expense

Interest and Other Income (Expense), net

Interest and other income (expense), net, consists of interest income and expense, market gains and losses on assets held for our deferred compensation plan, realized and unrealized foreign exchange gains and losses, bank charges, investment management fees and other miscellaneous non-operating items.

Income Taxes

The following table presents income tax information:

	Fiscal quarter ended
(In thousands, except percentages)	Dec 29, 2012					Dec 31, 2011
	Income Tax Provision		Effective Tax Rate			Income Tax (Benefit)			Effective Tax Rate
Income tax provision (benefit)	$	2,625		27.9	%	$	(2,196	)		53.9	%

The income tax provision for the third quarter of 2013 was $2.6 million on pretax income of $9.4 million, an effective tax rate of 27.9%. For the third quarter of 2012, the income tax benefit was $2.2 million on pretax loss of $4.1 million, an effective tax benefit of 53.9%. The higher effective tax rate for third quarter of 2012 was primarily due to the relative quarterly income levels, the mix of income between jurisdictions and their relative tax rates, and an increase in deductions from federal tax incentives related to higher income in the third quarter.

Our effective tax rate is subject to fluctuation based upon the mix of income and relative tax rates between jurisdictions, and the occurrence and timing of numerous discrete events such as changes in tax laws or their interpretations, extensions or expirations of research and experimentation credits, closure of tax years subject to examination, finalization of income tax returns, the relationship of fixed deductions to overall changes in estimated and actual pretax income or loss and the tax jurisdictions where income or loss is generated, and the ability to fully utilize our deferred tax assets.

16

Net Income (Loss)

The following table presents net income information:

	Fiscal quarter ended
(In thousands, except percentages)	Dec 29, 2012					Dec 31, 2011
	Net Income		% of Net Sales			Net Loss			% of Net Sales
Net income (loss)	$	6,768		17.8	%	$	(1,881	)		(3.8	)%

Net income for the third quarter of 2013 was $6.8 million, or $0.23 per basic share and diluted share, compared to a net loss of $1.9 million, or $(0.07) per diluted share for the third quarter of 2012. The increase was primarily due to the net legal settlement proceeds and gain on sale of property and equipment partially offset by lower sales volumes and gross profit in the third quarter of 2013.

Three Quarters Ended December 29, 2012 Compared to Three Quarters Ended December 31, 2011

Results of Operations

The following table presents results of operations data as a percentage of net sales:

	Three fiscal quarters ended
	Dec 29, 2012			Dec 31, 2011
Net sales		100.0	%		100.0	%
Cost of sales		60.2			56.5
Gross margin		39.8			43.5
Selling, service and administration		24.0			21.7
Research, development and engineering		16.3			15.6
Legal settlement (proceeds) costs, net		(8.7	)		0.3
Gain on sale of property and equipment, net		(0.7	)		—
Restructuring costs		—			0.4
Operating income		8.9			5.5
Gain on sale of previously impaired auction rate securities		—			1.3
Interest and other income (expense), net		(0.1	)		(0.2	)
Income before income taxes		8.8			6.6
Provision for income taxes		2.6			0.6
Net income		6.2	%		6.0	%

Net Sales

Net sales were $177.1 million for the first three quarters of 2013, a decrease of $31.6 million or 15% compared to net sales of $208.7 million for the first three quarters of 2012. The decrease in revenue was primarily driven by continued low demand for SG memory repair and LED scribing products partially offset by an increase in revenue from our flex interconnect products.

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The following table presents net sales information by product group:

	Three fiscal quarters ended
(In thousands, except percentages)	Dec 29, 2012					Dec 31, 2011
	Net Sales		% of Net Sales			Net Sales		% of Net Sales
Interconnect & Microfabrication Group (IMG)	$	147,506		83.3	%	$	134,757		64.5	%
Components Group (CG)		19,607		11.1			23,349		11.2
Semiconductor Group (SG)		9,938		5.6			50,631		24.3
	$	177,051		100.0	%	$	208,737		100.0	%

IMG sales in the first three quarters of 2013 increased $12.7 million or 9% compared to the first three quarters of 2012. The increase was primarily driven by shipment of increased flex interconnect orders received in late 2012 and early 2013. Increased sales in the flex-circuit market were driven by strong demand for smart phones and tablets which utilize an increased amount of flex circuitry in their designs.

CG sales in the first three quarters of 2013 decreased $3.7 million or 16% compared to the first three quarters of 2012. The decrease was primarily driven by slowed demand for tooling products.

SG sales in the first three quarters of 2013 decreased $40.7 million or 80% compared to the first three quarters of 2012. The decrease was driven by on-going lower demand for memory repair as customers continue to defer capacity additions. In addition, revenue declined in LED as a result of a continued overcapacity in the industry, especially for makers of LED backlights for display.

The following table presents net sales information by geographic region:

	Three fiscal quarters ended
(In thousands, except percentages)	Dec 29, 2012					Dec 31, 2011
	Net Sales		% of Net Sales			Net Sales		% of Net Sales
Asia	$	154,962		87.5	%	$	185,550		88.9	%
Americas		15,696		8.9			14,375		6.9
Europe		6,393		3.6			8,812		4.2
	$	177,051		100.0	%	$	208,737		100.0	%

Compared to the first three quarters of 2012, net sales for the first three quarters of 2013 decreased $30.6 million in Asia and $2.4 million in Europe with an increase of $1.3 million in the Americas. The majority of our systems are sold into Asia as our customers’ manufacturing facilities primarily reside in that region. The decrease in Asia was driven by lower demand for memory repair and LED scribing products. In addition, we saw a decline due to our microfabrication and flex interconnect customers utilizing existing capacity. Net sales in the Americas and Europe remain a lower percentage of total sales as purchases in these regions are primarily for specialized uses or research and development purposes, as compared to the trend by our Asian customers to source their high-volume manufacturing in that region.

Gross Profit

The following table presents gross profit information:

	Three fiscal quarters ended
(In thousands, except percentages)	Dec 29, 2012					Dec 31, 2011
	Gross Profit		% of Net Sales			Gross Profit		% of Net Sales
Gross Profit	$	70,406		39.8	%	$	90,862		43.5	%

Gross profit for the first three quarters of 2013 was $70.4 million, a decrease of $20.5 million compared to gross profit of $90.9 million for the first three quarters of 2012. Gross profit as a percentage of net sales decreased to 39.8% for the first three quarters of 2013 from 43.5% for the three quarters of 2012. These decreases were primarily related to lower revenue levels, a less favorable product mix, and write down of inventory related to our 3800 LED Test platform.

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Operating Expenses

The following table presents operating expense information:

	Three fiscal quarters ended
(In thousands, except percentages)	Dec 29, 2012						Dec 31, 2011
	Expense			% of Net Sales			Expense		% of Net Sales
Selling, service and administration	$	42,473			24.0	%	$	45,322		21.7	%
Research, development and engineering		28,791			16.3			32,456		15.6
Legal settlement (proceeds) costs, net		(15,365	)		(8.7	)		550		0.3
(Gain) loss on sale of property and equipment, net		(1,226	)		(0.7	)		2		—
Restructuring costs		—			—			861		0.4
	$	54,673			30.9	%	$	79,191		38.0	%

Selling, Service and Administration

SS&A expenses were $42.5 million for the first three quarters of 2013, a decrease of $2.8 million compared to the first three quarters of 2012. This decrease was primarily attributable to reduced variable expenses due to lower business volumes, labor costs and share-based compensation expense, partially offset by $0.9 million in acquisition and integration costs for Eolite systems. The decrease in share-based compensation expense primarily resulted from the prior year accelerated expense associated with the Chief Executive Officer’s retirement eligibility date and the lower grant date fair value for new awards granted in 2013.

Research, Development and Engineering

RD&E expenses totaled $28.8 million for the first three quarters of 2013, a decrease of $3.7 million compared to the first three quarters of 2012. This decrease was primarily due to lower labor costs associated with selective decreases in headcount, lower project materials and new product development costs, partially offset by the addition of Eolite expenses.

Legal Settlement Proceeds and Costs, net

Legal settlement proceeds and costs, net for first three quarters of 2013 was $15.4 million, which consisted of the All Ring litigation legal settlement proceeds of $16.3 million partially offset by court and legal fees associated with the All Ring litigation and other non-recurring legal matters. Legal settlement costs for the first three quarters of 2012 were $0.6 million, which consisted of court and legal fees associated with the All Ring litigation and other non-recurring legal matters.

Gain on Sale of Property and Equipment, net

During the third quarter of 2013, we sold a facility in China for $2.0 million, resulting in a pre-tax gain of $1.3 million partially offset by loss on disposal of certain fixed assets primarily used in testing and development.

Restructuring Costs

During the third quarter of 2012, we initiated restructuring plans to reduce our worldwide cost structure through transition of certain procurement and manufacturing activities to Asia and additionally identified and initiated other cost reduction actions. As a result of the actions, we recognized $0.9 million of restructuring costs during the first third quarters of 2012 which consisted primarily of employee severance and related benefits.

Non-operating Income and Expense

Gain on Sale of Previously Impaired Auction Rate Securities (ARS)

During the first quarter of 2012, we sold all of our remaining ARS with a total par value of $14.7 million for approximately $6.5 million. We recorded a total gain of $2.7 million, which included $1.4 million in reclassification of previously recorded unrealized gains out of accumulated other comprehensive income. As of December 29, 2012, we did not hold any ARS investments. See Note 5 “Fair Value Measurements” to the Condensed Consolidated Financial Statements in Item 1 Financial Statements and Supplementary Data for further discussion.

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Interest and Other Income (Expense), net

Interest and other income (expense), net, consists of interest income and expense, market gains and losses on assets held for our deferred compensation plan, realized and unrealized foreign exchange gains and losses, bank charges, investment management fees and other miscellaneous non-operating items. Net interest and other expense was $0.1 million for the first three quarters of 2013 compared to net interest and other expense of $0.5 million for the first three quarters of 2012. The decrease in expense was primarily attributable to market gains in 2013 on assets held for our deferred compensation plan and, to a lesser extent, improved interest income.

Income Taxes

The following table presents income tax information:

	Three fiscal quarters ended
(In thousands, except percentages)	Dec 29, 2012					Dec 31, 2011
	Income Tax Provision		Effective Tax Rate			Income Tax Provision		Effective Tax Rate
Income tax provision	$	4,634		29.6	%	$	1,335		9.6	%

The income tax provision for the first three quarters of 2013 was $4.6 million on pretax income of $15.7 million generating an effective tax rate of 29.6%. For the first three quarters of 2012, the income tax provision was $1.3 million on pretax income of $13.9 million generating an effective tax rate of 9.6%. The higher effective tax rate for the first three quarters of 2013 was primarily due to the relative level of income, the mix of income between jurisdictions and their relative tax rates, an increase in certain foreign losses subject to valuation, and differences between prior year tax estimates and actual tax results.

Our effective tax rate is subject to fluctuation based upon the mix of income and relative tax rates between jurisdictions, and the occurrence and timing of numerous discrete events such as changes in tax laws or their interpretations, extensions or expirations of research and experimentation credits, closure of tax years subject to examination, finalization of income tax returns, the relationship of fixed deductions to overall changes in estimated and actual pretax income or loss and the tax jurisdictions where income or loss is generated, and the ability to fully utilize our deferred tax assets.

Net Income

The following table presents net income information:

	Three fiscal quarters ended
(In thousands, except percentages)	Dec 29, 2012					Dec 31, 2011
	Net Income		% of Net Sales			Net Income		% of Net Sales
Net income	$	11,035		6.2	%	$	12,569		6.0	%

Net income for the first three quarters of 2013 was $11.0 million, or $0.38 per basic share and $0.37 per diluted share, compared to a net income of $12.6 million, or $0.44 per basic share and $0.43 per diluted share for the first three quarters of 2012. The decrease in net income was primarily due to lower gross profit on lower revenues in the first three quarters of 2013, substantially offset by the legal settlement proceeds and gain on the sale of property and equipment. Net income in 2012 was also higher in part due to the $2.7 million gain on the sale of previously impaired ARS investments.

Financial Condition and Liquidity

At December 29, 2012, our principal sources of liquidity were cash and cash equivalents of $47.2 million, short-term investments of $95.4 million and accounts receivable of $18.6 million. At December 29, 2012, we had a current ratio of 6.55 and held no long-term debt. Working capital of $235.3 million decreased compared to the March 31, 2012 balance of $269.5 million. We also held $6.3 million of non-current investments at December 29, 2012.

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In May 2008, the Board of Directors authorized a share repurchase program totaling $20.0 million to acquire shares of our outstanding common stock primarily to offset dilution from equity compensation programs. In December 2011, the Board of Directors terminated the 2008 repurchase program and authorized a new share repurchase program totaling $20.0 million to acquire shares of our outstanding common stock. The repurchases are to be made at management’s discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and other factors. We did not repurchase any shares under this program during the first three quarters of 2013 or 2012. There is no fixed completion date for the repurchase program. See the Form 10-K for the year ended March 31, 2012 for additional discussion related to these share repurchase programs.

In December 2011, the Board of Directors adopted a dividend policy under which we intend to pay quarterly cash dividends. The following table summarizes the dividend declared and paid by us since the dividend policy was adopted:

Date Declared	Record Date	Payment Date	Amount per Share
November 8, 2012	November 21, 2012	December 5, 2012	$	0.08
August 9, 2012	August 24, 2012	September 10, 2012	$	0.08
May 10, 2012	June 4, 2012	June 18, 2012	$	0.08
December 9, 2011	January 27, 2012	February 17, 2012	$	0.08

A special dividend of $2.00 per share was declared by the Board of Directors on December 3, 2012 after the successful All Ring patent litigation settlement. The special dividend should not be considered a recurring event. See Note 15 “Legal Proceedings” for further discussion.

During the first three quarters of 2013, we paid aggregate dividends of $65.7 million.

We currently anticipate that we will continue to pay cash dividends on a quarterly basis in the future, although the declaration, timing and amount of any future cash dividends are at the discretion of the Board of Directors and will depend on our financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination that cash dividends are in the best interest of our shareholders.

Sources and Uses of Cash

Net cash flows provided by operating activities totaled $27.5 million for the three quarters ended December 29, 2012 due to $11.0 million of net income and $18.1 million in non-cash changes offset by $1.6 million of cash outflows from working capital. The cash outflow from working capital was primarily due to an $11.7 million increase in inventory, a $4.3 million decrease in deferred revenue and a $0.9 million decrease in accounts payable and accrued inventory partially offset by a $14.3 million decrease in trade receivables and a $1.0 decrease in shipped systems pending acceptance.

For the three quarters ended December 29, 2012, net cash provided by investing activities of $16.2 million was primarily due to $885.8 million of proceeds from sales and maturities of investments and $2.0 million of proceeds from the sale of property and equipment, partially offset by $857.4 million of purchases of investments, $9.5 million of net cash paid for acquisition of Eolite Systems, and $5.1 million of purchases of property, plant and equipment. Net cash used in financing activities of $65.6 million was the result of $65.7 million of cash dividends paid to shareholders offset by $0.1 million used in employee stock purchase activity and net stock plan activity including employee tax deposits related to stock awards.

We believe that our existing cash, cash equivalents and short-term investments are adequate to fund our operations, any dividends which may be declared, our share repurchase program and contractual obligations for at least the next twelve months.

Critical Accounting Policies and Estimates

We reaffirm the “Critical Accounting Policies and Estimates” in Part II Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations reported in our Form 10-K for the year ended March 31, 2012.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the market risk disclosure contained in our Form 10-K for the year ended March 31, 2012.

Item 4. Controls and Procedures

Attached to this quarterly report as exhibits 31.1 and 31.2 are the certifications of our President and Chief Executive Officer (CEO) and our Chief Financial Officer (CFO) required by Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This portion of our quarterly report on Form 10-Q is our disclosure of the conclusions of our management regarding the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report based on management’s evaluation of those disclosure controls and procedures. This disclosure should be read in conjunction with the Section 302 Certifications for a complete understanding of the topics presented.

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our CEO and CFO, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the third quarter of 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

All Ring Patent Infringement Prosecution

Our proceedings against All Ring Tech Co., Ltd (All Ring) in Taiwan for alleged patent infringement were settled in ESI’s favor on November 29, 2012. All Ring paid us $475 million New Taiwan Dollars, representing approximately $16.3 million to settle the case, and the case was dismissed. This gain was partially offset by court and legal fees associated with the All Ring litigation and other non-recurring legal matters.

As a part of these proceedings, we established three letters of credit for approximately $19.5 million in July 2009, September 2009 and June 2011, which were collateralized by $22.3 million of restricted cash. The total restricted cash balance was included in Restricted cash on the Condensed Consolidated Balance Sheets as of March 31, 2012 and December 29, 2012. The settlement of the proceedings eliminated the need for us to maintain the letters of credit, and we began the process of closing the letters of credit in December 2012.

In the ordinary course of business, we are involved in various other legal matters, either asserted or unasserted, and investigations. In the opinion of management, ultimate resolution of these matters will not have a material effect on our consolidated financial position, results of operations or cash flows.

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Item 1A. Risk Factors

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 make other forward-looking statements. Investors are cautioned that such forward-looking statements are subject to an inherent risk that actual results may differ materially. 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:

Risks Related to Our Competition and Customers

Volatility of Our Customers’ Industries

Our business is dependent upon the capital expenditures of manufacturers of microelectronics, semiconductors and light emitting diodes (LEDs) used in consumer electronics, computers, wireless communications and other electronic products. The capital equipment market for microelectronics, semiconductor and consumer electronics manufacturers has historically been characterized by sudden and severe cyclical variations in product supply and demand due to a number of factors including capacity utilization, timing of customers’ new product introductions and demand for their products, inventory levels relative to demand and access to affordable capital. The timing, severity and duration of these market cycles are difficult or impossible to predict. In addition, the design win nature of our advanced microfabrication business has resulted in an increase in the volatility of our order and revenue levels. As a result, business levels can vary significantly from quarter to quarter or year to year. Significant downturns in the market for microelectronics, semiconductors, and LEDs used in electronic devices or in the market for consumer electronics reduce demand for our products and may materially and adversely affect our business, financial condition and results of operations. For example, starting in the second half of fiscal 2012, we experienced the negative impact of an uncertain economic environment, slower market growth and overcapacity in several of our markets, which resulted in overall lower order and revenue levels. As a result of this uncertain economic environment, our total order volume declined in 2012 compared to 2011. In addition, we believe the semiconductor memory repair market has matured, which will result in lower demand for our memory repair products during up cycles than we have experienced historically. The degree of the impact of any downturn on our business depends on a number of factors, including: the strength of the global and United States economies; the overall level of demand for consumer electronics products; the stability of global financial systems; and the overall health of the microelectronics, semiconductor, LEDs and consumer electronics industries.

Highly Competitive Markets

We face substantial competition from established competitors throughout the world, some of which have greater financial, engineering, manufacturing and marketing resources than we do. Those competitors with greater resources may, in addition to other things, be able to better withstand periodic downturns, compete more effectively on the basis of price and technology, or more quickly develop enhancements to, and new generations of, products that compete with the products we manufacture and market. Some competitors may be willing to sell competing products at lower margins than we would be willing to accept, increasing price-based competition. New companies may enter the markets in which we compete, or industry consolidation may occur, further increasing competition in those markets. We believe that to be competitive we must continue to expend significant financial resources in order to, among other things, invest in new product development and enhancements. 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.

Increased Price Pressure

We have experienced and continue to experience pricing pressure in the sale of our products, from both competitors and customers. Pricing pressures typically have become more intense during cyclical downturns when competitors seek to maintain or increase market share, reduce inventory or introduce more technologically advanced products. In addition, we may agree to pricing concessions with our customers in connection with volume orders. Our business, financial condition, margins or results of operations may be materially and adversely affected by competitive pressure and intense price-based competition.

Revenues are Largely Dependent on Few Customers

We depend on a few significant customers for a large portion of our revenues. In 2012, our top ten customers accounted for approximately 56% of total net sales, with one customer accounting for approximately 29% of total net sales. We anticipate that sales of our products to a relatively small number of customers will continue to account for a significant portion of our revenues. Consolidation between customers, changes in technologies or solutions used by customers, changes in products manufactured by customers or in end-user demand for those products, selection of suppliers other than us, customer bankruptcies or customer departures from their respective industries all may result in even fewer customers accounting for a high percentage of our revenue. Furthermore, none of our customers have any long-term obligation to continue to buy our products or services and may therefore delay, reduce or cease ordering our products or services at any time. The cancellation, reduction or deferral of purchases of our products by even a single customer could significantly reduce our revenues in any particular quarter. If we were to lose any of our significant customers or suffer a material reduction in their purchase orders, revenue could decline and our business, financial condition and results of operations could be materially and adversely affected.

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Revenues are Largely Based on the Sale of a Small Number of Product Units

We derive a substantial portion of our revenue from the sale of a relatively small number of products. Accordingly, our revenues, margins and other operating results could fluctuate significantly from quarter to quarter depending upon a variety of factors in addition to those described above, including:

• changes in the timing of orders and terms or acceptance of product shipments by our customers;

• changes in the mix of products and services that we sell;

• timing and market acceptance of our new product introductions; and

• delays or problems in the planned introduction of new products, or in the performance of any such products following delivery to customers.

As a result of these risks, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be meaningful, and that these comparisons may not be an accurate indicator of our future performance.

Risks Related to Our Supply Chain and Production

Variability of Production Capacity

To meet rapidly changing demand in the industries we serve, we must effectively manage our resources and production capacity. During periods of decreasing demand for our products, we must be able to appropriately align our cost structure with prevailing market conditions and effectively manage our supply chain. Our ability to rapidly and effectively reduce our cost structure in response to such downturns is limited by the fixed nature of many of our expenses in the near term and by our need to continue our investment in next-generation product technology and to support and service our products. Conversely, when upturns occur in the markets we serve, we may have difficulty rapidly and effectively increasing our manufacturing capacity or procuring sufficient materials to meet sudden increases in customer demand that could result in the loss of business to our competitors and harm to our relationships with our customers. If we are not able to timely and appropriately adapt to changes in our business environment, our business, financial condition or results of operations may be materially and adversely affected.

Problems with Critical Suppliers

We use a wide range of components from numerous suppliers in the manufacture of our products, including custom electronic, laser, optical and mechanical components. 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, some key parts are available only from a single supplier or a limited group of suppliers in the short term. In addition, some of the lasers we use in our products are difficult to manufacture, and as a result we may not receive an adequate supply of lasers in a timely fashion to fill orders. Operations at our suppliers’ facilities are subject to disruption or discontinuation for a variety of reasons, including changes in business relationships, competitive factors, financial difficulties, work stoppages, fire, natural disasters or other causes. Any such disruption or discontinuation to our suppliers’ operations could interrupt or reduce our manufacturing activities and delay delivery of our products, any or all of which could materially and adversely affect our results of operations. In addition, when markets recover from economic downturns, there is a heightened risk that one or more of our suppliers may not be able to meet increased demand requirements, adversely impacting our ability to fulfill orders and win business with our customers.

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Problems with Contract Manufacturers

We have arrangements with contract manufacturers to complete the manufacturing of certain of our products or product subcomponents. Any significant interruption in our contract manufacturers’ ability to provide manufacturing services to us as a result of contractual disputes with us or another party, labor disruptions, financial difficulties, natural disasters, delay or interruption in the receipt of inventory, customer prioritization or other causes could result in reduced manufacturing capabilities or delayed deliveries for certain of our products, any or all of which could materially and adversely affect our results of operations.

Charges for Excess or Obsolete Inventory

One factor on which we compete is the ability to ship products on schedules required by customers. In order to facilitate timely shipping, management forecasts demand, both in type and amount of products, and these forecasts are used to determine inventory to be purchased. We also order materials based on our technology roadmap, which represents management’s assessment of technology that will be utilized in new products that we develop. Certain types of inventory, including lasers and optical equipment, are particularly expensive and may only be used in the production of a single type of product. If actual demand is lower than forecast with respect to the type or amount of products actually ordered, or both, our inventory levels may increase. As a result, there is a risk that we may have to incur material accounting charges for excess and obsolete inventory if inventory cannot be used, which would negatively affect our financial results. Also, if we or our customers alter our technology or product development strategy, we may have inventory that may not be usable under the new strategy, which may also result in material accounting charges. For example, during 2012, we recorded $2.0 million of charges in cost of sales for an inventory write-off associated with discontinued products.

Risks Related to Our Organization

Operating a Global Business

International shipments accounted for 92% of net sales in 2012, with 87% of our net shipments to customers in Asia. We expect that international shipments will continue to represent a significant percentage of net sales in the future. We also have significant foreign operations, including manufacturing facilities in China and Singapore, research and development facilities in Canada, France and Taiwan, and sales and service offices in various countries. Under our globalization strategy, we intend to increase our foreign operations in the future. Our non-U.S. sales, purchases 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;

• difficulty in repatriating money, whether as a result of tax laws or otherwise;

• difficulties protecting intellectual property;

• compliance with labor laws and other laws governing employees;

• local labor disputes;

• shipping delays and disruptions;

• unexpected changes in trading policies, regulatory requirements, tariffs and other barriers; and

• difficulties in managing a global enterprise, including staffing, collecting accounts receivable, and managing suppliers, distributors and representatives.

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Our business and operating results could also be impacted, directly or indirectly, by natural disasters, outbreaks of infectious disease, military action, international conflicts, terrorist activities, civil unrest and associated political instability. Many of our facilities, including our Portland, Oregon headquarters, are in areas with known earthquake risk. Some of these events or circumstances may also result in heightened security concerns with respect to domestic and international travel and commerce, which may further affect our business and operating results. In particular, due to these uncertainties, we are subject to the following additional risks:

• 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;

• more frequent instances of shipping delays;

• demand for our products may not increase or may decrease; and

• our customers or suppliers may experience financial difficulties or cease operations.

Implementation and Modification of Globalization Strategy

We are implementing our globalization strategy in which we are moving certain operational resources and capabilities to different countries in Asia to be closer to many of our significant customers and to reduce costs. We believe this strategy will enhance customer relationships, improve our responsiveness, and reduce our manufacturing costs for certain products. We opened a manufacturing facility in Singapore in the fourth quarter of 2010, which manufactures certain IMG, LED, CG and laser ablation products and is now our primary system manufacturing facility. Additionally, we have a manufacturing facility in Beijing China, which manufactures certain laser products.

Our globalization strategy is subject to a variety of complexities and risks, many of which we have little experience managing, and which may divert a substantial amount of management’s time. These risks include:

• challenges in designing new facilities that can be scaled for future expansion, replicating current processes and bringing new facilities up to full operation;

• unpredictable costs, redundancy costs and cost overruns for developing new facilities and acquiring equipment;

• building local management teams, technical personnel and other staff for functions that we have not previously conducted outside of the United States;

• technical obstacles such as poor production or process yield and loss of quality control during the ramp up of a new facility;

• re-qualifications and other procedures that may be required by our customers;

• our ability to bring up local suppliers to meet our quality and cycle-time needs;

• our ability to reduce costs in the United States as we add costs in Asia;

• rapidly changing business conditions that may require plans to be changed or abandoned before they are fully implemented; and

• challenges posed by distance and by differences in language and culture.

These and other factors could delay the development and implementation of our strategy, as well as impair our gross margins, delay shipments and deliveries, cause us to lose sales, require us to write off investments already made, damage our reputation and harm our business, financial condition and results of operations. If we decide to change our current globalization strategy, we may incur charges for certain costs incurred.

Acquisitions and Divestitures

We may make acquisitions of, or significant investments in, other businesses with complementary products, services or technologies, such as our June 2012 acquisition of Eolite Systems. 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 the acquired businesses;

• implementation of our enterprise resource planning (ERP) system into the acquired company’s operations;

• diversion of management’s attention from other operational matters;

• the potential loss of key employees of the acquired company;

• lack of synergy or inability to realize expected synergies resulting from the acquisition;

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• acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance by the acquired company;

• difficulties establishing satisfactory internal controls at the acquired company;

• risks and uncertainties relating to the performance of the combined company following the transaction; and

• acquiring unanticipated liabilities for which we will not be indemnified.

Furthermore, the accounting for an acquisition could result in significant charges resulting from amortization or write-off of intangible assets we acquire. Our inability to effectively manage these risks could result in our inability to realize the anticipated benefits of an acquisition on a timely basis, or at all, and materially and adversely affect our business, financial condition and results of operations. In addition, all acquisition transaction costs must be expensed as incurred rather than capitalized, which may have a material adverse effect on our results of operations.

The means by which we finance an acquisition may also significantly affect our business or the value of the shares of our common stock. If we issue common stock to pay for an acquisition, the ownership percentage of our existing shareholders will be diluted and the value of the shares held by our existing shareholders could be reduced. If we use cash on hand 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. If we borrow funds in connection with an acquisition, we would be required to use cash to service the debt and to comply with financial and other covenants.

We may from time to time also make strategic investments in development stage companies. Investments in development stage companies are subject to a high degree of risk. We could lose all or a portion of our investment in any such company.

Hiring and Retention of Personnel

Our continued success depends in part upon the services of our key managerial, financial and technical personnel. The loss of key personnel, or our inability to attract, assimilate and retain qualified personnel, could result in the loss of customers, inhibit our ability to operate and grow our business and otherwise have a material adverse effect on our business and results of operations. We have previously had to, and may in the future have to, impose salary reductions on employees during economic downturns in an effort to maintain our financial position. These actions may have an adverse effect on employee loyalty and may make it more difficult for us to attract and retain key personnel. Competition for qualified personnel in the industries in which we compete is intense, and we may not be successful in attracting and retaining qualified personnel. We may incur significant costs in our efforts to recruit and retain key personnel, which could affect our financial position and results of operations.

Risks Related to Technology

Markets Characterized by Rapid Technological Change

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 and the requirements of current and potential customers. 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. The introduction by us or by our competitors of new or enhanced products, or alternative technologies, may cause our customers to defer, change or cancel orders for our existing products or cease purchasing our products altogether. For example, our semiconductor memory customers are exploring alternative redundancy technologies such as electrical redundancy technology. If our customers were to achieve sufficient yield improvement with one of these technologies and convert it into their manufacturing process, there could be a material adverse effect on the size of the addressable market of our memory yield improvement systems. Further, we cannot assure that our new products will gain market acceptance or that we will be able to respond effectively to product announcements by competitors, technology changes or emerging industry standards. If we are unable to develop new or enhanced products to address product or technology changes or new industry standards on a timely basis or at all, or if our new or enhanced products are not accepted by the market, or if our customers adopt alternative technologies, our business, financial condition and results of operations may be adversely affected.

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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 our current and potential customers or obsolete, 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 decline. In addition, as a result of our emphasis on research and development and technological innovation, our operating costs may increase in the future, and research and development expenses may increase as a percentage of total operating expenses and as a percentage of net sales.

Products are Highly Complex

Our products are highly complex, and our extensive product development, manufacturing and testing processes may not be adequate to detect all defects, errors, failures and quality issues that could impact customer satisfaction or result in claims against us. As a result, we may have to replace certain components or provide remediation in response to the discovery of defects in products after they are shipped. The occurrence of any defects, errors, failures or quality issues could result in cancellation of orders, product returns, diversion of our resources, legal actions by our customers and other losses to us or to our customers. These occurrences could also result in the loss of, or delay in, market acceptance of our products, loss of sales and increased expenses and warranty costs, which would harm our business and adversely affect our revenues and profitability.

Risks Related to Legal Matters

Protection of Proprietary Rights – Generally

Our success depends significantly upon the protection of our proprietary rights. We attempt to protect our proprietary rights through patents, copyrights, trademarks, maintenance of trade secrets and other measures, including entering into confidentiality agreements. We incur substantial costs to obtain and maintain patents and to defend our intellectual property rights. For example, we initiated litigation against All Ring Tech Co., Ltd. in Taiwan in August 2005 alleging that certain of our patent rights had been violated, which we settled in November 2012. We rely upon the laws of the United States and foreign countries where we develop, manufacture or sell our products to protect our proprietary rights. We may not be successful in protecting these proprietary rights, these rights may not provide the competitive advantages that we expect, or other parties may challenge, invalidate or circumvent these rights.

Protection of Proprietary Rights – Foreign Jurisdictions

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 United States 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, which could result in reduced sales and gross margins.

Intellectual Property Infringement Claims

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. While we attempt in our designs to avoid patent infringement, 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. Competitors or others have in the past and may in the future assert infringement claims against our customers or us 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.

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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.

Tax Audits and Changes in Tax Law

We are periodically under audit by United States and foreign tax authorities and may have exposure to additional tax liabilities as a result. Significant judgment is required in determining our provision for income and other tax liabilities. Although we believe our tax estimates are reasonable, the final outcome of tax audits and the impact of changes in tax laws or the interpretation of tax laws could result in material differences from what is reflected in historical income tax accruals. If additional taxes are assessed as a result of an examination, a material effect on our financial results, tax positions or cash flows could occur in the period or periods in which the determination is made.

Legal Proceedings

From time to time we are subject to various legal proceedings, including breach of contract claims and claims that involve possible infringement of patent or other intellectual property rights of third parties. It is inherently difficult to assess the outcome of litigation matters, and there can be no assurance that we will prevail in any litigation. Any litigation could result in substantial cost and diversion of management’s attention, which by itself could have a material adverse effect on our financial condition and results of operations. Further, adverse determinations in such litigation could result in loss of our property rights, subject us to significant liabilities, require us to seek licenses from others or prevent us from manufacturing or selling our products, any of which could materially adversely affect our business, financial condition, results of operations or cash flows.

Provisions Restricting Our Acquisition

Our articles of incorporation and bylaws contain provisions that could make it harder for a third party to acquire us without the consent of our Board of Directors. Our Board of Directors has also adopted a shareholder rights plan, or “poison pill,” which would significantly dilute the ownership of a hostile acquirer. In addition, the Oregon Control Share Act and the Oregon Business Combination Act limit the ability of parties who acquire a significant amount of voting stock to exercise control over us. These provisions may have the effect of lengthening the time required for a person to acquire control of us through a proxy contest or the election of a majority of our Board of Directors, may deter efforts to obtain control of us and may make it more difficult for a third party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by our shareholders.

Risks Related to Financial Matters

Unfavorable Currency Exchange Rate Fluctuations

Currency exchange rate fluctuations could have an adverse effect on our sales and results of operations and we could experience losses with respect to forward exchange contracts into which we may enter. Unfavorable currency fluctuations could require us to increase prices to foreign customers, which could result in lower net sales by us to those customers. Alternatively, if we do not adjust the prices for our products in response to unfavorable currency fluctuations, our results of operations could be materially and adversely affected. In addition, some of our foreign sales are denominated in the currency of the country in which these products are sold and the currency we receive in payment for such sales could be less valuable at the time of receipt as a result of exchange rate fluctuations. From time to time, we enter into forward exchange contracts to hedge the value of accounts receivable primarily denominated in Japanese yen and other currencies. However, we cannot be certain that our efforts will be adequate to protect us against significant currency fluctuations or that such efforts will not expose us to additional exchange rate risks, which could adversely affect our results of operations.

Fluctuations in Effective Tax Rate

As a global company, we are subject to taxation in the United States and numerous foreign jurisdictions. Our effective tax rate is subject to fluctuation from one period to the next because the income tax rates for each year are a function of many factors, including: (a) taxable income levels and the effects of a mix of profits (losses) earned by ESI and our subsidiaries in numerous tax jurisdictions with a broad range of income tax rates; (b) our ability to utilize deferred tax assets; (c) taxes, refunds, interest or penalties resulting from tax audits; (d) the magnitude of various credits and deductions as a percentage of total taxable income; and (e) changes in tax laws or the interpretation of such tax laws. The ability to utilize our deferred tax assets is highly dependent on future taxable income. If we were to experience an on-going decline in taxable income, there is a risk that our deferred tax assets could be subject to additional valuation allowance. Changes in the mix of these items may cause our effective tax rate to fluctuate between periods, which could have a material adverse effect on our financial position and results of operations.

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Impairment of Intangible Assets

We held a total of $12.1 million in acquired intangible assets and $7.9 million in goodwill at December 29, 2012. We review our acquired intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill for impairment using a qualitative and quantitative approach at least annually or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below the carrying value.

We performed our annual goodwill impairment analysis during the fourth quarter of 2012 and determined that it was not “more likely than not” that the fair value of our single reporting unit was less than its carrying value. Based on current economic conditions combined with our stock price, which has remained around carrying value per share since mid-May 2012, we will continue to monitor the situation. If at any time management determines that an impairment exists, we will be required to reflect the impaired value as part of operating income, which will result in a reduction in earnings and a corresponding reduction in our net asset value in the period such impairment is identified.

Stock Price Volatility

The market price of our common stock has fluctuated widely. During fiscal 2012, our stock price fluctuated between a high of $19.88 per share and a low of $11.10 per share. Consequently, the current market price of our common stock may not be indicative of future market prices, and we may be unable to sustain or increase the value of an investment in our common stock. Factors affecting our stock price, many of which are outside of our control, may include:

• variations in operating results from quarter to quarter;

• changes in earnings estimates by analysts or our failure to meet analysts’ expectations;

• changes in the market price per share of our public company customers;

• market conditions in the consumer electronics, semiconductor and other industries into which we sell products;

• general economic conditions;

• political changes, hostilities or natural disasters;

• low trading volume of our common stock;

• the number of analysts covering our common stock; and

• the number of firms making a market in our common stock.

In addition, the stock market has recently experienced significant price and volume fluctuations. These fluctuations have particularly affected the market prices of the securities of high-technology companies like ours. These market fluctuations could adversely affect the market price of our common stock.

Reduction or Cessation of Quarterly Dividends

Our Board of Directors first adopted a quarterly dividend policy in December 2011. We intend to pay quarterly dividends subject to capital availability and periodic determinations by our Board of Directors that cash dividends are in the best interest of our shareholders and are in compliance with all laws and agreements applicable to the declaration and payment of cash dividends. Future dividends may be affected by, among other factors: our views on potential future capital requirements for investments in acquisitions; funding of research and development; legal risks; stock repurchase programs; changes in federal and state income tax laws or corporate laws; and changes to our business model. Our dividend payments may change from time to time, and we cannot provide assurance that we will continue to declare dividends at all or in any particular amounts. Further, the special dividend declared by the Board of Directors in December 2012 should not be considered a recurring event. A reduction or cessation in our quarterly dividend payments could have a negative effect on our stock price.

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Impairment of Investments

Our investment portfolio is primarily comprised of commercial paper, debt securities issued by U.S. governmental agencies and municipal debt securities. These investments are intended to be highly liquid and low risk. If the markets for these securities were to deteriorate for any reason, including as a result of a downgrade in the credit rating of U.S. government securities, the liquidity and value of these investments could be negatively affected, which could result in impairment charges. Any such impairment charges may have a material impact on our financial condition and results of operations.

Item 4. Mine Safety Disclosures

Not applicable.

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Item 6. Exhibits

This list is intended to constitute the exhibit index.

3.1	Third Restated Articles of Incorporation, as amended. Incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K filed on June 15, 2010.
3.2	2009 Amended and Restated Bylaws. Incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed on May 19, 2009 (the “May 19 8-K”).
4.1	Rights Agreement, dated as of May 18, 2009, between Electro Scientific Industries, Inc. and Mellon Investor Services. Incorporated by reference to Exhibit 4.1 of the May 19 8-K.
10.1**	2004 Stock Incentive Plan, as amended
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document *
101.SCH	XBRL Taxonomy Extension Schema Document *
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB	XBRL Taxonomy Extension Label Linkbase Document *
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document *

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.

** Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate

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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 on its behalf by the undersigned thereunto duly authorized.

Dated: February 5, 2013		ELECTRO SCIENTIFIC INDUSTRIES, INC.
	By	/s/ Nicholas Konidaris
	Nicholas Konidaris
	President and Chief Executive Officer
	(Principal Executive Officer)
	By	/s/ Paul Oldham
	Paul Oldham
	Vice President of Administration,
	Chief Financial Officer and Corporate Secretary
	(Principal Financial Officer)
	By	/s/ Kerry Mustoe
	Kerry Mustoe
	Vice President, Corporate Controller and Chief Accounting Officer
	(Principal Accounting Officer)

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EX-10.1

Exhibit 10.1

2004 Stock Incentive Plan

ELECTRO SCIENTIFIC INDUSTRIES, INC.

2004 STOCK INCENTIVE PLAN

(As amended January 25, 2005, April 20, 2005,

October 25, 2007, May 12, 2011 and December 21, 2012)

1. Purpose. The purpose of this 2004 Stock Incentive Plan (the “Plan”) is to enable Electro Scientific Industries, Inc. (the “Company”) to attract and retain the services of (i) selected employees, officers and directors of the Company or any parent or subsidiary of the Company and (ii) selected non-employee agents, consultants, advisors and independent contractors of the Company or any parent, subsidiary of the Company. For purposes of this Plan, a person is considered to be employed by or in the service of the Company if the person is employed by or in the service of any entity (the “Employer”) that is either the Company or a parent or subsidiary of the Company.

2. Shares Subject to the Plan. Subject to adjustment as provided below and in Section 12, the shares to be offered under the Plan shall consist of Common Stock of the Company (“Common Stock”), and the total number of shares of Common Stock that may be issued under the Plan shall be 3,000,000 shares plus any shares that at the time the Plan is approved by shareholders are available for grant under the Company’s 1989 Stock Option Plan, 1996 Stock Incentive Plan and 2000 Stock Option Incentive Plan, which plans were previously approved by shareholders of the Company, and the Company’s 2000 Stock Option Plan, which plan was not previously approved by the Company’s shareholders (collectively, the “Prior Plans”), or that may subsequently become available for grant under any of the Prior Plans through the expiration, termination, forfeiture or cancellation of grants. If an option, stock appreciation right or Performance-Based Award granted under the Plan expires, terminates or is canceled, the unissued shares subject to that option, stock appreciation right or Performance-Based Award shall again be available under the Plan. If shares awarded as a bonus pursuant to Section 9 or sold pursuant to Section 10 under the Plan are forfeited to or repurchased by the Company, the number of shares forfeited or repurchased shall again be available under the Plan.

3. Effective Date and Duration of Plan.

3.1 Effective Date. The Plan shall become effective as of July 15, 2004. No awards shall be made under the Plan until the Plan is approved by shareholders of the Company in accordance with rules of The Nasdaq Stock Market.

3.2 Duration. The Plan shall continue in effect until all shares available for issuance under the Plan have been issued and all restrictions on the shares have lapsed. The Board of Directors may suspend or terminate the Plan at any time except with respect to Awards then outstanding under the Plan. Termination shall not affect any Awards or any right of the Company to repurchase shares or the forfeitability of shares issued under the Plan.

4. Administration.

4.1 Board of Directors. The Plan shall be administered by the Board of Directors of the Company, which shall determine and designate the individuals to whom awards shall be made, the amount of the awards and the other terms and conditions of the awards. Subject to the provisions of the Plan, the Board of Directors may adopt and amend rules and regulations relating to administration of the Plan, advance the lapse of any waiting period, accelerate any exercise date, waive or modify any restriction applicable to shares (except those restrictions imposed by law) and make all other determinations in the judgment of the Board of Directors necessary or desirable for the administration of the Plan. The interpretation and construction of the provisions of the Plan and related agreements by the Board of Directors shall be final and conclusive. The Board of Directors may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any related agreement in the manner and to the extent it deems expedient to carry the Plan into effect, and the Board of Directors shall be the sole and final judge of such expediency.

4.2 Committee. The Board of Directors may delegate to any committee of the Board of Directors (the “Committee”) any or all authority for administration of the Plan. If authority is delegated to the Committee, all references to the Board of Directors in the Plan shall mean and relate to the Committee, except (i) as otherwise provided by the Board of Directors and (ii) that only the Board of Directors may amend or terminate the Plan as provided in Sections 3 and 13.

5. Types of Awards; Eligibility; Limitations.

5.1 Types of Awards, Eligibility. The Board of Directors may, from time to time, take the following actions, separately or in combination, under the Plan (“Awards”): (i) grant Incentive Stock Options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), as provided in Sections 6.1, 6.2 and 8; (ii) grant options other than Incentive Stock Options (“Non-Statutory Stock Options”) as provided in Sections 6.1, 6.3 and 8; (iii) grant stock appreciation rights as provided in Sections 7 and 8; (iv) award stock bonuses (including bonuses in the form of restricted stock units) as provided in Section 9; (v) sell shares subject to restrictions as provided in Sections 10; (vi) award Performance-Based Awards as provided in Section 11. Awards may be made to employees, including employees who are officers or directors, and to non-employee directors; provided, however, that only employees of the Company or any parent or subsidiary of the Company (as defined in subsections 424(e) and 424(f) of the Code) are eligible to receive Incentive Stock Options under the Plan. The Board of Directors shall select the individuals to whom awards shall be made and shall specify the action taken with respect to each individual to whom an award is made.

5.2 Per Employee Share Limitations. No employee may be granted options and/or stock appreciation rights for more than an aggregate of 500,000 shares of Common Stock in any calendar year or restricted stock or restricted stock units for more than an aggregate of 170,000 shares of Common Stock in any calendar year; provided, however, that to the extent the annual limitation is not fully used in any year for an employee, any shares not used may be added to the number of shares for which options and/or stock appreciation rights or restricted stock and/or restricted stock units, as applicable, may be granted to that employee in any future year.

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5.3 Prohibition on Option Repricing. Except as provided in Section 12, without the prior approval of the Company’s shareholders, an option issued under the Plan may not be repriced by lowering the option exercise price or by cancellation of an outstanding option with a subsequent replacement or regrant of an option with a lower exercise price.

5.4 Maximum Number of Shares Issuable Upon Exercise of ISOs. The maximum aggregate number of shares of Common Stock that may be issued under the Plan upon exercise of Incentive Stock Options shall be equal to the sum of 3,000,000 shares plus any shares that at July 15, 2004 are available for grant under the Prior Plans or that may subsequently become available for grant under any of the Prior Plans through the expiration, termination, forfeiture or cancellation of grants, which number will not exceed 9,568,684 shares.

5.5 Reservation of Additional Shares. Except as provided in Section 12, additional shares of Common Stock may not be reserved for issuance under the Plan without the approval of the Company’s shareholders.

6. Stock Options.

6.1 General Rules Relating to Options.

6.1-1 Terms of Grant. The Board of Directors may grant options under the Plan. With respect to each option grant, the Board of Directors shall determine the number of shares subject to the option, the exercise price, the period of the option, the time or times at which the option may be exercised and whether the option is an Incentive Stock Option or a Non-Statutory Stock Option. At the time of the grant of an option or at any time thereafter, the Board of Directors may provide that an optionee who exercised an option with Common Stock of the Company shall automatically receive a new option to purchase additional shares equal to the number of shares surrendered and may specify the terms and conditions of such new options.

6.1-2 Nontransferability. Each Incentive Stock Option and, unless otherwise determined by the Board of Directors, each other option granted under the Plan by its terms (i) shall be nonassignable and nontransferable by the optionee, either voluntarily or by operation of law, except by will or by the laws of descent and distribution of the state or country of the optionee’s domicile at the time of death, and (ii) during the optionee’s lifetime, shall be exercisable only by the optionee.

6.1-3 Purchase of Shares. Unless the Board of Directors determines otherwise, on or before the date specified for completion of the purchase of shares pursuant to an option exercise, the optionee must pay the Company the full purchase price of those shares in cash or by check or, with the consent of the Board of Directors, in whole or in part, in Common Stock of the Company valued at fair market value, restricted stock or other contingent awards denominated in either stock or cash, promissory notes and other forms of consideration. Unless otherwise determined by the Board of Directors, any Common Stock provided in payment of the purchase price must have been previously acquired and held by the optionee for at least six months. The fair market value of Common Stock provided in payment of the purchase price shall be the closing price of the Common Stock last reported before the time payment in Common Stock is made or, if earlier, committed to be made, if the Common Stock is publicly traded, or another value of the Common Stock as specified by the Board of Directors. No shares shall be issued until full payment for the shares has been made, including all amounts owed for tax withholding. With the consent of the Board of Directors, an optionee may request the Company to apply automatically the shares to be received upon the exercise of a portion of a stock option (even though stock certificates have not yet been issued) to satisfy the purchase price for additional portions of the option.

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6.1-4 Limitations on Grants to Non-Exempt Employees. Unless otherwise determined by the Board of Directors, if an employee of the Company or any parent or subsidiary of the Company is a non-exempt employee subject to the overtime compensation provisions of Section 7 of the Fair Labor Standards Act (the “FLSA”), any option granted to that employee shall be subject to the following restrictions: (i) the option price shall be at least 85 percent of the fair market value, as described in Section 6.2-4, of the Common Stock subject to the option on the date it is granted; and (ii) the option shall not be exercisable until at least six months after the date it is granted; provided, however, that this six-month restriction on exercisability will cease to apply if the employee dies, becomes disabled or retires, there is a change in ownership of the Company, or in other circumstances permitted by regulation, all as prescribed in Section 7(e)(8)(B) of the FLSA.

6.2 Incentive Stock Options. Incentive Stock Options shall be subject to the following additional terms and conditions:

6.2-1 Limitation on Amount of Grants. If the aggregate fair market value of stock (determined as of the date the option is granted) for which Incentive Stock Options granted under this Plan (and any other stock incentive plan of the Company or its parent or subsidiary corporations, as defined in subsections 424(e) and 424(f) of the Code) are exercisable for the first time by an employee during any calendar year exceeds $100,000, the portion of the option or options not exceeding $100,000, to the extent of whole shares, will be treated as an Incentive Stock Option and the remaining portion of the option or options will be treated as a Non-Statutory Stock Option. The preceding sentence will be applied by taking options into account in the order in which they were granted. If, under the $100,000 limitation, a portion of an option is treated as an Incentive Stock Option and the remaining portion of the option is treated as a Non-Statutory Stock Option, unless the optionee designates otherwise at the time of exercise, the optionee’s exercise of all or a portion of the option will be treated as the exercise of the Incentive Stock Option portion of the option to the full extent permitted under the $100,000 limitation. If an optionee exercises an option that is treated as in part an Incentive Stock Option and in part a Non-Statutory Stock Option, the Company will designate the portion of the stock acquired pursuant to the exercise of the Incentive Stock Option portion as Incentive Stock Option stock by issuing a separate certificate for that portion of the stock and identifying the certificate as Incentive Stock Option stock in its stock records.

6.2-2 Limitations on Grants to 10 percent Shareholders. An Incentive Stock Option may be granted under the Plan to an employee possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or any parent or subsidiary (as defined in subsections 424(e) and 424(f) of the Code) only if the option price is at least 110 percent of the fair market value, as described in Section 6.2-4, of the Common Stock subject to the option on the date it is granted and the option by its terms is not exercisable after the expiration of five years from the date it is granted.

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6.2-3 Duration of Options. Subject to Sections 6.2-2, 8.1 and 8.2, Incentive Stock Options granted under the Plan shall continue in effect for the period fixed by the Board of Directors, except that by its terms no Incentive Stock Option shall be exercisable after the expiration of 10 years from the date it is granted.

6.2-4 Option Price. The option price per share shall be determined by the Board of Directors at the time of grant. Except as provided in Section 6.2-2, the option price shall not be less than 100 percent of the fair market value of the Common Stock covered by the Incentive Stock Option at the date the option is granted. The fair market value shall be the closing price of the Common Stock last reported on the date the option is granted, if the stock is publicly traded, or another value of the Common Stock as specified by the Board of Directors.

6.2-5 Limitation on Time of Grant. No Incentive Stock Option shall be granted on or after the tenth anniversary of the last action by the Board of Directors adopting the Plan or approving an increase in the number of shares available for issuance under the Plan, which action was subsequently approved within 12 months by the shareholders.

6.2-6 Early Dispositions. If within two years after an Incentive Stock Option is granted or within 12 months after an Incentive Stock Option is exercised, the optionee sells or otherwise disposes of Common Stock acquired on exercise of the Option, the optionee shall within 30 days of the sale or disposition notify the Company in writing of (i) the date of the sale or disposition, (ii) the amount realized on the sale or disposition and (iii) the nature of the disposition (e.g., sale, gift, etc.).

6.3 Non-Statutory Stock Options. Non-Statutory Stock Options shall be subject to the following terms and conditions, in addition to those set forth in Sections 6.1 and 8.

6.3-1 Option Price. The option price for Non-Statutory Stock Options shall be determined by the Board of Directors at the time of grant. The option price shall not be less than 100 percent of the fair market value of the Common Stock covered by the Non-Statutory Stock Option at the date the option is granted. The fair market value shall be the closing price of the Common Stock last reported on the date the option is granted, if the stock is publicly traded, or another value of the Common Stock as specified by the Board of Directors.

6.3-2 Duration of Options. Non-Statutory Stock Options granted under the Plan shall continue in effect for the period fixed by the Board of Directors, except that no Non-Statutory Option shall be exercisable after the expiration of 10 years from the date it is granted.

7. Stock Appreciation Rights.

7.1 Grant. Stock appreciation rights may be granted under the Plan by the Board of Directors, subject to such rules, terms, and conditions as the Board of Directors prescribes. The Board of Directors may provide that stock appreciation rights may be granted in substitution for stock options granted under the Plan. With respect to each grant, the Board shall determine the number of shares subject to the stock appreciation right, the exercise price of the stock appreciation right, the period of the stock appreciation right, and the time or times at which the stock appreciation right may be exercised. Stock appreciation rights shall continue in effect for the period fixed by the Board of Directors.

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7.2 Stock Appreciation Rights Granted in Connection with Options. If a stock appreciation right is granted in connection with an option, the stock appreciation right shall be exercisable only to the extent and on the same conditions that the related option could be exercised. Upon exercise of a stock appreciation right, any option or portion thereof to which the stock appreciation right relates terminates. If a stock appreciation right is granted in connection with an option, upon exercise of the option, the stock appreciation right or portion thereof to which the grant relates terminates.

7.3 Exercise. Each stock appreciation right shall entitle the holder, upon exercise, to receive from the Company in exchange therefor an amount equal in value to the excess of the fair market value on the date of exercise of one share of Common Stock of the Company over the exercise price as determined by the Board of Directors (or, in the case of a stock appreciation right granted in connection with an option, the option price per share under the option to which the stock appreciation right relates), multiplied by the number of shares covered by the stock appreciation right, or portion thereof, that is surrendered. Payment by the Company upon exercise of a stock appreciation right may be made in Common Stock valued at fair market value, in cash, or partly in Common Stock and partly in cash, all as determined by the Board of Directors. For this purpose, the fair market value of the Common Stock shall be the closing price of the Common Stock last reported before the time of exercise, or such other value of the Common Stock as specified by the Board of Directors.

7.4 Fractional Shares. No fractional shares shall be issued upon exercise of a stock appreciation right. In lieu thereof, cash may be paid in an amount equal to the value of the fraction or, if the Board of Directors shall determine, the number of shares may be rounded downward to the next whole share.

7.5 Nontransferability. Each stock appreciation right granted in connection with an Incentive Stock Option and, unless otherwise determined by the Board of Directors, each other stock appreciation right granted under the Plan, by its terms shall be nonassignable and nontransferable by the holder, either voluntarily or by operation of law, except by will or by the laws of descent and distribution of the state or country of the holder’s domicile at the time of death, and each stock appreciation right by its terms shall be exercisable during the holder’s lifetime only by the holder.

8. Exercise of Options and Stock Appreciation Rights.

8.1 Exercise. Except as provided in Section 8.2 or as determined by the Board of Directors, no option or stock appreciation right granted under the Plan may be exercised unless at the time of exercise the holder is employed by or in the service of the Company and shall have been so employed or provided such service continuously since the date the option or stock appreciation right was granted. Except as provided in Sections 8.2, 12 and 17, options and stock appreciation rights granted under the Plan may be exercised from time to time over the period stated in each option or stock appreciation right in amounts and at times prescribed by the Board of Directors, provided that options and stock appreciation rights may not be exercised for fractional shares. Unless otherwise determined by the Board of Directors, if a holder does not exercise an option or stock appreciation right in any one year for the full number of shares to which the holder is entitled in that year, the holder’s rights shall be cumulative and the holder may acquire those shares in any subsequent year during the term of the option or stock appreciation right.

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8.2 Termination of Employment or Service.

8.2-1 General Rule. Unless otherwise determined by the Board of Directors, if a holder’s employment or service with the Company terminates for any reason other than because of total disability or death as provided in Sections 8.2-2 and 8.2-3, his or her option or stock appreciation right may be exercised at any time before the expiration date of the option or stock appreciation right or the expiration of 3 months after the date of termination, whichever is the shorter period, but only if and to the extent the holder was entitled to exercise the option or stock appreciation right at the date of termination. Notwithstanding the foregoing, unless otherwise determined by the Board of Directors, if a holder’s employment or service with the Company terminates for any reason other than because of total disability or death as provided in Sections 8.2-2 and 8.2-3, and such holder dies before the expiration date of the option or stock appreciation right and the expiration of 3 months after the date of termination, his or her option or stock appreciation right may be exercised at any time before the expiration date of the option or stock appreciation right or before the date 12 months after the date of termination, whichever is the shorter period, but only if and to the extent the holder was entitled to exercise the option or stock appreciation right at the date of termination and only by the person or persons to whom the holder’s rights under the option or stock appreciation right shall pass by the holder’s will or by the laws of descent and distribution of the state or country of domicile at the time of death.

8.2-2 Termination Because of Total Disability. Unless otherwise determined by the Board of Directors, if a holder’s employment or service with the Company terminates because of total disability, his or her option or stock appreciation right may be exercised at any time before the expiration date of the option or stock appreciation right or before the date 12 months after the date of termination, whichever is the shorter period, but only if and to the extent the holder was entitled to exercise the option or stock appreciation right at the date of termination. The term “total disability” means a medically determinable mental or physical impairment that is expected to result in death or has lasted or is expected to last for a continuous period of 12 months or more and that, in the opinion of the Company and two independent physicians, causes the holder to be unable to perform his or her duties as an employee, director or officer of the Employer and unable to be engaged in any substantial gainful activity. Total disability shall be deemed to have occurred on the first day after the two independent physicians have furnished their written opinion of total disability to the Company and the Company has reached an opinion of total disability.

8.2-3 Termination Because of Death. Unless otherwise determined by the Board of Directors, if a holder dies while employed by or providing service to the Company, his or her option or stock appreciation right may be exercised at any time before the expiration date of the option or stock appreciation right or before the date 12 months after the date of death, whichever is the shorter period, but only if and to the extent the holder was entitled to exercise the option or stock appreciation right at the date of death and only by the person or persons to whom the holder’s rights under the option or stock appreciation right shall pass by the holder’s will or by the laws of descent and distribution of the state or country of domicile at the time of death.

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8.2-4 Amendment of Exercise Period Applicable to Termination. The Board of Directors may at any time extend the 3-month and 12-month exercise periods any length of time not longer than the original expiration date of the option or stock appreciation right. The Board of Directors may at any time increase the portion of an option or stock appreciation right that is exercisable, subject to terms and conditions determined by the Board of Directors.

8.2-5 Failure to Exercise Option or Stock Appreciation Right. To the extent that the option or stock appreciation right of any deceased holder or any holder whose employment or service terminates is not exercised within the applicable period, all further rights to purchase shares pursuant to the option or stock appreciation right shall cease and terminate.

8.2-6 Leave of Absence. Absence on leave approved by the Employer or on account of illness or disability shall not be deemed a termination or interruption of employment or service. Unless otherwise determined by the Board of Directors, vesting of options and stock appreciation rights shall continue during a medical, family or military leave of absence or other leave approved by the Employer, whether paid or unpaid, and vesting of options and stock appreciation rights shall be suspended during any other unpaid leave of absence.

8.3 Notice of Exercise or Surrender. Unless the Board of Directors determines otherwise, shares may be acquired pursuant to an option or stock appreciation right granted under the Plan only upon the Company’s receipt of written notice from the holder of the holder’s binding commitment to purchase shares, specifying the number of shares the holder desires to acquire under the option or stock appreciation right and the date on which the holder agrees to complete the transaction, and, if required to comply with the Securities Act of 1933, containing a representation that it is the holder’s intention to acquire the shares for investment and not with a view to distribution. Unless the Board of Directors determines otherwise, cash may be paid upon surrender of a stock appreciation right granted under the Plan only upon the Company’s receipt of written notice from the holder of the holder’s binding commitment to surrender the stock appreciation right, specifying the number of shares subject to the stock appreciation right being surrendered and the date on which the holder agrees to complete the surrender.

8.4 Tax Withholding. Each holder who has exercised an option or stock appreciation right shall, immediately upon notification of the amount due, if any, pay to the Company in cash or by check amounts necessary to satisfy any applicable federal, state and local tax withholding requirements. If additional withholding is or becomes required (as a result of exercise of an option or stock appreciation right or as a result of disposition of shares acquired pursuant to exercise of an option or stock appreciation right) beyond any amount deposited before delivery of the certificates, the holder shall pay such amount, in cash or by check, to the Company on demand. If the holder fails to pay the amount demanded, the Company or the Employer may withhold that amount from other amounts payable to the holder, including salary, subject to applicable law. With the consent of the Board of Directors, a holder may satisfy this obligation, in whole or in part, by instructing the Company to withhold from the shares to be issued upon exercise or by delivering to the Company other shares of Common Stock; provided, however, that the number of shares so withheld or delivered in connection with an option exercise shall not exceed the minimum amount necessary to satisfy the required withholding obligation.

8

8.5 Reduction of Reserved Shares. Upon the exercise of an option or stock appreciation right, the number of shares reserved for issuance under the Plan shall be reduced by the number of shares issued upon exercise of the option or stock appreciation right. Cash payments of stock appreciation rights shall not reduce the number of shares of Common Stock reserved for issuance under the Plan.

9. Stock Bonuses. The Board of Directors may award shares under the Plan as stock bonuses, including restricted stock units that provide for delivery of Common Stock at a later date. Shares awarded as a bonus shall be subject to the terms, conditions and restrictions determined by the Board of Directors. The restrictions may include restrictions concerning transferability and forfeiture of the shares awarded, together with any other restrictions determined by the Board of Directors. The Board of Directors may require the recipient to sign an agreement as a condition of the award, but may not require the recipient to pay any monetary consideration other than amounts necessary to satisfy tax withholding requirements. The agreement may contain any terms, conditions, restrictions, representations and warranties required by the Board of Directors. The certificates representing the shares awarded shall bear any legends required by the Board of Directors. The Company may require any recipient of a stock bonus to pay to the Company in cash or by check upon demand amounts necessary to satisfy any applicable federal, state or local tax withholding requirements. If the recipient fails to pay the amount demanded, the Company or the Employer may withhold that amount from other amounts payable to the recipient, including salary, subject to applicable law. With the consent of the Board of Directors, a recipient may satisfy this obligation, in whole or in part, by instructing the Company to withhold from any shares to be issued or by delivering to the Company other shares of Common Stock; provided, however, that the number of shares so withheld or delivered shall not exceed the minimum amount necessary to satisfy the required withholding obligation. Upon the issuance of a stock bonus, the number of shares reserved for issuance under the Plan shall be reduced by the number of shares issued.

10. Restricted Stock.

10.1 Restricted Stock. The Board of Directors may issue shares under the Plan for any consideration (including promissory notes and services) determined by the Board of Directors. Shares issued under the Plan shall be subject to the terms, conditions and restrictions determined by the Board of Directors; provided, however, that any award made under this Section 10 the vesting for which is time-based will provide for a restriction period of at least three years, with the restriction to lapse no more quickly than with respect to one-third of the shares annually over the three-year restriction period. Subject to the provisions of the Plan, the restrictions may include restrictions concerning transferability, repurchase by the Company and forfeiture of the shares issued, together with any other restrictions determined by the Board of Directors. All Common Stock issued pursuant to this Section 10.1 shall be subject to a Restricted Stock Agreement, which shall be executed by the Company and the prospective recipient of the shares before the delivery of certificates representing the shares. The Agreement may contain any terms, conditions, restrictions, representations and warranties required by the Board of Directors.

9

10.2 Other Provisions. The certificates representing shares of restricted stock shall bear any legends required by the Board of Directors. The Company may require any participant receiving restricted stock to pay to the Company in cash or by check upon demand amounts necessary to satisfy any applicable federal, state or local tax withholding requirements. If the participant fails to pay the amount demanded, the Company or the Employer may withhold that amount from other amounts payable to the participant, including salary, subject to applicable law. With the consent of the Board of Directors, a participant may satisfy this obligation, in whole or in part, by instructing the Company to withhold from any shares to be issued or by delivering to the Company other shares of Common Stock; provided, however, that the number of shares so withheld or delivered shall not exceed the minimum amount necessary to satisfy the required withholding obligation. Upon the issuance of restricted stock, the number of shares reserved for issuance under the Plan shall be reduced by the number of shares issued.

11. Performance-Based Awards. The Board of Directors may grant awards intended to qualify as qualified performance-based compensation under Section 162(m) of the Code and the regulations thereunder (“Performance-Based Awards”). Performance-Based Awards shall be denominated at the time of grant either in Common Stock (“Stock Performance Awards”) or in dollar amounts (“Dollar Performance Awards”). Payment under a Stock Performance Award or a Dollar Performance Award shall be made, at the discretion of the Board of Directors, in Common Stock (“Performance Shares”), or in cash or in any combination thereof. Performance-Based Awards shall be subject to the following terms and conditions:

11.1 Award Period. The Board of Directors shall determine the period of time for which a Performance-Based Award is made (the “Award Period”).

11.2 Performance Goals and Payment. The Board of Directors shall establish in writing objectives (“Performance Goals”) that must be met by the Company or any subsidiary, division or other unit of the Company (“Business Unit”) during the Award Period as a condition to payment being made under the Performance-Based Award. The Performance Goals for each award shall be one or more targeted levels of performance with respect to one or more of the following objective measures with respect to the Company or any Business Unit: earnings, earnings per share, stock price increase, total shareholder return (stock price increase plus dividends), return on equity, return on assets, return on capital, economic value added, sales, revenues, operating income, inventories, inventory turns, cash flows, or any of the foregoing before the effect of acquisitions, divestitures, accounting changes, restructuring and special charges, extraordinary items and all items of gain, loss or expense determined to be extraordinary or unusual in nature or infrequent in occurrence (determined according to criteria established by the Board of Directors). The Board of Directors shall also establish the number of Performance Shares or the amount of cash payment to be made under a Performance-Based Award if the Performance Goals are met or exceeded, including the fixing of a maximum payment (subject to Section 11.4). The Board of Directors may establish other restrictions to payment under a Performance-Based Award, such as a continued employment requirement, in addition to satisfaction of the Performance Goals. Some or all of the Performance Shares may be issued at the time of the award as restricted shares subject to forfeiture in whole or in part if Performance Goals or, if applicable, other restrictions are not satisfied.

10

11.3 Computation of Payment. During or after an Award Period, the performance of the Company or Business Unit, as applicable, during the period shall be measured against the Performance Goals. If the Performance Goals are not met, no payment shall be made under a Performance-Based Award. If the Performance Goals are met or exceeded, the Board of Directors shall certify that fact in writing and certify the number of Performance Shares earned or the amount of cash payment to be made under the terms of the Performance-Based Award.

11.4 Maximum Awards. No participant may receive in any fiscal year Stock Performance Awards under which the aggregate amount payable under the Awards exceeds the equivalent of 200,000 shares of Common Stock or Dollar Performance Awards under which the aggregate amount payable under the Awards exceeds $4,000,000.

11.5 Tax Withholding. Each participant who has received Performance Shares shall, upon notification of the amount due, pay to the Company in cash or by check amounts necessary to satisfy any applicable federal, state and local tax withholding requirements. If the participant fails to pay the amount demanded, the Company or the Employer may withhold that amount from other amounts payable to the participant, including salary, subject to applicable law. With the consent of the Board of Directors, a participant may satisfy this obligation, in whole or in part, by instructing the Company to withhold from any shares to be issued or by delivering to the Company other shares of Common Stock; provided, however, that the number of shares so delivered or withheld shall not exceed the minimum amount necessary to satisfy the required withholding obligation.

11.6 Effect on Shares Available. The payment of a Performance-Based Award in cash shall not reduce the number of shares of Common Stock reserved for issuance under the Plan. The number of shares of Common Stock reserved for issuance under the Plan shall be reduced by the number of shares issued upon payment of an award. Cash payments of Performance-Based Awards shall not reduce the number of shares of Common Stock reserved for issuance under the Plan.

12. Changes in Capital Structure.

12.1 Stock Splits, Stock Dividends, Changes in Capitalization. If the outstanding Common Stock of the Company is hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of any stock split, combination of shares, dividend payable in shares, recapitalization or reclassification, appropriate adjustment shall be made by the Board of Directors in the number and kind of shares available for grants under the Plan and in all other share amounts set forth in the Plan. In addition, the Board of Directors shall make appropriate adjustment in the number and kind of shares subject to any Awards theretofor granted, and the exercise and settlement prices of those Awards, if any, so that the holder’s proportionate interest before and after the occurrence of the event is maintained without changing the aggregate exercise or settlement price, if any. If any other change to the capital or corporate structure of the Company affecting Common Stock occurs, such as an extraordinary non-recurring dividend in cash or property, in order to prevent or limit diminution or enlargement of benefits or potential benefits intended to be made available under the Plan, the Board of Directors, in its sole discretion, may adjust the number or kind of shares subject to and/or the exercise price of outstanding Awards and make appropriate adjustments to any related share limits in the Plan with respect to Awards. Notwithstanding the foregoing, the Board of Directors shall have no obligation to effect any adjustment that would or might result in the issuance of fractional shares, and any fractional shares resulting from any adjustment may be disregarded or provided for in any manner determined by the Board of Directors. Any such adjustments made by the Board of Directors shall be conclusive.

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12.2 Mergers, Reorganizations, Etc. In the event of a merger, consolidation, plan of exchange, acquisition of property or stock, split-up, split-off, spin-off, reorganization or liquidation to which the Company is a party or any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company (each, a “Transaction”), the Board of Directors shall, in its sole discretion and to the extent possible under the structure of the Transaction, select one or more of the following alternatives for treating outstanding Awards under the Plan, with the Board of Directors having the discretion to apply different alternatives to various outstanding Awards:

12.2-1 Outstanding Awards shall remain in effect in accordance with their terms.

12.2-2 Outstanding Awards shall be converted into (a) Awards with respect to stock in one or more of the corporations, including the Company, that are the surviving or acquiring corporations in the Transaction, or (b) in a Transaction in which the consideration received is cash, if determined in the sole discretion of the Board of Directors, a cash obligation of the acquiring entity, with such conversion to occur by assumption of the Plan, assumption of Awards, or substitution of Awards. The amount, type of securities subject thereto and exercise or settlement price of the converted Awards shall be determined by the Board of Directors of the Company, taking into account the relative values of the companies involved in the Transaction and the exchange rate, if any, used in determining shares of the surviving corporation(s) to be held by holders of shares of the Company following the Transaction. Unless otherwise determined by the Board of Directors, the converted Awards shall be vested or released from restrictions on transfer and repurchase and forfeiture rights only to the extent that the vesting requirements or restrictions relating to Awards granted hereunder have been satisfied.

12.2-3 The Board of Directors shall provide a period of 30 days or less before the completion of the Transaction during which outstanding Awards may be exercised to the extent then exercisable, and upon the expiration of that period, all outstanding Awards (including Awards that are not options or stock appreciation rights) shall immediately terminate.

12.2-4 Outstanding Awards shall be cancelled immediately prior to the completion of the Transaction in exchange for a payment with respect to each vested or exercisable share subject to such cancelled Award in (i) cash, (ii) stock in one or more corporations that are the surviving or acquiring corporations in the Transaction, or (iii) other property which, in any such case, shall have a fair market value equal to the fair market value of the consideration to be paid per share of Common Stock in the Transaction over the exercise or settlement price per share under the Award, if any (the “Spread”). In the event such determination is made by the Board of Directors, the Spread (reduced by applicable withholding taxes, if any) shall be paid to the holders in respect of their cancelled Awards as soon as practicable following the closing of the Transaction. This provision shall not apply to Incentive Stock Options awarded prior to October 25, 2007.

12

The Board of Directors may, in its sole discretion, accelerate in full or in part the vesting or exercisability of Awards under the Plan and the full or partial release from restrictions on transfer and repurchase or forfeiture rights of Award under the Plan, on such terms and conditions as the Board of Directors may specify prior to the completion of the Transaction.

12.3 Dissolution of the Company. In the event of the dissolution of the Company, options and stock appreciation rights shall be treated in accordance with Section 12.2-3.

12.4 Rights Issued by Another Corporation. The Board of Directors may also grant options, stock appreciation rights, stock bonuses and Performance-Based Awards and issue restricted stock under the Plan with terms, conditions and provisions that vary from those specified in the Plan, provided that any such awards are granted in substitution for, or in connection with the assumption of, existing options, stock appreciation rights, stock bonuses, Performance-Based Awards or restricted stock granted, awarded or issued by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of an acquisition of another entity, business or an interest in another entity whether by merger, stock purchase, asset purchase or other form of transaction.

13. Amendment of the Plan. The Board of Directors may at any time modify or amend the Plan in any respect. Except as provided in Section 12, however, no change in an award already granted shall be made without the written consent of the holder of the award if the change would adversely affect the holder.

14. Approvals. The Company’s obligations under the Plan are subject to the approval of state and federal authorities or agencies with jurisdiction in the matter. The Company will use its best efforts to take steps required by state or federal law or applicable regulations, including rules and regulations of the Securities and Exchange Commission and any stock exchange on which the Company’s shares may then be listed, in connection with the grants under the Plan. The foregoing notwithstanding, the Company shall not be obligated to issue or deliver Common Stock under the Plan if such issuance or delivery would violate state or federal securities laws.

15. Employment and Service Rights. Nothing in the Plan or any award pursuant to the Plan shall (i) confer upon any employee any right to be continued in the employment of an Employer or interfere in any way with the Employer’s right to terminate the employee’s employment at will at any time, for any reason, with or without cause, or to decrease the employee’s compensation or benefits, or (ii) confer upon any person engaged by an Employer any right to be retained or employed by the Employer or to the continuation, extension, renewal or modification of any compensation, contract or arrangement with or by the Employer.

16. Rights as a Shareholder. The recipient of any award under the Plan shall have no rights as a shareholder with respect to any shares of Common Stock until the date the recipient becomes the holder of record of those shares. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date occurs before the date the recipient becomes the holder of record.

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17. Suspension or Termination of Awards; Claw-Back. Notwithstanding any provision of the Plan to the contrary, if at any time (including after a notice of exercise has been delivered with respect to an Award that is an option or stock appreciation right), the Board of Directors, including any Committee authorized pursuant to Section 4.2 (the Board of Directors or such Committee, the “Committee” for purposes of this Section), reasonably believes that a participant, other than a non-employee director, has committed an act of misconduct as described in this section, the Committee may suspend the participant’s right to exercise any stock option or stock appreciation right or the vesting of restricted stock or restricted stock unit awards pending a determination of whether an act of misconduct has been committed. If the Committee determines a participant, other than a non-employee director, has committed an act of embezzlement, fraud, dishonesty, nonpayment of any obligation owed to the Company or its subsidiaries, breach of fiduciary duty or deliberate disregard of Company rules resulting in loss, damage or injury to the Company, or if a participant makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any customer to breach a contract with the Company or induces any principal for whom the Company or its subsidiaries acts as agent to terminate such agency relationship, neither the participant nor his or her estate shall be entitled to exercise any stock option or stock appreciation right whatsoever and the participant’s restricted stock or restricted stock unit agreement shall be terminated and cancelled. In addition, for any participant who is designated an “executive officer” by the Board of Directors, if the Committee determines that the participant engaged in an act of embezzlement, fraud or breach of fiduciary duty during the participant’s employment that contributed to an obligation to restate the Company’s financial statements (“Contributing Misconduct”), the participant shall be required to repay to the Company, in cash and upon demand, the Option Proceeds and/or Restricted Stock Proceeds, as applicable, resulting from the sale or other disposition (including to the Company) of shares issued or issuable upon exercise of a stock option or stock appreciation right or upon vesting of restricted stock or a restricted stock unit, as applicable, if the sale or disposition was effected during the 12-month period following the first public issuance or filing with the Securities and Exchange Commission of the financial statements required to be restated. The term “Option Proceeds” means, with respect to any sale or other disposition (including to the Company) of shares issued or issuable upon exercise of an option or stock appreciation right, an amount determined appropriate by the Committee to reflect the effect of the restatement on the Company’s stock price, up to the amount equal to the number of shares sold or disposed of multiplied by the difference between the market value per share at the time of such sale or disposition and the exercise price. The term “Restricted Stock Proceeds” means, with respect to any sale or other disposition (including to the Company) of restricted stock or a restricted stock unit, an amount determined appropriate by the Committee to reflect the effect of the restatement on the Company’s stock price, up to the amount equal to the market value per share at the time of such sale or other disposition multiplied by the number of shares or units sold or disposed of. The return of Option Proceeds and/or Restricted Stock Proceeds is in addition to and separate from any other relief available to the Company due to the executive officer’s Contributing Misconduct. Any determination by the Committee with respect to the foregoing shall be final, conclusive and binding on all parties. For any participant who is an “executive officer,” the determination of the Committee shall be subject to the approval of the Board of Directors.

14

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, Nicholas Konidaris, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Electro Scientific Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 5, 2013

/s/ Nicholas Konidaris

Nicholas Konidaris

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, Paul Oldham, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Electro Scientific Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 5, 2013

/s/ Paul Oldham

Paul Oldham

Vice President of Administration, Chief Financial Officer and Corporate Secretary

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this quarterly report on Form 10-Q of Electro Scientific Industries, Inc. (the “Company”) for the quarterly period ended December 29, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Nicholas Konidaris, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Nicholas Konidaris

Nicholas Konidaris

President and Chief Executive Officer

Date: February 5, 2013

This certification is made solely for the purpose of 18 U.S.C. Section 1350, and not for any other purpose. A signed original of this written statement required by Section 906 has been provided to Electro Scientific Industries, Inc. and will be retained by Electro Scientific Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this quarterly report on Form 10-Q of Electro Scientific Industries, Inc. (the “Company”) for the quarterly period ended December 29, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul Oldham, Vice President of Administration, Chief Financial Officer and Corporate Secretary of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Paul Oldham

Paul Oldham

Vice President of Administration, Chief Financial Officer and Corporate Secretary

Date: February 5, 2013

This certification is made solely for the purpose of 18 U.S.C. Section 1350, and not for any other purpose. A signed original of this written statement required by Section 906 has been provided to Electro Scientific Industries, Inc. and will be retained by Electro Scientific Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Share-Based Compensation - Additional Information (Detail) (USD $) In Millions, except Share data, unless otherwise specified	9 Months Ended
	Dec. 29, 2012	Dec. 31, 2011
Restricted Stock
Share-based Compensation Arrangement by Share-based Payment Award
Number of shares granted	552,500	468,900
Stock Appreciation Rights (SARs)
Share-based Compensation Arrangement by Share-based Payment Award
Number of shares granted		194,000
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award
Number of shares granted	5,000
Total unrecognized share-based compensation, net of estimated forfeitures	10.4
Total unrecognized share-based compensation, net of estimated forfeitures, expected recognition period	1 year 10 months 24 days

XML

Net Sales by Product Type (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Dec. 29, 2012	Dec. 31, 2011	Dec. 29, 2012	Dec. 31, 2011
Product Information
Net sales	$ 37,930	$ 49,807	$ 177,051	$ 208,737
Interconnect Microfabrication Group
Product Information
Net sales	30,537	35,318	147,506	134,757
Components Group
Product Information
Net sales	4,071	6,054	19,607	23,349
Semiconductor Group
Product Information
Net sales	$ 3,322	$ 8,435	$ 9,938	$ 50,631

XML

Allocation of Purchase Price of Assets Acquired and Liabilities Assumed Based on the Fair Value (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 29, 2012
Business Acquisition
Investments	$ 285
Accounts receivable	113
Inventory	1,554
Prepaid expense and other assets	824
Property, plant and equipment	227
Acquired intangibles	5,539
Goodwill	3,875
Accounts payable and accrued liabilities	(1,157)
Short term debt	(1,794)
Total purchase price, net of cash acquired	$ 9,466

XML

Net Sales by Geographic Area (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Dec. 29, 2012	Dec. 31, 2011	Dec. 29, 2012	Dec. 31, 2011
Geographic Reporting Disclosure
Net sales	$ 37,930	$ 49,807	$ 177,051	$ 208,737
Asia
Geographic Reporting Disclosure
Net sales	28,928	42,731	154,962	185,550
Americas
Geographic Reporting Disclosure
Net sales	6,990	4,515	15,696	14,375
Europe
Geographic Reporting Disclosure
Net sales	$ 2,012	$ 2,561	$ 6,393	$ 8,812

XML

Other Assets (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 29, 2012	Mar. 31, 2012
Other Assets [Line Items]
Minority equity investment	$ 8,966	$ 8,966
Consignment and demo equipment, net	4,459	4,394
Other	1,440	903
Other assets	$ 14,865	$ 14,263

XML

Deferred Revenue (Tables)

9 Months Ended

Dec. 29, 2012

Reconciliation of the Changes in Deferred Revenue

The following is a reconciliation of the changes in deferred revenue:

	Fiscal quarter ended						Three fiscal quarters ended
(In thousands)	Dec 29, 2012			Dec 31, 2011			Dec 29, 2012			Dec 31, 2011
Deferred revenue, beginning	$	9,456		$	9,363		$	10,751		$	16,039
Revenue deferred		5,394			4,267			43,340			33,304
Revenue recognized		(8,330	)		(5,246	)		(47,571	)		(40,959	)
Deferred revenue, ending	$	6,520		$	8,384		$	6,520		$	8,384

XML

Restructuring and Cost Management Plans - Additional Information (Detail)	9 Months Ended
	Dec. 29, 2012
Restructuring Cost and Reserve
Completion date of restructuring plans	Dec. 29, 2012

XML

Share-Based Compensation (Tables)

9 Months Ended

Dec. 29, 2012

Share-Based Compensation Expense

Share-based compensation expense was included in the Company’s Condensed Consolidated Statements of Operations as follows:

	Fiscal quarter ended				Three fiscal quarters ended
(In thousands)	Dec 29, 2012		Dec 31, 2011		Dec 29, 2012		Dec 31, 2011
Cost of sales	$	202	$	302	$	635	$	859
Selling, service and administration		867		1,557		4,145		7,094
Research, development and engineering		413		534		1,579		1,617
Total share-based compensation expense	$	1,482	$	2,393	$	6,359	$	9,570

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Product Warranty Accrual (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Dec. 29, 2012	Dec. 31, 2011	Dec. 29, 2012	Dec. 31, 2011
Product Warranty
Product warranty accrual, beginning	$ 6,096	$ 5,117	$ 4,187	$ 4,415
Warranty charges incurred, net	(1,603)	(1,248)	(5,513)	(5,199)
Provision for warranty charges	1,297	768	7,116	5,421
Product warranty accrual, ending	$ 5,790	$ 4,637	$ 5,790	$ 4,637

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Fair Value Measurements - Additional Information (Detail) (USD $)								3 Months Ended		3 Months Ended		3 Months Ended
	Dec. 29, 2012	Mar. 31, 2012	Dec. 29, 2012 Omni Guide Incorporation	Dec. 29, 2012 Omni Guide Incorporation Other Assets	Mar. 31, 2012 Omni Guide Incorporation Other Assets	Dec. 29, 2012 Omni Guide Incorporation Series D Preferred Stock	Dec. 29, 2012 Omni Guide Incorporation Series E Preferred Stock	Jul. 02, 2011 Auction Rate Securities	Apr. 02, 2011 Auction Rate Securities	Jul. 02, 2011 Auction Rate Securities Accumulated Net Unrealized Investment Gain (Loss), Reclassification Adjustments	Apr. 02, 2011 Auction Rate Securities Converted To Preferred Stock	Jul. 02, 2011 Preferred Stock
Schedule of Available-for-sale Securities
Auction rate securities, fair value									$ 5,200,000
Auction rate securities, par value									10,700,000		4,000,000
Proceeds from sale of securities								6,000,000				500,000
Gain on sale of securities								2,700,000		1,400,000
Investment in preferred stock	8,966,000	8,966,000		9,000,000	9,000,000	6,000,000	3,000,000
Ownership interest			11.00%
Investments maturity within one year	105,300,000
Investments maturity between one to five years	$ 6,300,000

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Shareholders' Equity (Tables)

9 Months Ended

Dec. 29, 2012

Dividend Declared and Paid

The following table summarizes the dividends declared and paid by the Company since adoption of the dividend policy:

Date Declared	Record Date	Payment Date	Amount per Share
November 8, 2012	November 21, 2012	December 5, 2012	$	0.08
August 9, 2012	August 24, 2012	September 10, 2012	$	0.08
May 10, 2012	June 4, 2012	June 18, 2012	$	0.08
December 9, 2011	January 27, 2012	February 17, 2012	$	0.08

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Reconciliation of Weighted Average Shares Outstanding Used in Calculation of Basic and Diluted Earnings Per Share (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Dec. 29, 2012	Dec. 31, 2011	Dec. 29, 2012	Dec. 31, 2011
Earnings Per Share Disclosure
Net income (loss)	$ 6,768	$ (1,881)	$ 11,035	$ 12,569
Weighted average shares used for basic earnings per share	29,434	28,849	29,296	28,689
Incremental diluted shares	609		658	695
Weighted average shares used for diluted earnings per share	30,043	28,849	29,954	29,384
Net income (loss) per share:
Net income (loss) - basic	$ 0.23	$ (0.07)	$ 0.38	$ 0.44
Net income (loss) - diluted	$ 0.23	$ (0.07)	$ 0.37	$ 0.43

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Business Acquisitions - Additional Information (Detail) (USD $) In Thousands, unless otherwise specified	9 Months Ended		3 Months Ended
	Dec. 29, 2012	Jun. 14, 2012	Dec. 29, 2012 Minimum Y	Dec. 29, 2012 Maximum Y	Dec. 29, 2012 Developed Technology Rights	Dec. 29, 2012 Customer Relationships	Dec. 29, 2012 Trademarks and Backlog [Member]
Business Acquisition
Business acquisition, cash paid		$ 9,700
Business acquisition and integration related costs	900
Total purchase price, net of cash acquired	9,466
Business acquisition, goodwill	3,875
Business acquisition, identifiable intangible assets recorded	$ 5,539				$ 5,000	$ 400	$ 100
Business acquisition intangibles amortized over useful lives period, maximum			1	9

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Recent Accounting Pronouncements

9 Months Ended

Dec. 29, 2012

Recent Accounting Pronouncements

2. Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the quarter ended December 29, 2012 that are of significance to the Company.

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Investments (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 29, 2012	Mar. 31, 2012
Available for sale Securities Current
Schedule of Available-for-sale Securities
Cost	$ 105,325	$ 147,925
Unrealized Gain	27	56
Fair Value	105,352	147,981
Available for sale Securities Current | Commercial Paper
Schedule of Available-for-sale Securities
Cost	44,265	83,645
Unrealized Gain	1
Fair Value	44,266	83,645
Available for sale Securities Current | Government agencies
Schedule of Available-for-sale Securities
Cost	43,185	46,293
Unrealized Gain	14	5
Fair Value	43,199	46,298
Available for sale Securities Current | Corporate Bonds
Schedule of Available-for-sale Securities
Cost	16,827	17,987
Unrealized Gain	12	51
Fair Value	16,839	18,038
Available for sale Securities Current | Municipal Bonds
Schedule of Available-for-sale Securities
Cost	1,048
Fair Value	1,048
Available for sale Securities Non Current
Schedule of Available-for-sale Securities
Cost	6,249	23,059
Unrealized Gain	4	13
Unrealized Loss		(26)
Fair Value	6,253	23,046
Available for sale Securities Non Current | Government agencies
Schedule of Available-for-sale Securities
Cost	4,997	20,989
Unrealized Gain	4
Unrealized Loss		(26)
Fair Value	5,001	20,963
Available for sale Securities Non Current | Corporate Bonds
Schedule of Available-for-sale Securities
Cost	1,252	2,070
Unrealized Gain		13
Fair Value	$ 1,252	$ 2,083

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Other Assets (Tables)

9 Months Ended

Dec. 29, 2012

Other Assets

Other assets consisted of the following:

(In thousands)	Dec 29, 2012		Mar 31, 2012
Minority equity investment	$	8,966	$	8,966
Consignment and demo equipment, net		4,459		4,394
Other		1,440		903
	$	14,865	$	14,263

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Other Current Assets (Tables)

9 Months Ended

Dec. 29, 2012

Other Current Assets

Other current assets consisted of the following:

(In thousands)	Dec 29, 2012		Mar 31, 2012
Prepaid expenses	$	2,620	$	2,687
Value added tax receivable		784		1,055
Other		1,159		318
	$	4,563	$	4,060

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Legal Proceedings - Additional Information (Detail)			9 Months Ended
	Dec. 29, 2012 USD ($)	Mar. 31, 2012 USD ($)	Dec. 29, 2012 All Ring Patent Infringement Prosecution USD ($)	Dec. 29, 2012 All Ring Patent Infringement Prosecution TWD
Gain Contingencies
Settlement due to the company			$ 16,300,000	475,000,000
Letters of credit, amount			19,500,000
Restricted cash	$ 22,269,000	$ 22,269,000	$ 22,269,000

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Components of Inventories (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 29, 2012	Mar. 31, 2012
Inventory Disclosure
Raw materials and purchased parts	$ 54,220	$ 48,126
Work-in-process	13,116	10,511
Finished goods	12,888	9,418
Inventories	$ 80,224	$ 68,055

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Business Acquisitions (Tables)

9 Months Ended

Dec. 29, 2012

Allocation of Purchase Price of Assets Acquired and Liabilities Assumed Based on the Fair Value

The following table presents the allocation of the purchase price of $9.5 million, net of cash acquired, to the assets acquired and liabilities assumed based on their fair values (in thousands):

Investments	$	285
Accounts receivable		113
Inventory		1,554
Prepaid expense and other assets		824
Property, plant and equipment		227
Acquired intangibles		5,539
Goodwill		3,875
Accounts payable and accrued liabilities		(1,157	)
Short term debt		(1,794	)
Total purchase price, net of cash acquired	$	9,466

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Accrued Liabilities (Tables)

9 Months Ended

Dec. 29, 2012

Accrued Liabilities

Accrued liabilities consisted of the following:

(In thousands)	Dec 29, 2012		Mar 31, 2012
Payroll-related liabilities	$	8,097	$	6,446
Product warranty accrual		5,790		4,187
Pension benefit liabilities		2,049		2,110
Professional fees payable		1,907		2,011
Freight accrual		1,680		1,119
Income taxes payable		1,356		1,730
Purchase order commitments and receipts		847		1,473
Value added taxes payable		332		260
Customer deposits		272		385
Restructuring costs payable		10		1,048
Other		1,000		866
	$	23,340	$	21,635

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Basis of Presentation

9 Months Ended

Dec. 29, 2012

Basis of Presentation

1. Basis of Presentation

These unaudited interim condensed consolidated financial statements have been prepared 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 U.S. generally accepted accounting principles have been condensed or omitted in these interim statements. Accordingly, these condensed consolidated financial statements are to be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for its fiscal year ended March 31, 2012. These interim statements include all adjustments (consisting of only normal recurring adjustments and accruals) necessary for a fair presentation of results for the interim periods presented. The results for interim periods are not necessarily indicative of the results of operations for the entire year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates.

Management believes that the estimates used are reasonable. Significant estimates made by management include: revenue recognition; inventory valuation; product warranty reserves; allowance for doubtful accounts; accrued restructuring costs; share-based compensation; income taxes including the valuation of deferred tax assets; fair value measurements; valuation of cost method equity investments; valuation of long-lived assets; and valuation of goodwill.

There have been no significant changes to the Company’s significant accounting policies from those presented in Note 2 “Summary of Significant Accounting Policies” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for its fiscal year ended March 31, 2012. All references to years or quarters relate to fiscal years or fiscal quarters unless otherwise noted.

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Product Warranty Accrual (Tables)

9 Months Ended

Dec. 29, 2012

Reconciliation of the Change in Aggregate Accrual for Product Warranty

The following is a reconciliation of the change in the aggregate accrual for product warranty:

	Fiscal quarter ended						Three fiscal quarters ended
(In thousands)	Dec 29, 2012			Dec 31, 2011			Dec 29, 2012			Dec 31, 2011
Product warranty accrual, beginning	$	6,096		$	5,117		$	4,187		$	4,415
Warranty charges incurred, net		(1,603	)		(1,248	)		(5,513	)		(5,199	)
Provision for warranty charges		1,297			768			7,116			5,421
Product warranty accrual, ending	$	5,790		$	4,637		$	5,790		$	4,637

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Share-Based Compensation Expense (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Dec. 29, 2012	Dec. 31, 2011	Dec. 29, 2012	Dec. 31, 2011
Employee Service Share-based Compensation, Allocation of Recognized Period Costs
Total share-based compensation expense	$ 1,482	$ 2,393	$ 6,359	$ 9,570
Cost of Sales
Employee Service Share-based Compensation, Allocation of Recognized Period Costs
Total share-based compensation expense	202	302	635	859
Selling, General and Administrative Expenses
Employee Service Share-based Compensation, Allocation of Recognized Period Costs
Total share-based compensation expense	867	1,557	4,145	7,094
Research and Development Expense
Employee Service Share-based Compensation, Allocation of Recognized Period Costs
Total share-based compensation expense	$ 413	$ 534	$ 1,579	$ 1,617

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Earning Per Share - Additional Information (Detail) In Millions, unless otherwise specified	3 Months Ended		9 Months Ended
	Dec. 29, 2012	Dec. 31, 2011	Dec. 29, 2012	Dec. 31, 2011
Antidilutive Securities Excluded from Computation of Earnings Per Share
Number of shares that are not included in the calculation of diluted net earnings per share	2.5	4.2	2.3	2.8

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Dec. 29, 2012	Mar. 31, 2012
Current assets:
Cash and cash equivalents	$ 47,240	$ 69,780
Restricted cash	22,269	22,269
Short-term investments	95,364	106,674
Trade receivables, net of allowances of $452 and $390	18,614	32,744
Inventories	80,224	68,055
Shipped systems pending acceptance	359	1,360
Deferred income taxes, net	9,048	10,021
Other current assets	4,563	4,060
Total current assets	277,681	314,963
Non-current investments	6,253	23,046
Property, plant and equipment, net of accumulated depreciation of $106,815 and $101,716	30,253	32,103
Non-current deferred income taxes, net	32,880	36,489
Goodwill	7,889	4,014
Acquired intangible assets, net of accumulated amortization of $12,422 and $10,609	12,059	8,332
Other assets	14,865	14,263
Total assets	381,880	433,210
Current liabilities:
Accounts payable	12,511	13,045
Accrued liabilities	23,340	21,635
Deferred revenue	6,520	10,751
Total current liabilities	42,371	45,431
Non-current income taxes payable	9,521	9,109
Commitments and contingencies
Shareholders' equity:
Preferred stock, without par value; 1,000 shares authorized; no shares issued
Common stock, without par value; 100,000 shares authorized; 29,497 and 28,970 issued and outstanding	174,113	168,143
Retained earnings	155,333	210,021
Accumulated other comprehensive income	542	506
Total shareholders' equity	329,988	378,670
Total liabilities and shareholders' equity	$ 381,880	$ 433,210

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Other Current Assets (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 29, 2012	Mar. 31, 2012
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure
Prepaid expenses	$ 2,620	$ 2,687
Value added tax receivable	784	1,055
Other	1,159	318
Other current assets	$ 4,563	$ 4,060

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Dec. 29, 2012	Dec. 31, 2011	Dec. 29, 2012	Dec. 31, 2011
Foreign currency translation adjustment, taxes	$ (134)	$ 68	$ 19	$ 56
Accumulated other comprehensive income related to benefit plan obligation, taxes	1	1	4	4
Net unrealized (loss) gain on available-for-sale securities, taxes	$ (8)	$ 24	$ (5)	$ 9

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Shareholders Equity - Additional Information (Detail) (USD $) In Millions, except Per Share data, unless otherwise specified	1 Months Ended		9 Months Ended
	Dec. 09, 2011	May 15, 2008	Dec. 29, 2012	Dec. 03, 2012
Equity Note
Share repurchase, authorized	$ 20.0	$ 20.0
Dividend paid, total amount			$ 65.7
Special dividend per share declared				$ 2

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Product and Geographic Information (Tables)

9 Months Ended

Dec. 29, 2012

Net Sales by Product Type and Geographic Area

Net sales by product type were as follows:

	Fiscal quarter ended				Three fiscal quarters ended
(In thousands)	Dec 29, 2012		Dec 31, 2011		Dec 29, 2012		Dec 31, 2011
Interconnect & Microfabrication Group (IMG)	$	30,537	$	35,318	$	147,506	$	134,757
Components Group (CG)		4,071		6,054		19,607		23,349
Semiconductor Group (SG)		3,322		8,435		9,938		50,631
	$	37,930	$	49,807	$	177,051	$	208,737

Net sales by geographic area, based on the location of the end user, were as follows:

	Fiscal quarter ended				Three fiscal quarters ended
(In thousands)	Dec 29, 2012		Dec 31, 2011		Dec 29, 2012		Dec 31, 2011
Asia	$	28,928	$	42,731	$	154,962	$	185,550
Americas		6,990		4,515		15,696		14,375
Europe		2,012		2,561		6,393		8,812
	$	37,930	$	49,807	$	177,051	$	208,737

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Legal Proceedings

9 Months Ended

Dec. 29, 2012

Legal Proceedings

15. Legal Proceedings

All Ring Patent Infringement Prosecution

The Company’s proceedings against All Ring Tech Co., Ltd (All Ring) in Taiwan for alleged patent infringement were settled in the Company’s favor on November 29, 2012. All Ring paid the Company $475 million New Taiwan Dollars, representing approximately $16.3 million to settle the case, and the case was dismissed. This gain was partially offset by court and legal fees associated with the All Ring litigation and other non-recurring legal matters.

As a part of these proceedings, the Company established three letters of credit for approximately $19.5 million in July 2009, September 2009 and June 2011, which were collateralized by $22.3 million of restricted cash. The total restricted cash balance was included in Restricted cash on the Condensed Consolidated Balance Sheets as of March 31, 2012 and December 29, 2012. The settlement of the proceedings eliminated the need for the Company to maintain the letters of credit, and the Company began the process of closing the letters of credit in December 2012.

In the ordinary course of business, the Company is involved in various other legal matters, either asserted or unasserted, and investigations. In the opinion of management, ultimate resolution of these matters will not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

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Restructuring and Cost Management Plans (Tables)

9 Months Ended

Dec. 29, 2012

Amounts Related to Restructuring Costs Payable

The following table presents the amounts related to restructuring costs payable (in thousands):

Restructuring costs payable balance as of March 31, 2012	$	1,048
Employee severance and related benefits:
Costs incurred and other adjustments		(92	)
Cash payments		(946	)
Restructuring costs payable balance as of December 29, 2012	$	10

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Shareholders' Equity

9 Months Ended

Dec. 29, 2012

Shareholders' Equity

17. Shareholders’ Equity

Share Repurchase Program

On May 15, 2008, the Board of Directors authorized a share repurchase program totaling $20.0 million to acquire shares of the Company’s outstanding common stock primarily to offset dilution from equity compensation programs. On December 9, 2011, the Board of Directors terminated the 2008 repurchase program and authorized a new share repurchase program totaling $20.0 million to acquire shares of the Company’s outstanding common stock. The repurchases are to be made at management’s discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and other factors. The Company did not repurchase any shares under this program in either the first three quarters of 2013 or in 2012. There is no fixed completion date for the repurchase program. See the Company’s Form 10-K for the year ended March 31, 2012 for additional information related to these share repurchase programs.

Dividends

On December 9, 2011, the Board of Directors adopted a dividend policy under which the Company intends to pay quarterly cash dividends. The following table summarizes the dividends declared and paid by the Company since adoption of the dividend policy:

Date Declared	Record Date	Payment Date	Amount per Share
November 8, 2012	November 21, 2012	December 5, 2012	$	0.08
August 9, 2012	August 24, 2012	September 10, 2012	$	0.08
May 10, 2012	June 4, 2012	June 18, 2012	$	0.08
December 9, 2011	January 27, 2012	February 17, 2012	$	0.08

A special dividend of $2.00 per share was declared by the Board of Directors on December 3, 2012 after the successful patent settlement. The special dividend should not be considered a recurring event. See Note 15 “Legal Proceedings” above for further discussion.

During the first three quarters of 2013, the Company paid aggregate dividends of $65.7 million.

The Company currently anticipates that it will continue to pay cash dividends on a quarterly basis in the future, although the declaration, timing and amount of any future cash dividends are at the discretion of the Board of Directors and will depend on the Company’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination that cash dividends are in the best interest of the shareholders.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Dec. 29, 2012	Dec. 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 11,035	$ 12,569
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	6,867	8,130
Amortization of acquired intangible assets	1,810	1,307
Share-based compensation expense	6,132	9,546
Provision for doubtful accounts		50
(Gain) loss on sale of property and equipment, net	(1,226)	2
Gain on sale of previously impaired auction rate securities		(2,729)
Deferred income taxes	4,537	(2,109)
Changes in operating accounts:
Decrease in trade receivables, net	14,315	18,502
Increase in inventories	(11,744)	(6,432)
Decrease in shipped systems pending acceptance	1,002	4,050
Decrease in other current assets	61	2,937
Decrease in accounts payable and accrued liabilities	(912)	(21,219)
Decrease in deferred revenue	(4,343)	(7,660)
Net cash provided by operating activities	27,534	16,944
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments	(857,435)	(720,961)
Proceeds from sales and maturities of investments	885,818	660,707
Proceeds from sale of auction rate securities		6,450
Increase in restricted cash		(11,500)
Purchase of property, plant and equipment	(5,127)	(4,198)
Proceeds from the sale of property, plant and equipment	2,020
Cash paid for acquisition of Eolite Systems, net of cash acquired	(9,466)
Decrease in other assets	403	174
Net cash provided by (used in) investing activities	16,213	(69,328)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid to shareholders	(65,723)
Stock plan activity, net	73	2,345
Excess tax benefit of share-based compensation	71	519
Net cash (used in) provided by financing activities	(65,579)	2,864
Effect of exchange rate changes on cash	(708)	665
NET CHANGE IN CASH AND CASH EQUIVALENTS	(22,540)	(48,855)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	69,780	116,412
CASH AND CASH EQUIVALENTS AT END OF PERIOD	47,240	67,557
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes	(1,174)	(4,268)
Income tax refunds received	651	132
Dividends declared but not paid		$ 2,311

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, unless otherwise specified	Dec. 29, 2012	Mar. 31, 2012
Trade receivables, allowances	$ 452	$ 390
Property, plant and equipment, accumulated depreciation	106,815	101,716
Acquired intangible assets, accumulated amortization	$ 12,422	$ 10,609
Preferred stock, without par value
Preferred stock, shares authorized	1,000	1,000
Preferred stock, shares issued
Common stock, without par value
Common stock, shares authorized	100,000	100,000
Common stock, issued	29,497	28,970
Common stock, outstanding	29,497	28,970

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Accrued Liabilities

9 Months Ended

Dec. 29, 2012

Accrued Liabilities

10. Accrued Liabilities

Accrued liabilities consisted of the following:

(In thousands)	Dec 29, 2012		Mar 31, 2012
Payroll-related liabilities	$	8,097	$	6,446
Product warranty accrual		5,790		4,187
Pension benefit liabilities		2,049		2,110
Professional fees payable		1,907		2,011
Freight accrual		1,680		1,119
Income taxes payable		1,356		1,730
Purchase order commitments and receipts		847		1,473
Value added taxes payable		332		260
Customer deposits		272		385
Restructuring costs payable		10		1,048
Other		1,000		866
	$	23,340	$	21,635

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Document and Entity Information	9 Months Ended
	Dec. 29, 2012	Jan. 30, 2013
Document Information
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Dec. 29, 2012
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3
Trading Symbol	ESIO
Entity Registrant Name	ELECTRO SCIENTIFIC INDUSTRIES INC
Entity Central Index Key	0000726514
Current Fiscal Year End Date	--03-30
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		29,502,808

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Product Warranty Accrual

9 Months Ended

Dec. 29, 2012

Product Warranty Accrual

11. Product Warranty Accrual

The following is a reconciliation of the change in the aggregate accrual for product warranty:

	Fiscal quarter ended						Three fiscal quarters ended
(In thousands)	Dec 29, 2012			Dec 31, 2011			Dec 29, 2012			Dec 31, 2011
Product warranty accrual, beginning	$	6,096		$	5,117		$	4,187		$	4,415
Warranty charges incurred, net		(1,603	)		(1,248	)		(5,513	)		(5,199	)
Provision for warranty charges		1,297			768			7,116			5,421
Product warranty accrual, ending	$	5,790		$	4,637		$	5,790		$	4,637

Net warranty charges incurred include labor charges and costs of replacement parts for system repairs under warranty. These costs are recorded net of any estimated cost recoveries resulting from either successful repair of damaged parts or from warranties offered by the Company’s suppliers for defective components. The provision for warranty charges reflects the estimate of future anticipated net warranty costs to be incurred for all products under warranty at quarter end and is recorded to cost of sales.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Dec. 29, 2012	Dec. 31, 2011	Dec. 29, 2012	Dec. 31, 2011
Net sales	$ 37,930	$ 49,807	$ 177,051	$ 208,737
Cost of sales	24,697	28,646	106,645	117,875
Gross profit	13,233	21,161	70,406	90,862
Operating expenses:
Selling, service and administration	11,696	13,944	42,473	45,322
Research, development and engineering	8,730	10,480	28,791	32,456
Legal settlement (proceeds) costs, net	(15,365)		(15,365)	550
(Gain) loss on sale of property and equipment, net	(1,226)		(1,226)	2
Restructuring costs		861		861
Net operating expenses	3,835	25,285	54,673	79,191
Operating income (loss)	9,398	(4,124)	15,733	11,671
Non-operating (expense) income:
Gain on sale of previously impaired auction rate securities				2,729
Interest and other (expense) income, net	(5)	47	(64)	(496)
Total non-operating (expense) income	(5)	47	(64)	2,233
Income (loss) before income taxes	9,393	(4,077)	15,669	13,904
Provision for (benefit from) income taxes	2,625	(2,196)	4,634	1,335
Net income (loss)	$ 6,768	$ (1,881)	$ 11,035	$ 12,569
Net income (loss) per share - basic	$ 0.23	$ (0.07)	$ 0.38	$ 0.44
Net income (loss) per share - diluted	$ 0.23	$ (0.07)	$ 0.37	$ 0.43
Weighted average number of shares - basic	29,434	28,849	29,296	28,689
Weighted average number of shares - diluted	30,043	28,849	29,954	29,384
Cash dividends paid per common share	$ 2.08		$ 2.24

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Fair Value Measurements

9 Months Ended

Dec. 29, 2012

Fair Value Measurements

5. Fair Value Measurements

Financial Assets Measured at Fair Value

ASC Topic 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include the following:

• Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;

• Level 2, defined as inputs that are observable either directly or indirectly such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and other inputs that can be corroborated by observable market data; and

• Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of December 29, 2012 and March 31, 2012 was as follows (in thousands):

December 29, 2012	Level 1		Level 2			Level 3		Total
Money market securities	$	2,712	$	—		$	—	$	2,712
Government agencies		—		48,200			—		48,200
Commercial paper		—		44,266			—		44,266
Corporate bonds		—		18,090			—		18,090
Municipal bonds		—		1,048			—		1,048
Forward purchase or (sale) contracts:
Japanese Yen		—		429			—		429
New Taiwan Dollar		—		(2	)		—		(2	)
Korean Won		—		26			—		26
Euro		—		(67	)		—		(67	)
British Pound		—		28			—		28
Chinese Renminbi		—		(32	)		—		(32	)
Singapore Dollar		—		(2	)		—		(2	)
March 31, 2012	Level 1		Level 2			Level 3		Total
Money market securities	$	5,244	$	—		$	—	$	5,244
Commercial paper		—		83,645			—		83,645
Government agencies		—		67,261			—		67,261
Corporate Bonds		—		20,121			—		20,121
Forward purchase or (sale) contracts:
Japanese Yen		—		202			—		202
New Taiwan Dollar		—		(5	)		—		(5	)
Korean Won		—		(17	)		—		(17	)
Euro		—		(1	)		—		(1	)
British Pound		—		20			—		20
Chinese Renminbi		—		(1	)		—		(1	)

For Level 1 assets, the Company utilized quoted prices in active markets for identical assets.

For Level 2 assets, exclusive of forward contracts, the Company utilized quoted prices in active markets for similar assets. For forward contracts, spot prices at December 28, 2012 and March 30, 2012 were utilized to calculate unrealized gain/loss.

During the third quarter of 2013, there were no transfers between Level 1 and Level 2 assets. As of December 29, 2012, the Company did not hold any auction rate securities (ARS) investments. In the first quarter of 2012, the Company sold all of its remaining ARS for approximately $6.0 million and all of its related preferred stock for approximately $0.5 million. These ARS had a total estimated fair value of $5.2 million as of April 2, 2011, which consisted of $10.7 million par value ARS and $4.0 million par value ARS which were converted by the bond issuer to its preferred stock in 2009. The Company recorded a gain of $2.7 million in the first quarter of 2012, which included $1.4 million in reclassification of previously recorded unrealized gain out of accumulated other comprehensive income.

As of December 29, 2012, the Company had $6.0 million invested in Series D Preferred Stock and $3.0 million invested in Series E Preferred Stock of OmniGuide, Inc., representing an 11% interest. At each reporting period end, the Company determines whether events or circumstances have occurred that are likely to have a significant adverse effect on the fair value of these investments. If there are no events or circumstances identified that would adversely affect the fair value of the investments, the fair values of the investments are not calculated as it is not practicable to do so. As of December 29, 2012 and March 31, 2012, management had not identified events or circumstances that indicated the investments were impaired; therefore, as presented in Note 8 “Other Assets”, the full carrying value of $9.0 million was included in Other assets on the Consolidated Balance Sheets at December 29, 2012 and March 31, 2012.

Investments

Certain information regarding the Company’s investments at December 29, 2012 and March 31, 2012 was as follows (in thousands):

December 29, 2012			Unrealized
	Cost		Gain		Loss			Fair Value
Available-for-sale securities (current):
Commercial paper	$	44,265	$	1		—		$	44,266
Government agencies		43,185		14		—			43,199
Corporate bonds		16,827		12		—			16,839
Municipal bonds		1,048		—		—			1,048
	$	105,325	$	27	$	—		$	105,352
Available-for-sale securities (non-current):
Government agencies		4,997		4		—			5,001
Corporate bonds		1,252		—		—			1,252
	$	6,249	$	4	$	—		$	6,253
March 31, 2012			Unrealized
	Cost		Gain		Loss			Fair Value
Available-for-sale securities (current):
Commercial paper	$	83,645	$	—	$	—		$	83,645
Government agencies		46,293		5		—			46,298
Corporate Bonds		17,987		51		—			18,038
	$	147,925	$	56	$	—		$	147,981
Available-for-sale securities (non-current):
Government agencies	$	20,989	$	—	$	(26	)	$	20,963
Corporate Bonds		2,070		13		—			2,083
	$	23,059	$	13	$	(26	)	$	23,046

For purposes of determining gross realized gains and losses, and reclassification out of accumulated other comprehensive income, the cost of securities sold is based on specific identification. Net unrealized holding gains and losses on current available-for-sale securities included in accumulated other comprehensive income were insignificant as of December 29, 2012 and March 31, 2012.

Underlying maturities of investments at December 29, 2012 were $105.3 million within one year and $6.3 million between one to five years.

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Share-Based Compensation

9 Months Ended

Dec. 29, 2012

Share-Based Compensation

4. Share-Based Compensation

The Company recognizes expense related to the fair value of its share-based compensation awards using the Black-Scholes model to estimate the fair value of awards on the date of grant, except for unvested restricted stock unit awards which are valued at the fair value of the Company’s stock on the date of award. The Company recognizes compensation expense for all share-based compensation awards on a straight-line basis over the requisite service period of the award.

Stock-settled stock appreciation rights (SARs) grant the right to receive shares of the Company’s stock equivalent to the increase in stock value of a specified number of shares over a specified period of time, divided by the stock price at the time of exercise. The Company uses the Black-Scholes model to estimate the fair value of SARs. Similar to options, SARs are recorded at the fair value of the award at grant date and the expense is recognized on a straight-line basis over the requisite service period of the award.

The Company granted a total of 552,500 restricted stock unit awards and 5,000 stock options but did not grant any SARs during the first three quarters of 2013. The Company granted a total of 468,900 restricted stock unit awards and 194,000 SARs during the first three quarters of 2012, but did not grant any stock options in that period.

Share-based compensation expense was included in the Company’s Condensed Consolidated Statements of Operations as follows:

	Fiscal quarter ended				Three fiscal quarters ended
(In thousands)	Dec 29, 2012		Dec 31, 2011		Dec 29, 2012		Dec 31, 2011
Cost of sales	$	202	$	302	$	635	$	859
Selling, service and administration		867		1,557		4,145		7,094
Research, development and engineering		413		534		1,579		1,617
Total share-based compensation expense	$	1,482	$	2,393	$	6,359	$	9,570

As of December 29, 2012, no share-based compensation expense was capitalized. The Company has $10.4 million of total unrecognized share-based compensation costs, net of estimated forfeitures, which are expected to be recognized over a weighted-average period of 1.9 years.

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Restructuring and Cost Management Plans

9 Months Ended

Dec. 29, 2012

Restructuring and Cost Management Plans

16. Restructuring and Cost Management Plans

In 2012, the Company continued its efforts to reduce its worldwide cost structure through transition of certain procurement and manufacturing activities to Asia and additionally identified and initiated other cost reduction actions. The Company completed these actions as of December 29, 2012. See the Company’s Form 10-K for the year ended March 31, 2012 for additional information related to restructuring and cost management plans.

During the first three quarters of 2013, no additional restructuring costs were incurred. At December 29, 2012, the amount of unpaid restructuring costs is included in Accrued liabilities on the Condensed Consolidated Balance Sheet.

The following table presents the amounts related to restructuring costs payable (in thousands):

Restructuring costs payable balance as of March 31, 2012	$	1,048
Employee severance and related benefits:
Costs incurred and other adjustments		(92	)
Cash payments		(946	)
Restructuring costs payable balance as of December 29, 2012	$	10

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Deferred Revenue

9 Months Ended

Dec. 29, 2012

Deferred Revenue

12. Deferred Revenue

Generally, revenue is recognized upon fulfillment of acceptance criteria at the Company’s factory and title transfer which frequently occurs at the time of delivery to a common carrier. Revenue is deferred whenever title transfer is pending and/or acceptance criteria have not yet been fulfilled. Deferred revenue occurrences include sales to Japanese customers, shipments of substantially new products and shipments with custom specifications and acceptance criteria. In sales involving multiple element arrangements, the relative selling price of any undelivered elements, including installation services, is deferred until the elements are delivered and acceptance criteria are met. Revenue related to maintenance and service contracts is deferred and recognized ratably over the duration of the contracts.

The following is a reconciliation of the changes in deferred revenue:

	Fiscal quarter ended						Three fiscal quarters ended
(In thousands)	Dec 29, 2012			Dec 31, 2011			Dec 29, 2012			Dec 31, 2011
Deferred revenue, beginning	$	9,456		$	9,363		$	10,751		$	16,039
Revenue deferred		5,394			4,267			43,340			33,304
Revenue recognized		(8,330	)		(5,246	)		(47,571	)		(40,959	)
Deferred revenue, ending	$	6,520		$	8,384		$	6,520		$	8,384

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Other Assets

9 Months Ended

Dec. 29, 2012

Other Assets

8. Other Assets

Other assets consisted of the following:

(In thousands)	Dec 29, 2012		Mar 31, 2012
Minority equity investment	$	8,966	$	8,966
Consignment and demo equipment, net		4,459		4,394
Other		1,440		903
	$	14,865	$	14,263

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Dividend Declared and Paid (Detail) (USD $)	3 Months Ended				9 Months Ended
	Dec. 29, 2012	Sep. 29, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 29, 2012
Dividends
Date Declared		Aug. 09, 2012	May 10, 2012	Dec. 09, 2011
Record Date		Aug. 24, 2012	Jun. 04, 2012	Jan. 27, 2012
Payment Date		Sep. 10, 2012	Jun. 18, 2012	Feb. 17, 2012
Amount per Share	$ 2.08	$ 0.08	$ 0.08	$ 0.08	$ 2.24
Dividend Payment on December 05, 2012
Dividends
Date Declared	Nov. 08, 2012
Record Date	Nov. 21, 2012
Payment Date	Dec. 05, 2012
Amount per Share	$ 0.08

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Inventories

9 Months Ended

Dec. 29, 2012

Inventories

6. Inventories

Inventories are principally valued at standard costs, which approximate the lower of cost (first-in, first-out) or market. Components of inventories were as follows:

(In thousands)	Dec 29, 2012		Mar 31, 2012
Raw materials and purchased parts	$	54,220	$	48,126
Work-in-process		13,116		10,511
Finished goods		12,888		9,418
	$	80,224	$	68,055

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Other Current Assets

9 Months Ended

Dec. 29, 2012

Other Current Assets

7. Other Current Assets

Other current assets consisted of the following:

(In thousands)	Dec 29, 2012		Mar 31, 2012
Prepaid expenses	$	2,620	$	2,687
Value added tax receivable		784		1,055
Other		1,159		318
	$	4,563	$	4,060

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Business Acquisitions

9 Months Ended

Dec. 29, 2012

Business Acquisitions

9. Business Acquisitions

On June 14, 2012, the Company acquired Eolite Systems (Eolite), a designer and manufacturer of unique fiber lasers, for $9.7 million in cash for all their outstanding shares. During the first three quarters of 2013, the Company also incurred approximately $0.9 million in acquisition-related costs which are included in Selling, service and administration expenses in the Condensed Consolidated Statements of Operations. The purchase price was allocated to the underlying assets acquired and liabilities assumed based on their fair values. Analyses supporting the purchase price allocation included a valuation of assets and liabilities as of the closing date, an analysis of intangible assets and a detailed review of the opening balance sheet to determine other significant adjustments required to recognize assets and liabilities at fair value.

The following table presents the allocation of the purchase price of $9.5 million, net of cash acquired, to the assets acquired and liabilities assumed based on their fair values (in thousands):

Investments	$	285
Accounts receivable		113
Inventory		1,554
Prepaid expense and other assets		824
Property, plant and equipment		227
Acquired intangibles		5,539
Goodwill		3,875
Accounts payable and accrued liabilities		(1,157	)
Short term debt		(1,794	)
Total purchase price, net of cash acquired	$	9,466

The acquisition provides the Company with direct access to differentiated, higher power laser technology which can be used in a broad set of microfabrication applications. The Company has allocated $3.9 million of the purchase price to goodwill. The premium paid over the fair value of the individual assets acquired and liabilities assumed reflects the Company’s view that this acquisition will increase the Company’s ability to customize lasers to specific customer applications with differentiated capability. None of the goodwill is deductible for tax purposes.

As a result of the acquisition, the Company recorded $5.5 million of identifiable intangible assets including approximately $5.0 million of developed technology, $0.4 million in customer relationships, $0.1 million in trademarks and backlog. The acquired intangibles will be amortized over their useful lives which range from one to nine years.

The operating results of this acquisition are included in the Company’s results of operations since the date of acquisition. Pro forma financial information has not been provided for the acquisition of Eolite as it was not material to the Company’s overall financial position.

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Earnings Per Share (Tables)

9 Months Ended

Dec. 29, 2012

Reconciliation of Weighted Average Shares Outstanding Used in Calculation of Basic and Diluted Earnings Per Share

The following is a reconciliation of weighted average shares outstanding used in the calculation of basic and diluted earnings per share:

	Fiscal quarter ended					Three fiscal quarters ended
(In thousands, except per share data)	Dec 29, 2012		Dec 31, 2011			Dec 29, 2012		Dec 31, 2011
Net income (loss)	$	6,768	$	(1,881	)	$	11,035	$	12,569
Weighted average shares used for basic earnings per share		29,434		28,849			29,296		28,689
Incremental diluted shares		609		—			658		695
Weighted average shares used for diluted earnings per share		30,043		28,849			29,954		29,384
Net income (loss) per share:
Net income (loss) – basic	$	0.23	$	(0.07	)	$	0.38	$	0.44
Net income (loss) – diluted	$	0.23	$	(0.07	)	$	0.37	$	0.43

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Reconciliation of Changes in Deferred Revenue (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Dec. 29, 2012	Dec. 31, 2011	Dec. 29, 2012	Dec. 31, 2011
Deferred Revenue Arrangement
Deferred revenue, beginning	$ 9,456	$ 9,363	$ 10,751	$ 16,039
Revenue deferred	5,394	4,267	43,340	33,304
Revenue recognized	(8,330)	(5,246)	(47,571)	(40,959)
Deferred revenue, ending	$ 6,520	$ 8,384	$ 6,520	$ 8,384

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Product and Geographic Information

9 Months Ended

Dec. 29, 2012

Product and Geographic Information

14. Product and Geographic Information

Net sales by product type were as follows:

	Fiscal quarter ended				Three fiscal quarters ended
(In thousands)	Dec 29, 2012		Dec 31, 2011		Dec 29, 2012		Dec 31, 2011
Interconnect & Microfabrication Group (IMG)	$	30,537	$	35,318	$	147,506	$	134,757
Components Group (CG)		4,071		6,054		19,607		23,349
Semiconductor Group (SG)		3,322		8,435		9,938		50,631
	$	37,930	$	49,807	$	177,051	$	208,737

Net sales by geographic area, based on the location of the end user, were as follows:

	Fiscal quarter ended				Three fiscal quarters ended
(In thousands)	Dec 29, 2012		Dec 31, 2011		Dec 29, 2012		Dec 31, 2011
Asia	$	28,928	$	42,731	$	154,962	$	185,550
Americas		6,990		4,515		15,696		14,375
Europe		2,012		2,561		6,393		8,812
	$	37,930	$	49,807	$	177,051	$	208,737

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Fair Value Measurements (Tables)

9 Months Ended

Dec. 29, 2012

Fair Value Hierarchy for Financial Assets Measured at Fair Value on Recurring Basis

The Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of December 29, 2012 and March 31, 2012 was as follows (in thousands):

December 29, 2012	Level 1		Level 2			Level 3		Total
Money market securities	$	2,712	$	—		$	—	$	2,712
Government agencies		—		48,200			—		48,200
Commercial paper		—		44,266			—		44,266
Corporate bonds		—		18,090			—		18,090
Municipal bonds		—		1,048			—		1,048
Forward purchase or (sale) contracts:
Japanese Yen		—		429			—		429
New Taiwan Dollar		—		(2	)		—		(2	)
Korean Won		—		26			—		26
Euro		—		(67	)		—		(67	)
British Pound		—		28			—		28
Chinese Renminbi		—		(32	)		—		(32	)
Singapore Dollar		—		(2	)		—		(2	)
March 31, 2012	Level 1		Level 2			Level 3		Total
Money market securities	$	5,244	$	—		$	—	$	5,244
Commercial paper		—		83,645			—		83,645
Government agencies		—		67,261			—		67,261
Corporate Bonds		—		20,121			—		20,121
Forward purchase or (sale) contracts:
Japanese Yen		—		202			—		202
New Taiwan Dollar		—		(5	)		—		(5	)
Korean Won		—		(17	)		—		(17	)
Euro		—		(1	)		—		(1	)
British Pound		—		20			—		20
Chinese Renminbi		—		(1	)		—		(1	)

Investments

Certain information regarding the Company’s investments at December 29, 2012 and March 31, 2012 was as follows (in thousands):

December 29, 2012			Unrealized
	Cost		Gain		Loss			Fair Value
Available-for-sale securities (current):
Commercial paper	$	44,265	$	1		—		$	44,266
Government agencies		43,185		14		—			43,199
Corporate bonds		16,827		12		—			16,839
Municipal bonds		1,048		—		—			1,048
	$	105,325	$	27	$	—		$	105,352
Available-for-sale securities (non-current):
Government agencies		4,997		4		—			5,001
Corporate bonds		1,252		—		—			1,252
	$	6,249	$	4	$	—		$	6,253
March 31, 2012			Unrealized
	Cost		Gain		Loss			Fair Value
Available-for-sale securities (current):
Commercial paper	$	83,645	$	—	$	—		$	83,645
Government agencies		46,293		5		—			46,298
Corporate Bonds		17,987		51		—			18,038
	$	147,925	$	56	$	—		$	147,981
Available-for-sale securities (non-current):
Government agencies	$	20,989	$	—	$	(26	)	$	20,963
Corporate Bonds		2,070		13		—			2,083
	$	23,059	$	13	$	(26	)	$	23,046

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Accrued Liabilities (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 29, 2012	Sep. 29, 2012	Mar. 31, 2012	Dec. 31, 2011	Oct. 01, 2011	Apr. 02, 2011
Schedule of Accrued Liabilities
Payroll-related liabilities	$ 8,097		$ 6,446
Product warranty accrual	5,790	6,096	4,187	4,637	5,117	4,415
Pension benefit liabilities	2,049		2,110
Professional fees payable	1,907		2,011
Freight accrual	1,680		1,119
Income taxes payable	1,356		1,730
Purchase order commitments and receipts	847		1,473
Value added taxes payable	332		260
Customer deposits	272		385
Restructuring costs payable	10		1,048
Other	1,000		866
Accrued liabilities	$ 23,340		$ 21,635

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Fair Value Hierarchy for Financial Assets Measured at Fair Value on Recurring Basis (Detail) (Fair Value, Measurements, Recurring, USD $) In Thousands, unless otherwise specified	Dec. 29, 2012	Mar. 31, 2012
Money Market Instruments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	$ 2,712	$ 5,244
Government agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	48,200	67,261
Commercial Paper
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	44,266	83,645
Corporate Bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	18,090	20,121
Municipal Bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	1,048
Forward purchase or (sale) contracts | Japanese Yen
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	429	202
Forward purchase or (sale) contracts | New Taiwan Dollar
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	(2)	(5)
Forward purchase or (sale) contracts | Korean Won
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	26	(17)
Forward purchase or (sale) contracts | Euro
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	(67)	(1)
Forward purchase or (sale) contracts | British Pound
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	28	20
Forward purchase or (sale) contracts | Chinese Renminbi
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	(32)	(1)
Forward purchase or (sale) contracts | Singapore Dollar
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	(2)
Level 1 | Money Market Instruments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	2,712	5,244
Level 2 | Government agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	48,200	67,261
Level 2 | Commercial Paper
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	44,266	83,645
Level 2 | Corporate Bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	18,090	20,121
Level 2 | Municipal Bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	1,048
Level 2 | Forward purchase or (sale) contracts | Japanese Yen
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	429	202
Level 2 | Forward purchase or (sale) contracts | New Taiwan Dollar
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	(2)	(5)
Level 2 | Forward purchase or (sale) contracts | Korean Won
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	26	(17)
Level 2 | Forward purchase or (sale) contracts | Euro
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	(67)	(1)
Level 2 | Forward purchase or (sale) contracts | British Pound
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	28	20
Level 2 | Forward purchase or (sale) contracts | Chinese Renminbi
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	(32)	(1)
Level 2 | Forward purchase or (sale) contracts | Singapore Dollar
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Fair value of financial assets	$ (2)

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Dec. 29, 2012	Dec. 31, 2011	Dec. 29, 2012	Dec. 31, 2011
Net income (loss)	$ 6,768	$ (1,881)	$ 11,035	$ 12,569
Other comprehensive income:
Foreign currency translation adjustment, net of taxes of ($134), $68, $19 and $56	(239)	121	37	401
Reclassification of unrealized gain on auction rate securities				(1,445)
Accumulated other comprehensive income related to benefit plan obligation, net of taxes of $1, $1, $4 and $4	3	2	8	6
Net unrealized (loss) gain on available-for-sale securities, net of taxes of ($8), $24, ($5), and $9	(15)	42	(9)	15
Comprehensive income (loss)	$ 6,517	$ (1,716)	$ 11,071	$ 11,546

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Restricted Cash

9 Months Ended

Dec. 29, 2012

Restricted Cash

3. Restricted Cash

As of December 29, 2012, the Company had restricted cash of $22.3 million, which collateralized commercial letters of credit substituted for the cash bond previously held by the Kaohsiung District Court of Taiwan. The total restricted cash balance of $22.3 million was included in Restricted cash on the Condensed Consolidated Balance Sheets at December 29, 2012 as a current asset. The related litigation was settled in the Company’s favor on November 29, 2012 and cancellation of the letters of credit had not yet been completed as of December 29, 2012. See Note 15 “Legal Proceedings” below for further discussion.

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Amounts Related to Restructuring Costs Payable (Detail) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Dec. 29, 2012
Restructuring Cost and Reserve
Beginning balance	$ 1,048
Costs incurred and other adjustments	(92)
Cash payments	(946)
Ending balance	$ 10

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Inventories (Tables)

9 Months Ended

Dec. 29, 2012

Components of Inventories

Components of inventories were as follows:

(In thousands)	Dec 29, 2012		Mar 31, 2012
Raw materials and purchased parts	$	54,220	$	48,126
Work-in-process		13,116		10,511
Finished goods		12,888		9,418
	$	80,224	$	68,055

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Restricted Cash - Additional Information (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 29, 2012	Mar. 31, 2012
Restricted Cash and Cash Equivalents Items
Restricted cash	$ 22,269	$ 22,269
All Ring Patent Infringement Prosecution
Restricted Cash and Cash Equivalents Items
Restricted cash	$ 22,269

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Earnings Per Share

9 Months Ended

Dec. 29, 2012

Earnings Per Share

13. Earnings Per Share

The following is a reconciliation of weighted average shares outstanding used in the calculation of basic and diluted earnings per share:

	Fiscal quarter ended					Three fiscal quarters ended
(In thousands, except per share data)	Dec 29, 2012		Dec 31, 2011			Dec 29, 2012		Dec 31, 2011
Net income (loss)	$	6,768	$	(1,881	)	$	11,035	$	12,569
Weighted average shares used for basic earnings per share		29,434		28,849			29,296		28,689
Incremental diluted shares		609		—			658		695
Weighted average shares used for diluted earnings per share		30,043		28,849			29,954		29,384
Net income (loss) per share:
Net income (loss) – basic	$	0.23	$	(0.07	)	$	0.38	$	0.44
Net income (loss) – diluted	$	0.23	$	(0.07	)	$	0.37	$	0.43

Awards of options, stock-settled stock appreciation rights (SARs), unvested restricted stock units (RSUs) and shares associated with the Company’s Employee Stock Purchase Plan (ESPP) representing an additional 2.5 million and 4.2 million shares for the third quarter ended December 29, 2012 and December 31, 2011, respectively, were not included in the calculation of diluted net earnings per share because their effect would have been antidilutive.

For the three quarters ended December 29, 2012 and December 31, 2011, awards of options, SARs, unvested RSUs and ESPP shares representing an additional 2.3 million and 2.8 million shares, respectively, were not included in the calculation of diluted net earnings per share because their effect would have been antidilutive.