Oct 30, 2018

ESI Announces Second Quarter Fiscal 2019 Results and Agreement to be Acquired by MKS Instruments, Inc.

PORTLAND, Ore., Oct. 30, 2018 (GLOBE NEWSWIRE) -- Electro Scientific Industries, Inc. (NASDAQ:ESIO), an innovator of laser-based manufacturing solutions for the microtechnology industry, today announced the signing of a definitive agreement to be acquired by MKS Instruments, Inc. and financial results for its fiscal 2019 second quarter ended September 29, 2018. Financial measures are provided on both a GAAP and non-GAAP basis. Non-GAAP results exclude the impact of purchase accounting, equity compensation, restructuring, and other items shown in the non-GAAP reconciliation table below.

ESI Signs Definitive Agreement

ESI announces the signing of a definitive agreement for MKS Instruments, Inc. (NASDAQ:MKSI) to acquire ESI for $30.00 per share. The all-cash transaction is valued at approximately $1 billion. The transaction is subject to customary closing conditions, including the approval of ESI’s shareholders and antitrust approvals in the U.S. and certain other foreign jurisdictions, and is expected to close in the first quarter of calendar 2019. MKS intends to fund the transaction with cash on hand and a new, fully-committed debt financing. See the separate announcement from MKS Instruments for additional transaction details.

As a result, ESI is canceling today’s previously announced investor call.

In connection with this transaction, Stifel is acting as financial advisor and Wilson Sonsini Goodrich & Rosati P.C. is acting as legal advisor to ESI.

FY19 Q2 Financial Performance

Second quarter revenue was $85.9 million, compared to $71.0 million in the second quarter of last fiscal year. GAAP net income was $16.8 million or $0.47 per diluted share, compared to net income of $4.3 million or $0.12 per diluted share one year ago. On a non-GAAP basis net income was $21.1 million or $0.59 per diluted share, compared to net income of $13.7 million or $0.39 per share in the prior fiscal year's second quarter. Total orders for the quarter were $66.9 million, compared to $128.9 million one year ago and $82.3 million in the prior quarter.

Michael Burger, ESI’s president and CEO stated, "With Component Test and Service bookings remaining well above historical levels in the quarter, we continue to demonstrate the increased diversity of our product portfolio. We also officially launched our new Capstone TM flex drilling system and Allegro LC MLCC test tool, both of which have been extremely well received, and are expected to contribute new product revenue in the second half of the fiscal year."

GAAP gross margin was 45.5%, compared to 37.4% in the second quarter of last fiscal year and operating expense was $20.0 million, down from $22.1 million last year, both improvements resulting from last year's restructuring costs. Operating income was $19.1 million, or 22% of revenue, compared to income of $4.4 million in last fiscal year's second quarter.

Non-GAAP gross margin was 45.9%, compared to 46.4% one year ago. Non-GAAP operating expense decreased year over year from $18.6 million to $18.3 million resulting in non-GAAP operating income of $21.1 million or 25% of sales.

At quarter end, total cash, cash equivalents, restricted cash and current investments increased to $179.3 million. The company generated $51.1 million of cash from operations during the quarter, driven primarily by strong customer collections and reduced inventory levels.

Discussion of Non-GAAP Financial Measures

In this press release, we have presented financial measures which have not been determined in accordance with generally accepted accounting principles (GAAP) and are therefore non-GAAP financial measures. Non-GAAP, or adjusted, financial measures exclude the impact of purchase accounting, equity compensation, restructuring, and other items. We believe that this presentation of non-GAAP financial measures allows investors to assess the Company's operating performance by comparing it to prior periods on a more consistent basis. We have included a reconciliation of various non-GAAP financial measures to those measures reported in accordance with GAAP. Because our calculation of non-GAAP financial measures may differ from similar measures used by other companies, investors should be careful when comparing our non-GAAP financial measures to those of other companies.

About ESI

ESI enables our customers to commercialize technology using precision laser processes. ESI's solutions produce the industry's highest quality and throughput, and target the lowest total cost of ownership. ESI is headquartered in Portland, Oregon, with global operations and subsidiaries in Asia, Europe and North America. More information is available at www.esi.com.

Additional Information and Where to Find It
This communication is being made in respect of the proposed transaction involving Electro Scientific Industries, Inc. (“ESI”) and MKS Instruments, Inc. (“MKS”). In connection with the proposed transaction, ESI intends to file relevant materials with the Securities and Exchange Commission (the “SEC”), including a proxy statement. Promptly after filing its definitive proxy statement with the SEC, ESI will mail the definitive proxy statement and a proxy card to each stockholder of ESI entitled to vote at the special meeting relating to the proposed transaction. This communication is not a substitute for the proxy statement or any other document that ESI may file with the SEC or send to its stockholders in connection with the proposed transaction. BEFORE MAKING ANY VOTING DECISION, ESI SHAREHOLDERS ARE URGED TO READ THESE MATERIALS (INCLUDING ANY AMENDMENTS OR SUPPLEMENTS THERETO) AND ANY OTHER RELEVANT DOCUMENTS IN CONNECTION WITH THE PROPOSED TRANSACTION THAT ESI WILL FILE WITH THE SEC WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT ESI AND THE PROPOSED TRANSACTION. ESI stockholders may obtain free copies of the proxy statement (when it becomes available) and other relevant documents filed with the SEC by ESI at the SEC’s web site (http://www.sec.gov). Free copies of the proxy statement, when available, and other filings made by ESI with the SEC also may be obtained from the Investor Relations section of ESI web site (www.esi.com) or by directing a request to ESI, Attn: Investor Relations, at 13900 N.W. Science Park Drive, Portland, Oregon 97229.

Participants in the Solicitation
ESI and its directors and executive officers may be deemed to be participants in the solicitation of proxies from ESI’s stockholders with respect to the proposed transaction. Information about ESI’s directors and executive officers and their ownership of ESI’s common stock is set forth in ESI’s proxy statement on Schedule 14A filed with the SEC on July 10, 2018, and ESI’s Annual Report on Form 10-K for the fiscal year ended March 31, 2018, which was filed with the SEC on June 8, 2018. Additional information regarding the potential participants, and their direct or indirect interests in the proposed transaction, by security holdings or otherwise, will be set forth in the proxy statement and other materials to be filed with SEC in connection with the proposed transaction.

Notice Regarding Forward-Looking Statements

This communication, and any documents to which ESI refers you in this communication, contains not only historical information, but also forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent ESI’s current expectations or beliefs concerning future events, including but not limited to the expected completion and timing of the proposed transaction, expected benefits and costs of the proposed transaction, management plans relating to the proposed transaction, strategies and objectives of ESI for future operations and other information relating to the proposed transaction. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “forecasts,” “should,” “estimates,” “contemplate,” “future,” “goal,” “potential,” “predict,” “project,” “projection,” “target,” “seek,” “may,” “will,” “could,” “should,” “would,” “assuming,” and similar expressions are intended to identify forward-looking statements. You should read any such forward-looking statements carefully, as they involve a number of risks, uncertainties and assumptions that may cause actual results to differ significantly from those projected or contemplated in any such forward-looking statement. Those risks, uncertainties and assumptions include, (i) the risk that the proposed transaction may not be completed in a timely manner or at all, which may adversely affect ESI’s business and the price of the common stock of ESI, (ii) the failure to satisfy any of the conditions to the consummation of the proposed transaction, including the adoption of the merger agreement by the stockholders of ESI and the receipt of certain regulatory approvals, (iii) the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement, (iv) the effect of the announcement or pendency of the proposed transaction on ESI’s business relationships, operating results and business generally, (v) risks that the proposed transaction disrupts current plans and operations and the potential difficulties in employee retention as a result of the proposed transaction, (vi) risks related to diverting management’s attention from ESI’s ongoing business operations, (vii) the outcome of any legal proceedings that may be instituted against us related to the merger agreement or the proposed transaction, (viii) unexpected costs, charges or expenses resulting from the proposed transaction, and (ix) other risks described in ESI’s filings with the SEC, such as its Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.

The forward-looking statements also include the risk that anticipated growth opportunities may be smaller than anticipated or may not be realized; risks related to the relative strength and volatility of the electronics industry; the volatility associated with the industries we serve which includes the relative level of capacity and demand, and financial strength of the manufacturers; the risk that customer orders may be canceled or delayed, including as a result of any shipment delays; our ability to respond promptly to customer requirements; the risk, especially at heightened production levels, that we may not be able to ship products on the schedule required by customers, whether as a result of production delays, supply delays, or otherwise; our ability to develop, manufacture and successfully deliver new products and enhancements; the risk that customer acceptance of new or customized products may be delayed; the risk that large orders and related revenues may not be repeated; our ability to create and sustain intellectual property protection around our products; the risk that competing or alternative technologies could reduce demand for our products; the risk that we may not be successful in penetrating new or adjacent markets; the risk that our new products may not gain acceptance in the marketplace; the risk that new products may not be introduced to the market in the anticipated time frame or at all; foreign currency fluctuations; the risk that duties or tariffs could be imposed or increased on goods imported or exported by us; the risk of timing of shipments or increased costs related to licenses for goods exported by us; the risk that changes to policies regarding immigration and visits to the United States could negatively impact our ability to hire or retain and train qualified personnel or our ability to operate internationally on an integrated basis; our ability to utilize recorded deferred tax assets; taxes, interest or penalties resulting from tax audits; and changes in tax laws or the interpretation of such tax laws.

Forward-looking statements speak only as of the date of this communication or the date of any document incorporated by reference in this document. Except as required by applicable law or regulation, ESI does not assume any obligation to update any such forward-looking statements whether as the result of new developments or otherwise.

Contact
Erica Mannion or Michael Funari
Sapphire Investor Relations, LLC
617-542-6180
investorrelations@esi.com

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

Second Quarter Fiscal 2019 Results

Condensed Consolidated Statements of Operations
(Unaudited)

  Fiscal quarter ended   Two fiscal quarters ended
(In thousands, except per share data) Sep 29, 2018   Jun 30, 2018   Sep 30, 2017   Sep 29, 2018   Sep 30, 2017
Net sales:                  
Systems $ 71,263     $ 96,857     $ 60,316     $ 168,120     $ 122,409  
Services 14,654     13,767     10,651     28,421     21,242  
Total net sales 85,917     110,624     70,967     196,541     143,651  
Cost of sales:                  
Systems 40,539     50,094     38,179     90,633     79,605  
Services 6,311     7,332     6,256     13,643     11,094  
Total cost of sales 46,850     57,426     44,435     104,276     90,699  
Gross profit 39,067     53,198     26,532     92,265     52,952  
Gross margin 45.5 %   48.1 %   37.4 %   46.9 %   36.9 %
Operating expenses:                  
Selling, general and administrative 10,838     10,130     11,648     20,968     24,456  
Research, development and engineering 9,154     10,059     8,274     19,213     17,208  
Restructuring costs         2,162         3,373  
Total operating expenses 19,992     20,189     22,084     40,181     45,037  
Operating income 19,075     33,009     4,448     52,084     7,915  
Non-operating income (expense):                  
Interest and other income (expense), net 383     452     (229 )   835     (413 )
Total non-operating income (loss) 383     452     (229 )   835     (413 )
Income before income taxes 19,458     33,461     4,219     52,919     7,502  
Provision for (benefit from) income taxes 2,623     2,318     (41 )   4,941     340  
Net income $ 16,835     $ 31,143     $ 4,260     $ 47,978     $ 7,162  
Net income per share - basic $ 0.49     $ 0.90     $ 0.13     $ 1.39     $ 0.21  
Net income per share - diluted $ 0.47     $ 0.87     $ 0.12     $ 1.34     $ 0.21  


Electro Scientific Industries, Inc.

Second Quarter Fiscal 2019 Results

Condensed Consolidated Balance Sheets
(Unaudited)

(In thousands) Sep 29, 2018   Jun 30, 2018   Mar 31, 2018
Assets          
Current assets:          
Cash and cash equivalents $ 66,183     $ 74,854     $ 76,792  
Short-term investments 112,004     55,026     47,121  
Trade receivables, net 38,422     80,525     63,044  
Inventories 81,434     94,265     87,686  
Shipped systems pending acceptance 1,831     1,937     4,734  
Other current assets (1) 4,474     5,041     5,493  
Total current assets 304,348     311,648     284,870  
Non-current assets:          
Property, plant and equipment, net 24,711     22,870     22,025  
Non-current deferred income taxes, net 43,734     43,637     43,518  
Goodwill 2,626     2,626     2,626  
Acquired intangible assets, net 4,456     4,812     5,169  
Other assets(1) 12,997     11,110     14,780  
Total assets $ 392,872     $ 396,703     $ 372,988  
Liabilities and shareholders' equity          
Current liabilities:          
Accounts payable $ 16,675     $ 32,616     $ 37,354  
Accrued liabilities 28,430     32,193     34,533  
Deferred revenue 8,535     9,026     9,818  
Total current liabilities 53,640     73,835     81,705  
Non-current liabilities          
Long-term debt 12,550     12,659     12,766  
Income taxes payable 2,349     2,345     1,901  
Other liabilities 7,932     10,614     10,258  
Total liabilities 76,471     99,453     106,630  
Shareholders' equity:          
Preferred and common stock 214,485     211,766     210,995  
Retained earnings 102,836     86,000     54,816  
Accumulated other comprehensive (loss) income (920 )   (516 )   547  
Total shareholders' equity 316,401     297,250     266,358  
Total liabilities and shareholders' equity $ 392,872     $ 396,703     $ 372,988  
End of period shares outstanding 34,699     34,525     34,387  

(1)As of September 29, 2018 and June 30, 2018, $1.1 million of current restricted cash was included in Other current assets. Included in Other assets as of March 31, 2018, is long-term restricted cash of $1.1 million.


Electro Scientific Industries, Inc.

Second Quarter Fiscal 2019 Results

Condensed Consolidated Statements of Cash Flows
(Unaudited)

  Fiscal quarter ended   Two fiscal quarters ended
(In thousands) Sep 29, 2018   Jun 30, 2018   Sep 30, 2017   Sep 29, 2018   Sep 30, 2017
Net income $ 16,835     $ 31,143     $ 4,260     $ 47,978     $ 7,162  
Non-cash adjustments and changes in operating activities 34,236     (21,374 )   14,005     12,862     18,534  
Net cash provided by operating activities 51,071     9,769     18,265     60,840     25,696  
Net cash used in investing activities (60,334 )   (9,916 )   (28,597 )   (70,250 )   (33,386 )
Net cash provided by (used in) financing activities 931     (840 )   (725 )   91     (1,231 )
Effect of exchange rate changes on cash (336 )   (947 )   125     (1,283 )   260  
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (8,668 )   (1,934 )   (10,932 )   (10,602 )   (8,661 )
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD 75,951     77,885     60,003     77,885     57,732  
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD $ 67,283     $ 75,951     $ 49,071     $ 67,283     $ 49,071  


Electro Scientific Industries, Inc.

Analysis of Second Quarter Fiscal 2019 Results

(Unaudited)

  Fiscal quarter ended   Two fiscal quarters ended
(Dollars and shares in thousands) Sep 29, 2018   Jun 30, 2018   Sep 30, 2017   Sep 29, 2018   Sep 30, 2017
Sales detail:                  
Printed Circuit Board $ 38,816   $ 66,337   $ 38,187   $ 105,153   $ 84,372
Component Test 18,555   9,405   7,007   27,960   14,455
Semiconductor 11,227   18,777   9,641   30,004   14,822
Industrial Machining 2,665   2,338   5,481   5,003   8,760
Service 14,654   13,767   10,651   28,421   21,242
Net sales $ 85,917   $ 110,624   $ 70,967   $ 196,541   $ 143,651
                   
As % of Net Sales                  
GAAP                  
Gross profit 45.5%   48.1%   37.4%   46.9%   36.9%
Selling, general and administrative expense 13%   9%   16%   11%   17%
Research, development and engineering expense 11%   9%   12%   10%   12%
Total operating expenses 23%   18%   31%   20%   31%
Operating income 22%   30%   6%   27%   6%
Non-GAAP                  
Gross profit 45.9%   48.3%   46.4%   47.3%   46.5%
Net operating expenses 21%   17%   26%   19%   27%
Operating income 25%   31%   20%   28%   19%
                   
GAAP - Effective tax rate % 13.5%   6.9%   (1.0%)   9.3%   4.5%
Weighted average shares outstanding                  
Basic 34,606   34,459   33,861   34,529   33,647
Diluted 35,959   35,924   34,874   35,916   34,716
End of period employees 644   634   594   644   594
                   
Reconciliation of Cash, cash equivalents, restricted cash and current Investments     Fiscal quarter ended
      Sep 29, 2018   Jun 30, 2018   Mar 31, 2018   Sep 30, 2017
Cash     $ 29,817   $ 25,808   27,043   29,998
Cash equivalents     36,366   49,046   49,749   17,975
Current restricted cash     1,100   1,097    
Long-term restricted cash         1,093   1,098
Cash, cash equivalents, and restricted cash at end of period     67,283   75,951   77,885   49,071
Short-term investments     112,004   55,026   47,121   32,802
Cash, cash equivalents, restricted cash and current investments     $ 179,287   $ 130,977   125,006   81,873


Electro Scientific Industries, Inc.
Second Quarter Fiscal 2019 Results
Reconciliation of GAAP to Non-GAAP Financial Measures
(Unaudited)

  Fiscal quarter ended   Two fiscal quarters ended
(In thousands, except per share data) Sep 29, 2018   Jun 30, 2018   Sep 30, 2017   Sep 29, 2018   Sep 30, 2017
Gross profit per GAAP $ 39,067     $ 53,198     $ 26,532     $ 92,265     $ 52,952  
Purchase accounting 242     243     242     485     493  
Equity compensation 122     106     77     228     144  
Charges for other asset and inventory impairment         6,083         13,277  
Charges from VAT audit     (97 )       (97 )    
Non-GAAP gross profit $ 39,431     $ 53,450     $ 32,934     $ 92,881     $ 66,866  
                   
Operating expenses per GAAP $ 19,992     $ 20,189     $ 22,084     $ 40,181     $ 45,037  
Purchase accounting (116 )   (114 )   (117 )   (230 )   (336 )
Equity compensation (1,543 )   (1,393 )   (1,253 )   (2,936 )   (2,464 )
Restructuring costs         (2,162 )       (3,373 )
Non-GAAP operating expenses $ 18,333     $ 18,682     $ 18,552     $ 37,015     $ 38,864  
                   
Operating income per GAAP $ 19,075     $ 33,009     $ 4,448     $ 52,084     $ 7,915  
Non-GAAP adjustments to gross profit 364     252     6,402     616     13,914  
Non-GAAP adjustments to operating expenses 1,659     1,507     3,532     3,166     6,173  
Non-GAAP operating income $ 21,098     $ 34,768     $ 14,382     $ 55,866     $ 28,002  
                   
Non-operating income (expense), net per GAAP $ 383     $ 452     $ (229 )   $ 835     $ (413 )
Adjustment to VAT audit     (49 )       (49 )    
Non-GAAP non-operating income (expense) $ 383     $ 403     $ (229 )   $ 786     $ (413 )
Non-GAAP income before income taxes $ 21,481     $ 35,171     $ 14,153     $ 56,652     $ 27,589  
                   
Net income per GAAP $ 16,835     $ 31,143     $ 4,260     $ 47,978     $ 7,162  
Non-GAAP adjustments to gross profit 364     252     6,402     616     13,914  
Non-GAAP adjustments to operating expenses 1,659     1,507     3,532     3,166     6,173  
Non-GAAP adjustments to non-operating expense     (49 )       (49 )    
Income tax effect of other non-GAAP adjustments (a) 2,239     1,734     (483 )   3,973     (507 )
Non-GAAP net income $ 21,097     $ 34,587     $ 13,711     $ 55,684     $ 26,742  
Basic Non-GAAP net income per share $ 0.61     $ 1.00     $ 0.40     $ 1.61     $ 0.79  
Diluted Non-GAAP net income per share $ 0.59     $ 0.96     $ 0.39     $ 1.55     $ 0.77  

(a) The income tax effect of other non-GAAP adjustments in the first quarter and second quarter of fiscal 2019 was primarily due to offsets from net operating losses utilization.

ESI Logo on White; No Tagline.png

Source: Electro Scientific Industries, Inc.