Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 30, 2017
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, including area code: 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  ý    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  ý    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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨    
Accelerated filer 
ý
Non-accelerated filer
¨    
Smaller reporting company
¨
Emerging growth company
¨


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares outstanding of the Registrant’s Common Stock as of February 2, 2018 was 33,552,089 shares.
 


Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
2018 FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
 
Part I
FINANCIAL INFORMATION
 
Financial Statements (Unaudited)
 
 
 
 
 
 
Part II
OTHER INFORMATION
 
 





Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
Dec 30, 2017
 
Apr 1, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
62,251

 
$
56,642

Short-term investments
36,824

 
5,743

Trade receivables, net of allowances of $658 and $603
75,674

 
40,494

Inventories, net
74,502

 
58,942

Shipped systems pending acceptance
5,780

 
5,713

Other current assets
5,116

 
6,180

Total current assets
260,147

 
173,714

Non-current assets:
 
 
 
Property, plant and equipment (PP&E), net of accumulated depreciation of $81,728 and $112,075
19,732

 
21,619

Goodwill
2,626

 
3,027

Acquired intangible assets, net of accumulated amortization of $23,035 and $21,994
5,525

 
6,564

Income taxes receivable
935

 

Other assets
17,339

 
19,821

Total assets
$
306,304

 
$
224,745

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
38,577

 
$
21,213

Accrued liabilities
40,391

 
22,186

Deferred revenue
11,982

 
14,712

Total current liabilities
90,950

 
58,111

Non-current liabilities:
 
 
 
Long-term debt
12,875

 
13,489

Income taxes payable
1,587

 
1,036

Other liabilities
10,085

 
7,578

Total liabilities
115,497

 
80,214

Commitments and contingencies (See Note 12: Commitments & Contingencies)


 


Shareholders’ equity:
 
 
 
Preferred stock, without par value; 1,000 shares authorized; no shares issued

 

Common stock, without par value; 100,000 shares authorized; 34,309 and 33,260 issued and outstanding
211,330

 
207,152

Accumulated deficit
(20,273
)
 
(61,407
)
Accumulated other comprehensive loss
(250
)
 
(1,214
)
Total shareholders’ equity
190,807

 
144,531

Total liabilities and shareholders’ equity
$
306,304

 
$
224,745

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


3

Table of Contents

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 30, 2017
 
Dec 31, 2016
 
Dec 30, 2017
 
Dec 31, 2016
Net sales:
 
 
 
 
 
 
 
Systems
$
99,418

 
$
25,427

 
$
221,827

 
$
85,069

Services
11,422

 
8,352

 
32,664

 
26,036

Total net sales
110,840

 
33,779

 
254,491

 
111,105

Cost of sales:
 
 
 
 
 
 
 
Systems
52,502

 
17,283

 
132,107

 
53,851

Services
5,182

 
5,048

 
16,276

 
14,018

Total cost of sales
57,684

 
22,331

 
148,383

 
67,869

Gross profit
53,156

 
11,448

 
106,108

 
43,236

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
11,040

 
13,280

 
35,496

 
38,917

Research, development and engineering
8,165

 
7,868

 
25,373

 
23,258

Restructuring costs
706

 
321

 
4,079

 
321

Acquisition and integration costs

 
31

 

 
366

Total operating expenses
19,911

 
21,500

 
64,948

 
62,862

Operating income (loss)
33,245

 
(10,052
)
 
41,160

 
(19,626
)
Non-operating income:
 
 
 
 
 
 
 
Interest and other income, net
789

 
34

 
376

 
162

Total non-operating income
789

 
34

 
376

 
162

Income (loss) before income taxes
34,034

 
(10,018
)
 
41,536

 
(19,464
)
Provision for (benefit from) income taxes
61

 
(325
)
 
401

 
22

Net income (loss)
$
33,973

 
$
(9,693
)
 
$
41,135

 
$
(19,486
)
Net income (loss) per share - basic
$
0.99

 
$
(0.29
)
 
$
1.22

 
$
(0.60
)
Net income (loss) per share - diluted
$
0.94

 
$
(0.29
)
 
$
1.16

 
$
(0.60
)
Weighted average number of shares - basic
34,224

 
32,919

 
33,839

 
32,379

Weighted average number of shares - diluted
36,010

 
32,919

 
35,562

 
32,379

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


4

Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands)
Dec 30, 2017
 
Dec 31, 2016
 
Dec 30, 2017
 
Dec 31, 2016
Net income (loss)
$
33,973

 
$
(9,693
)
 
$
41,135

 
$
(19,486
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of taxes of $8, $0, $8 and $0
581

 
(745
)
 
969

 
(884
)
Other comprehensive income related to benefit plan obligation, net of taxes of $(2), $(5), $(7) and $(7)
4

 
5

 
13

 
14

Net unrealized loss on available-for-sale securities, net of taxes of $0, $0, $0 and $0
(17
)
 
(2
)
 
(18
)
 
(6
)
Other comprehensive income (loss):
568

 
(742
)
 
964

 
(876
)
Comprehensive income (loss)
$
34,541

 
$
(10,435
)
 
$
42,099

 
$
(20,362
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

5

Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three fiscal quarters ended
(In thousands)
Dec 30, 2017
 
Dec 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
41,135

 
$
(19,486
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Non-cash restructuring charges
13,858

 

Depreciation and amortization
5,508

 
5,424

Share-based compensation expense
3,510

 
5,118

Amortization of acquired intangible assets
1,015

 
832

Provision for (benefit from) doubtful accounts
603

 
(341
)
Gain on sale of laser ablation assets
(917
)
 

Loss on disposal of property and equipment, net
101

 
52

Impairment of inventory

 
946

Decrease in deferred income taxes
2

 
37

Changes in operating accounts, net of acquisitions:

 

Increase (decrease) in accounts payable and accrued liabilities
36,963

 
(5,189
)
(Increase) decrease in trade receivables, net
(35,271
)
 
15,258

Increase in inventories
(24,402
)
 
(3,259
)
Increase in shipped systems pending acceptance
(67
)
 
(2,802
)
(Decrease) increase in deferred revenue
(2,730
)
 
4,449

Decrease (increase) in other current assets
1,489

 
(738
)
Net cash provided by operating activities
40,797

 
301

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of investments
(48,668
)
 
(331,343
)
Proceeds from sales and maturities of investments
17,034

 
339,691

Purchase of property, plant and equipment
(3,116
)
 
(3,408
)
Proceeds from sale of property, plant and equipment
37

 
7

Proceeds from sale of laser ablation assets
2,999

 

Cash paid for business acquisitions, net of cash acquired

 
(2,010
)
Increase in other assets
(4,646
)
 
(120
)
Net cash (used in) provided by investing activities
(36,360
)
 
2,817

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Repayment of debt
(321
)
 

Payment of withholding taxes on stock-based compensation
(1,696
)
 
(801
)
Proceeds from issuance of common stock
2,624

 
1,043

Net cash provided by financing activities
607

 
242

Effect of exchange rate changes on cash
562

 
(882
)
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
5,606

 
2,478

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD
57,732

 
42,413

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
$
63,338

 
$
44,891

SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Cash paid for interest
$
(496
)
 
$
(30
)
Cash paid for income taxes
(979
)
 
(504
)
Income tax refunds received
67

 
45

Net (decrease) increase in PP&E and other assets related to transfers from inventory
(824
)
 
5,414

Non-cash additions to PP&E
483

 
205

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

6

Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
Note 14
Note 15
Note 16
Note 17
Note 18
Note 19
Note 20
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 United States generally accepted accounting principles (U.S. GAAP) have been condensed or omitted in these interim statements. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Annual Report of Electro Scientific Industries, Inc. (the Company) on Form 10-K for its fiscal year ended April 1, 2017. 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 U.S. GAAP 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; valuation of inventory; accrued restructuring costs; share-based compensation; income taxes, including the valuation of deferred tax assets; valuation of long-lived assets, including intangibles; valuation of goodwill and acquisition accounting.
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 April 1, 2017. All references to years or quarters relate to fiscal years or fiscal quarters unless otherwise noted. The fiscal quarters ended December 30, 2017 and December 31, 2016 each consisted of 13-week periods. Similarly, the three quarters ended December 30, 2017 and the three quarters ended December 31, 2016 each consisted of 39-week periods.

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Table of Contents

Restricted Cash
Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain long-term contractual agreements are recorded in Other non-current assets on our balance sheet. The following table provides a summary of the Company's cash, cash equivalents, and restricted cash position.
(In thousands)
Dec 30, 2017
 
Apr 1, 2017
 
Dec 31, 2016
Cash and cash equivalents
$
62,251

 
$
56,642

 
$
44,891

Restricted cash included in other long-term assets
1,087

 
1,090

 

Total cash, cash equivalents and restricted cash
$
63,338

 
$
57,732

 
$
44,891

2. Recent Accounting Pronouncements
Adopted accounting pronouncements:
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, “Compensation – Stock Compensation – Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies the accounting for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and the accounting for forfeitures. ASU 2016-09 was effective for the Company as of April 2, 2017, the beginning of fiscal 2018. Adopting ASU 2016-09 increased diluted weighted average shares outstanding by approximately 40 thousand shares in the first quarter of 2018 due to the change in recognition of excess tax benefits in the calculation. The ASU is expected to increase the volatility of the Company's diluted shares outstanding on a go-forward basis.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” ASU 2015-11 simplifies the measurement of inventory by requiring companies to measure inventory at the lower of cost and net realizable value rather than measuring at the lower of cost of market where the market value was determined based off of three different measures. ASU 2015-11 was effective for the Company as of April 2, 2017, the beginning of fiscal 2018. Adopting ASU 2015-11 has not had a material effect on the Company's inventory valuation.
Recently issued accounting pronouncements not yet adopted
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in order to (i) improve disclosures related to an entity's risk management activities through better transparency and understandability and (ii) simplify and reduce the complexity of hedge accounting by preparers. ASU 2017-12 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods, which would be the Company's fiscal year ending March 28, 2020. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. While the Company does not expect the adoption of ASU 2017-12 to have a material effect on its business, the Company is still evaluating any potential impact that adoption of ASU 2017-12 may have on its financial position, results of operations or cash flows.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which amends the scope of modification accounting surrounding share-based payment arrangements as issued in ASU 2016-09 by providing guidance on the various types of changes which would trigger modification accounting for share-based payment awards, specifically an entity would not apply modification accounting under ASC 718 if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, which would be the Company's fiscal year ending March 30, 2019. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. The adoption of ASU 2017-09 will not have a material effect on the Company's financial position, results of operations or cash flows.
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires companies to disaggregate the current-service-cost component from other components of net benefit cost and provides specific guidance for presentation in the income statement. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, which would be the Company's fiscal year ending March 30, 2019. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The adoption of ASU 2017-07 will not have a material effect on the Company's financial position, results of operations or cash flows.

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In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date for implementation of ASU 2014-09 by one year, making the new guidance effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted no earlier than the original effective date. The FASB has continued to issue ASU topics to further clarify ASU 2014-09. These have included ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20. The effective date and transition requirements of these ASU topics are the same as the effective date and transition requirements of ASU 2015-14. The new standards are effective for the Company's fiscal year ending March 30, 2019, beginning with the first quarter of that fiscal year.
The new standard permits adoption by using either (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The Company plans to elect the modified retrospective approach as its transition method. The Company developed an implementation plan and assigned cross-functional internal resources to perform a comprehensive assessment of the new standard and its impact on the financial statements of the Company. This assessment is ongoing and includes identification, consideration, and quantification of the impact of the new standard on the Company's financial statements, accounting policies, processes, control environment and systems. The outcome of this evaluation will be the implementation of supporting processes and systems that enable timely and accurate reporting under the new standard.
While the Company continues to assess all potential impacts under the new standard, we believe that based on a preliminary assessment the new standard is unlikely to result in a significant change to the amount or timing of revenue recognition related to system sales or service contracts, the Company's major revenue streams. There may be some impact related to the allocation of value and timing of recognition in situations where service contracts, which the Company expects to be recognized over time, are sold together with systems that are primarily recognized at a point in time. The Company believes that certain aspects of the new guidance will require significant judgment, including identification of relevant performance obligations and quantification and allocation of the consideration to which the entity expects to be entitled in exchange for those goods or services. Further, in connection with the adoption of the standard, there is a requirement to capitalize certain costs, which for the Company primarily comprises commission expenses for sales representatives. Any such costs required to be capitalized would amortize over the period of performance for the underlying contracts. The Company is still evaluating the impact of capitalizing costs to execute a contract. However, the primary potential impact is expected to relate to commissions on service contracts with a duration approximating or exceeding one year. The impact related to contracts with a duration over one year is not expected to be significant and the Company expects to elect the practical expedient under the new standard for costs with a duration less than one year and expense those items as incurred. This preliminary assessment is based on the Company's analysis of actual historical revenue transactions and current customer contracts under the new guidance and presumes certain conclusions as it relates to accounting policies under the new standard and the Company's current contracts. Due to the complexity of certain of the Company's contracts and at least the possibility that contractual arrangements could change, the actual revenue recognition treatment required under the new standard for these arrangements may be dependent on contract-specific terms and may vary from this overall expectation. The Company currently expects that necessary operational changes will be implemented prior to the adoption date. The new standard will increase the Company's revenue related disclosures; primarily by expanding disclosure of the Company's policies, significant estimates, and performance obligations.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, to improve and simplify the accounting for the income tax consequences of intra-entity transfers of assets other than inventory, requiring companies to recognize income tax consequences upon the transfer of the asset to a third party. ASU 2016-16 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, which would be the Company's fiscal year ending March 30, 2019. While the Company does not expect the adoption of ASU 2016-16 to have a material effect on its business, the Company is still evaluating any potential impact that adoption of ASU 2016-16 may have on its financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosing key information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, which would be the Company's fiscal year ending March 28, 2020. The Company is still evaluating any potential impact that adoption of ASU 2016-02 may have on its financial position, results of operations or cash flows.


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Table of Contents

3. Fair Value Measurements
Financial Assets and Liabilities 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 for 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 and liabilities measured at fair value on a recurring basis as of December 30, 2017 and April 1, 2017 was as follows (in thousands):
December 30, 2017
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market securities
$
24,537

 
$

 
$

 
$
24,537

Commercial paper

 
4,149

 

 
4,149

Total cash equivalents
$
24,537

 
$
4,149

 
$

 
$
28,686

Short term investments - available for sale:
 
 
 
 
 
 
 
U.S. treasury fund
$
10,447

 
$

 
$

 
$
10,447

Commercial paper

 
24,173

 

 
24,173

Corporate bonds

 
2,204

 

 
2,204

Total short-term investments - available for sale
$
10,447

 
$
26,377

 
$

 
$
36,824

Forward purchase or (sale) contracts:
 
 
 
 
 
 
 
Japanese Yen
$

 
$
(1
)
 
$

 
$
(1
)
New Taiwan Dollar

 
11

 

 
11

Korean Won

 
(4
)
 

 
(4
)
Euro

 
(14
)
 

 
(14
)
British Pound

 
(13
)
 

 
(13
)
Chinese Renminbi

 
(51
)
 

 
(51
)
Total forward contracts
$

 
$
(72
)
 
$

 
$
(72
)
Deferred compensation plan assets:*
 
 
 
 
 
 
 
Mutual funds and exchange traded funds
$
2,634

 
$

 
$

 
$
2,634

Money market securities
959

 

 

 
959

Total deferred compensation plan assets
$
3,593

 
$

 
$

 
$
3,593


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Table of Contents

April 1, 2017
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market securities
$
22,395

 
$

 
$

 
$
22,395

Commercial paper

 
4,945

 

 
4,945

Total cash equivalents
$
22,395

 
$
4,945

 
$

 
$
27,340

Short term investments - available for sale:
 
 
 
 
 
 
 
Commercial paper
$

 
$
5,743

 
$

 
$
5,743

Total short-term investments - available for sale
$

 
$
5,743

 
$

 
$
5,743

Forward purchase or (sale) contracts:
 
 
 
 
 
 
 
Japanese Yen
$

 
$
9

 
$

 
$
9

New Taiwan Dollar

 
20

 

 
20

Korean Won

 
39

 

 
39

Euro

 
(96
)
 

 
(96
)
British Pound

 
16

 

 
16

Chinese Renminbi

 
(5
)
 

 
(5
)
Singapore Dollar

 
(1
)
 

 
(1
)
Total forward contracts
$

 
$
(18
)
 
$

 
$
(18
)
Deferred compensation plan assets:*
 
 
 
 
 
 
 
Mutual funds and exchange traded funds
$
845

 
$

 
$

 
$
845

Money market securities
2,213

 

 

 
2,213

Total deferred compensation plan assets
$
3,058

 
$

 
$

 
$
3,058

*These investments represent assets held in trust for the deferred compensation plan
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 30, 2017 and April 1, 2017 were utilized to calculate fair values.
During the first three quarters of 2018 and 2017, there were no transfers between Level 1, 2 or 3 assets.
Investments
The Company’s investments, other than money market securities for which there is no unrealized gain or loss, at December 30, 2017 and April 1, 2017 were as follows (in thousands): 
 
 
 
Unrealized
 
 
December 30, 2017
Cost
 
Gain
 
Loss
 
Fair Value
Available-for-sale securities (current):
 
 
 
 
 
 
 
U.S. treasury fund
$
10,465

 
$

 
$
(18
)
 
$
10,447

Commercial paper
28,322

 

 

 
28,322

Corporate Bonds
2,205

 

 
(1
)
 
2,204

Total investments (current)
$
40,992

 
$

 
$
(19
)
 
$
40,973

Available-for-sale securities (non-current):
 
 
 
 
 
 
 
Mutual funds, exchange traded funds and money market securities*
$
3,322

 
$
271

 
$

 
$
3,593

Total investments (non-current)
$
3,322

 
$
271

 
$

 
$
3,593

 
 
 
Unrealized
 
 
April 1, 2017
Cost
 
Gain
 
Loss
 
Fair Value
Available-for-sale securities (current):
 
 
 
 
 
 
 
Commercial paper
$
10,688

 
$

 
$

 
$
10,688

Total investments (current)
$
10,688

 
$

 
$

 
$
10,688

Available-for-sale securities (non-current):
 
 
 
 
 
 
 
Mutual funds, exchange traded funds and money market securities*
$
2,974

 
$
84

 
$

 
$
3,058

Total investments (non-current)
$
2,974

 
$
84

 
$

 
$
3,058

*These investments represent assets held in trust for the deferred compensation plan

11

Table of Contents

For purposes of determining gross realized gains and losses and reclassification out of accumulated other comprehensive income (loss), 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 (loss) were insignificant as of December 30, 2017 and April 1, 2017.
4. Trade Accounts Receivable
Trade accounts receivable consisted of the following:
(In thousands)
Dec 30, 2017
 
Apr 1, 2017
Current trade accounts receivable, net
$
75,674

 
$
40,494

Non-current trade accounts receivable
65

 
489

 
$
75,739

 
$
40,983

Non-current trade accounts receivable are included in Other assets in the Condensed Consolidated Balance Sheets.
5. Inventories
Inventories are principally valued at standard cost, which approximates the lower of cost or net realizable value on a first-in, first-out basis. Components of inventories were as follows:
(In thousands)
Dec 30, 2017
 
Apr 1, 2017
Raw materials and purchased parts
$
50,720

 
$
41,383

Work-in-process
18,737

 
13,829

Finished goods
5,045

 
3,730

 
$
74,502

 
$
58,942

6. Other Assets
Other assets consisted of the following:
(In thousands)
Dec 30, 2017
 
Apr 1, 2017
Demo and leased equipment, net
$
8,636

 
$
11,011

Long term deposits and non-trade receivables
2,620

 
2,872

Non-current restricted cash
1,087

 
1,090

Non-current deferred income taxes, net
827

 
890

Other non-current assets
4,169

 
3,958

 
$
17,339

 
$
19,821

Depreciation expense for demo and leased equipment totaled $0.6 million in the third quarter of 2018 and $0.1 million in the third quarter of 2017. For the three fiscal quarters ended December 30, 2017 depreciation expense for demo and leased equipment totaled $0.8 million compared to $0.3 million for the three fiscal quarters ended December 31, 2016. Of the total $8.6 million and $11.0 million of demo and leased equipment at December 30, 2017 and April 1, 2017, $4.1 million and $1.1 million were leased assets at customer sites generating revenue.
Included in Other non-current assets are long-term investments held in a trust for the deferred compensation plan, non-current trade accounts receivable and other items.


12

Table of Contents

7. Accrued Liabilities
Accrued liabilities consisted of the following:
(In thousands)
Dec 30, 2017
 
Apr 1, 2017
Payroll-related liabilities
$
12,841

 
$
6,335

Customer deposits
11,431

 
1,242

Product warranty accrual
4,506

 
3,394

Purchase order commitments and receipts
3,014

 
2,522

Restructuring costs payable
2,608

 
4,996

Professional fees payable
832

 
734

Current portion, long-term debt
415

 
434

Other current liabilities
4,744

 
2,529

 
$
40,391

 
$
22,186

Included in other current liabilities above are accrued amounts for value-added taxes, income taxes, freight, and other similar items.
8. Product Warranty
The following is a reconciliation of the changes in the aggregate product warranty accrual:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands)
Dec 30, 2017
 
Dec 31, 2016
 
Dec 30, 2017
 
Dec 31, 2016
Product warranty accrual, beginning
$
7,156

 
$
5,521

 
$
5,474

 
$
5,734

Warranty charges incurred, net
(3,273
)
 
(1,674
)
 
(8,384
)
 
(4,988
)
Provision for warranty charges
5,067

 
1,064

 
11,860

 
4,165

Product warranty accrual, ending
$
8,950

 
$
4,911

 
$
8,950

 
$
4,911

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. Of the total of $9.0 million and $4.9 million of product warranty accruals as of December 30, 2017 and December 31, 2016, $4.5 million and $0.8 million were non-current and were included in Other liabilities on the Condensed Consolidated Balance Sheets.
9. Deferred Revenue
Generally, revenue is recognized upon fulfillment of acceptance criteria at the Company's factory and transfer of risk of loss and title. Revenue is deferred whenever title transfer is pending, risk of loss has not transferred, and/or acceptance criteria have not yet been fulfilled. Deferred revenue arises from, among other factors, sales to Japanese customers, shipments of substantially new products and shipments with custom specifications and other acceptance criteria where the Company cannot demonstrate a track record of acceptance. For sales involving multiple element arrangements, the relative selling price of any undelivered elements, including installation services and similar items, 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 30, 2017
 
Dec 31, 2016
 
Dec 30, 2017
 
Dec 31, 2016
Deferred revenue, beginning
$
15,616

 
$
11,583

 
$
15,397

 
$
7,685

Revenue deferred
51,191

 
9,075

 
66,661

 
28,547

Revenue recognized
(54,420
)
 
(9,440
)
 
(69,671
)
 
(25,014
)
Deferred revenue, ending
$
12,387

 
$
11,218

 
$
12,387

 
$
11,218


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Of the total of $12.4 million and $11.2 million of deferred revenue at December 30, 2017 and December 31, 2016, $0.4 million and $0.4 million were non-current and were included in Other liabilities on the Condensed Consolidated Balance Sheets.
10. Long-term Debt
On January 9, 2017, ESI Leasing, LLC (ESI Leasing), a wholly owned subsidiary of the Company, entered into a loan agreement (Loan Agreement) with First Technology Federal Credit Union (Lender). The Loan Agreement provides for a term loan from the Lender to ESI Leasing in the principal amount of $14 million (Loan). The interest rate of the Loan is fixed at 4.75% per annum, except that it may be increased if certain covenants under the Loan Agreement are not satisfied and after and during the continuation of an “Event of Default” as defined in the Loan Agreement. The Loan amortizes over a period of approximately 20 years, with the outstanding principal maturing and becoming due on January 1, 2027. ESI Leasing pays monthly principal and interest payments on the Loan totaling $1.1 million annually through the maturity of the Loan. The Company unconditionally guarantees the Loan. The Company is required to maintain certain deposits with the Lender through March 31, 2019, at which point the restriction will be removed as long as we are in compliance with certain minimum covenants.
The principal maturities for each of the upcoming calendar twelve-month periods ending on December 30 are as follows:
(In thousands)
2018
 
2019
 
2020
 
2021
 
2022
Principal maturities
$
449

 
$
471

 
$
492

 
$
518

 
$
543

Total debt outstanding on the Loan Agreement were as follows:
(In thousands)
Dec 30, 2017
 
Apr 1, 2017
Total debt outstanding
$
13,290

 
$
13,923

Less: Current portion, long-term debt
(415
)
 
(434
)
Long-term debt
$
12,875

 
$
13,489

Deferred debt issuance costs related to the above long-term debt as of December 30, 2017 and April 1, 2017 were $311 thousand and $337 thousand, respectively.
11. Revolving Credit Facility
The Company is party to a loan and security agreement (Credit Facility) with Silicon Valley Bank (SVB), which was initially entered into on March 20, 2015 and amended on July 12, 2016. The Credit Facility provides for a senior secured asset-based revolving facility with availability up to $30.0 million, including a $15.0 million sublimit for letters of credit. In the fourth quarter of fiscal 2017, the Company amended and extended the Credit Facility by one year. With this extension, the Credit Facility expires March 20, 2019. At December 30, 2017, the Company had no amounts outstanding under the Credit Facility, was in compliance with all covenants, and was not in default under the Credit Facility. The commitment fee on the amount of unused credit was 0.3 percent. As amended, the Credit Facility allows for a greater level of EBITDA losses, but reduces the level of permitted acquisitions and purchases of capital equipment. If the Company fails to meet the covenants in its Credit Facility or its lenders fail to fund, access to the facility may be limited or the facility may become unavailable altogether.
12. Commitments & Contingencies
The Company mitigates credit risk by transacting with highly rated counterparties for foreign exchange contracts, letters of credit and other transactions where counterparty risk is a factor. The Company has evaluated the non-performance risks associated with the Company's lenders and other parties and believes them to be insignificant.
From time to time the Company may be party to litigation arising in the normal course of business. Currently, the Company is not party to any litigation it believes would have a material adverse effect on the Company's financial position, results of operations or cash flows.


14

Table of Contents

13. Shareholders’ Equity
Share Repurchase Program
In December 2011, the Board of Directors authorized a 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, acceptable share price and other factors. The Company did not repurchase any shares during fiscal 2017 or the first three quarters of 2018. There is no expiration date for the repurchase program.
14. Accumulated Other Comprehensive Income (Loss)
The following is a reconciliation of the changes in accumulated other comprehensive income (AOCI):
 
Foreign currency translation adjustment
 
Accumulated other comprehensive income related to benefit plan obligation
 
Net unrealized loss on available-for-sale securities
 
Total
Balance at April 1, 2017
$
(1,242
)
 
$
45

 
$
(17
)
 
$
(1,214
)
Other comprehensive income (loss) before reclassifications and taxes
961

 
20

 
(18
)
 
963

Amounts reclassified from AOCI

 

 

 

Tax effect
8

 
(7
)
 

 
1

Other Comprehensive income (loss)
969

 
13

 
(18
)
 
964

Balance at December 30, 2017
$
(273
)
 
$
58

 
$
(35
)
 
$
(250
)
15. Share-Based Compensation
The Company's share-based compensation consists of stock-settled stock appreciation rights (SARs), restricted stock unit awards with a service condition (time-based RSUs), restricted stock unit awards with a performance condition (performance-based RSUs), restricted stock unit awards with a market performance condition (market-based RSUs) and an employee stock purchase plan.
The Company recognizes expense related to the fair value of SARs and the 1990 Employee Stock Purchase Plan (ESPP) using the Black-Scholes model to estimate the fair value of awards on the date of grant. The fair value of time-based and performance-based restricted stock units (RSUs) are measured on the grant date based on the market value of the Company's common stock. The market-based RSUs must achieve the total shareholder return (TSR) measures in order for the awards to vest, and the grant date fair value of the awards is calculated using a Monte Carlo simulation model.
Except for performance-based RSUs, the Company recognizes compensation expense for all share-based compensation awards, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Expense for performance-based RSUs is recognized based on the probability of achievement of the performance criteria. The compensation cost for market-based RSUs is recognized over the related service period, even if the market condition is never satisfied. The impact of adjustments related to awards where the requisite service period was not completed is reflected as an offset to current period shared-based compensation expense.
The Company granted a total of 442,400 time-based RSUs and 222,400 market-based RSUs during the first three quarters of 2018, but did not grant any SARs or performance-based RSUs. Grants for the third quarter of 2018 consisted of 46,000 time-based RSUs and 25,000 market-based RSUs.

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Table of Contents

Share-based compensation expense under the stock incentive plans is included in the Company’s Condensed Consolidated Statements of Operations as follows:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands)
Dec 30, 2017
 
Dec 31, 2016
 
Dec 30, 2017
 
Dec 31, 2016
Cost of sales
$
64

 
$
142

 
$
208

 
$
398

Selling, general and administrative
498

 
1,391

 
2,629

 
3,573

Research, development and engineering
151

 
285

 
484

 
656

Total share-based compensation expense
$
713

 
$
1,818

 
$
3,321

 
$
4,627

The Company does not have any capitalizable share-based compensation costs for the three fiscal quarters ended December 30, 2017 and December 31, 2016, respectively. As of December 30, 2017, the Company had $8.0 million of total unrecognized share-based compensation costs, net of estimated forfeitures, which are expected to be recognized over a weighted average period of 2.3 years.
16. Product and Geographic Information
Operating segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker (CODM) in deciding how to allocate resources and in assessing performance. The Company's CODM is its Chief Executive Officer (CEO).
The Company and its consolidated subsidiaries operate in a single segment, defined as a manufacturer of high-technology microfabrication and related equipment. This segment sells products into a variety of end markets that are grouped into four major categories for the purpose of providing an understanding of the principal end markets for the products manufactured by the Company, specifically: 1) Printed Circuit Board (PCB), 2) Component Test, 3) Semiconductor, and 4) Industrial Machining.
The following table presents net sales information by the four major market categories addressed by the Company's single segment:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands)
Dec 30, 2017
 
Dec 31, 2016
 
Dec 30, 2017
 
Dec 31, 2016
Printed Circuit Board
$
83,799

 
$
15,987

 
$
179,658

 
$
60,432

Component Test
7,473

 
5,407

 
23,331

 
14,999

Semiconductor
12,351

 
6,690

 
31,116

 
21,521

Industrial Machining
7,217

 
5,695

 
20,386

 
14,153

Net Sales
$
110,840

 
$
33,779

 
$
254,491

 
$
111,105

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 30, 2017
 
Dec 31, 2016
 
Dec 30, 2017
 
Dec 31, 2016
Asia
$
103,069

 
$
26,015

 
$
233,685

 
$
92,184

Americas
2,431

 
6,210

 
9,537

 
11,464

Europe
5,340

 
1,554

 
11,269

 
7,457

Net Sales
$
110,840

 
$
33,779

 
$
254,491

 
$
111,105

17. Restructuring and Cost Management Plans
2017 Corporate Restructuring:
In the fourth quarter of 2017, the Company initiated a restructuring plan to improve business effectiveness and streamline operations to achieve a stated target profit level for the Company as a whole. As a part of the restructuring plan, the management team was reorganized from a business unit to a functional structure; the Company closed facilities in Montreal, Canada; Napa, California; and Sunnyvale, California; the Company discontinued certain products; and the Company made select reductions in headcount across the Company. Actions under this plan were completed as of the end of the third fiscal quarter of 2018.
Total expenses related to the plan were $17.2 million in the first three quarters of 2018 and $7.6 million in the fourth quarter of 2017. Included in the 2018 expenses are approximately $13.3 million of charges, all incurred in the first and second

16

Table of Contents

quarters of 2018, impacting gross margins primarily related to impairment of other assets and inventory stemming from the product portfolio program reviews. Operating expense charges included $2.5 million of facilities and fixed assets charges related to streamlining facilities and discontinued products and $1.3 million of employee severance and related costs. Restructuring costs of $0.7 million incurred in the third quarter of 2018 were primarily related to the employee severance and related costs to a departed executive. Product portfolio reviews are complete as of the end of third quarter of 2018. The impacts of the decisions made in the portfolio reviews involve the use of certain estimates. Actual results could differ from those estimates and result in additional charges.
The following table presents the total expected restructuring costs as of December 30, 2017 (in thousands):
 
Total Expected Costs for the Plan
 
Costs Recognized from inception of the plan through the Quarter ended Dec 30, 2017
 
Remaining Costs to be Recognized Subsequent to Dec 30, 2017
Employee severance and related personnel costs
$
4,872

 
$
4,872

 
$

Site closure costs
1,714

 
1,714

 

Current asset impairments and other gross profit charges(1)
14,947

 
14,947

 

Non-current asset impairments
3,032

 
3,032

 

Other costs
239

 
239

 

Total
$
24,804

 
$
24,804

 
$

(1) Current asset impairments include inventory charges recorded in cost of sales.
The following table presents the amounts payable related to the 2017 Corporate Restructuring (in thousands):
 
Employee severance and related personnel costs
 
Site closure costs
 
Current asset impairments and other gross profit charges(1)
 
Non-current asset impairments
 
Other Costs
 
Total
Balance as of April 2, 2016
$

 
$

 
$

 
$

 
$

 
$

Costs incurred
3,588

 
888

 
1,669

 
1,376

 
66

 
7,587

Cash payments
(341
)
 

 

 

 
(66
)
 
(407
)
Non-cash items

 

 
(1,669
)
 
(1,376
)
 

 
(3,045
)
Balance as of April 1, 2017
$
3,247

 
$
888

 
$

 
$

 
$

 
$
4,135

Costs incurred
1,284

 
824

 
13,278

 
1,657

 
175

 
17,218

Cash (payments) receipts
(3,788
)
 
(1,389
)
 
(1,750
)
 
32

 
(175
)
 
(7,070
)
Non-cash items

 

 
(10,876
)
 
(1,689
)
 

 
(12,565
)
Balance as of December 30, 2017
$
743

 
$
323

 
$
652

 
$

 
$

 
$
1,718

(1) Asset and facilities costs include inventory charges recorded in cost of sales.
Other restructuring plans:
The Company's previously disclosed restructuring plans are largely complete. Net restructuring costs related to these plans were $0.4 million in 2018 and $0.4 million in 2017. Please see Note 26: Restructuring and Cost Management Plans to the Company’s financial statements included in its Annual Report on Form 10-K for the fiscal year ending April 1, 2017. The amounts payable of $0.9 million at December 30, 2017 are expected to be future cash outflows, primarily relating to facility costs to be paid through the end of calendar 2018. The Company does not expect to incur additional expenses related to these plans.
The following table presents the amounts related to restructuring costs payable (in thousands):
Restructuring & cost management amounts payable as of April 2, 2016
$
757

Cash payments and other adjustments
(297
)
Costs incurred
401

Restructuring & cost management amounts payable as of April 1, 2017
861

Cash payments and other adjustments
(380
)
Costs incurred
409

Restructuring & cost management amounts payable as of December 30, 2017
$
890


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Table of Contents

Overall restructuring reserve:
As of December 30, 2017, and April 1, 2017, the amount of unpaid restructuring costs included in accrued liabilities on the Consolidated Balance Sheets were $2.6 million and $5.0 million, respectively. Included in the payable balance are amounts for severance and employee benefits, asset retirement obligation and net lease commitments.
18. Income Taxes
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law in the U.S. on December 22, 2017. The Tax Act includes various changes to the tax law, including a permanent reduction in the corporate income tax rate. The Company recognized the estimated effects of the changes in the tax rate and laws resulting from the Tax Act during the quarter ended December 31, 2017.
The Tax Act reduces the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Company’s federal statutory rate for the fiscal year ending March 31, 2018 is a blended rate based on the weighting of pre- and post-Tax Act rates and will be 21% for future fiscal years.
Deferred tax assets and liabilities are remeasured at the new rates; however, given a full valuation allowance against net deferred tax assets, the expense arising from the re-measurement of deferred tax assets and liabilities is fully offset by an equivalent adjustment to our existing valuation allowance, resulting in no net impact to tax expense.
The Tax Act imposes a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiaries’ earnings. Based on the information available as of December 31, 2017, the Company estimated undistributed foreign earnings of approximately $43 million. The taxable income arising from this deemed repatriation is expected to be fully offset by the utilization of net operating loss carryforwards and other tax credits, offset by changes in the valuation allowance, resulting in no net impact to tax expense.
The Tax Act also includes a base erosion and anti-abuse tax (BEAT), applicable to corporations with annual gross receipts of at least $500M for the prior 3-years, which requires U.S. multinationals making “excessive” deductible payments to their foreign affiliates to pay a 10 percent tax on their income without those deductions, after a one-year, 5 percent transition rate. Further the Tax Act imposes a tax on global intangible low-taxed income (GILTI) on controlled foreign corporations’ aggregate net income over a 10% benchmark return on qualified business asset investment less interest expense. We have not evaluated the impacts of these provisions at this time nor have we elected whether to treat the impacts of GILTI as a period expense or as a deferred tax item.
We continue to evaluate the impact the new legislation will have on our financial position, results of operations, and cash flows. We expect additional technical guidance from the Department of Treasury, possibly up through the date of the Company’s tax return filings. Additionally, the FASB has proposed new accounting guidance regarding the treatment of the impact of the Tax Act on items recorded within accumulated other comprehensive income (loss), but this guidance has not been finalized. The Securities and Exchange Commission Staff Accounting Bulletin No. 118 allows the use of provisional amounts if accounting for the income tax effects of the Act has not been completed when the Company’s financial statements are issued. This measurement period may extend no longer than one year.
While we believe the net impact on the 2018 effective tax rate and tax expense is not material due to our existing net operating loss carryforwards and other tax credits, rule-making and the Company’s assessment remains ongoing. Therefore, the final impact of the Tax Reform may differ due to changes in interpretations, assumptions and that we are not able to fully quantify the impact on our financial position, results of operations, and cash flows at this time. Provisional amounts will be adjusted during the measurement period as accounting for the income tax effects of the Act is completed and the rules and technical guidance are finalized.

18

Table of Contents

19. Earnings (Loss) Per Share
The following is a reconciliation of weighted average shares outstanding used in the calculation of basic and diluted earnings (loss) per share:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands, except per share data)
Dec 30, 2017
 
Dec 31, 2016
 
Dec 30, 2017
 
Dec 31, 2016
Net income (loss)
$
33,973

 
$
(9,693
)
 
$
41,135

 
$
(19,486
)
Weighted average shares used for basic earnings per share
34,224

 
32,919

 
33,839

 
32,379

Incremental diluted shares
1,786

 

 
1,723

 

Weighted average shares used for diluted earnings per share
36,010

 
32,919

 
35,562

 
32,379

Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.99

 
$
(0.29
)
 
$
1.22

 
$
(0.60
)
Diluted
$
0.94

 
$
(0.29
)
 
$
1.16

 
$
(0.60
)
Awards of options, SARs and RSUs representing an additional 0.1 million and 2.8 million shares of stock for the third quarter of 2018 and 2017, respectively, and 0.4 million and 2.5 million shares of stock for the first three quarters of 2018 and 2017, respectively, were not included in the calculation of diluted net earnings per share because their effect would have been antidilutive.
20. Business Acquisitions
Fiscal 2017
On August 1, 2016, the Company acquired all of the outstanding shares of Visicon Technologies, Inc. (Visicon), a leading supplier of high-accuracy and high-throughput measurement and defect detection systems based in Napa, California. The consideration under the merger agreement is subject to adjustment for indebtedness, seller's transaction expenses, working capital and other items.
Based on closing working capital levels and other adjustments, the Company paid $2.0 million in cash and issued 603,939 shares of ESI common stock, valued at approximately $4.2 million. The value of the common stock was based on the closing price of stock on August 1, 2016. A portion of the shares issued in connection with the agreement were reserved in escrow to serve as a source of payment for any purchase price adjustments or indemnity claims by the Company. The sellers have contractually agreed to limitations on the sale of the shares of common stock they received in connection with the sale of Visicon; specifically, no shares could be sold for six months following closing, after which twenty-five percent of the shares become salable each quarter thereafter. The shares issued as a part of this merger represented a non-cash investing activity of $4.2 million.
The Company finalized the valuation of assets acquired, liabilities assumed, and consideration in the first quarter of 2018. The amounts shown below represent the fair value of the associated assets acquired, liabilities assumed and consideration transferred as of the acquisition date. The total estimated purchase price of $6.2 million, net of cash acquired, was allocated to the underlying assets acquired and liabilities assumed based on estimated fair value, as shown in the following table:
(In thousands)
 
Accounts receivable
$
391

Inventory
982

Prepaid expense and other current assets
116

Property, plant and equipment
737

Acquired intangibles
3,300

Goodwill
2,626

Other assets
26

Accounts payable and other accrued liabilities
(1,952
)
Total purchase price, net of cash acquired
$
6,226

The acquisition provided the Company with a portfolio of standalone defect detection systems for the medical device and consumer electronics markets. In addition to a standalone product portfolio and associated value streams, the acquisition provided complementary technology for integrated verification of laser machining, to allow the Company to expand its presence into the medical device market, present an opportunity for enhanced vertical integration and result in synergies with the Company's current consumer electronics customer base.
None of the goodwill is deductible for tax purposes. The acquired intangible assets consisted primarily of approximately $2.1 million of developed technology. Identified intangible assets are expected to be amortized over their useful lives of one to six years.
The operating results of the acquired entity 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 Visicon as it is not material to the Company’s operations and financial position.
Fiscal 2015
The Company acquired all of the outstanding shares of Wuhan Topwin Optoelectronics Technology Co., Ltd. (Topwin), a Chinese manufacturer of laser-based systems. In connection with this acquisition, the Company issued 145,442 shares and treated that as compensation to an employee of the Company who was previously an owner of Topwin. The compensation expense was recognized over the service period and from acquisition through the third quarter of fiscal 2018, the Company has recognized $1.7 million in share-based compensation expense related to this acquisition. Share-based compensation expense recognized in 2018 was $0.2 million, all incurred in the first quarter.

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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”, “projects”, “anticipates,” “plan,” “continue,” “could,” “estimates,” “intends,” “should,” “will,” “may” and similar words, constitute forward-looking statements that are subject to a number of risks and uncertainties. Forward looking statements include any statements regarding anticipated sales, gross margins, our profitability in future periods, sources of our future revenue, the effect of new guidance on revenue recognition, the effect of our adoption of accounting pronouncements or standards, our ability to complete our corporate restructuring in a timely manner and implement our new functional structure, our expectation of restructuring costs, the expected benefits of our acquisition of Visicon, future impairment of goodwill, future anticipated net warranty costs, our products’ ability to satisfy the needs of manufacturers, our relationships with suppliers and customers, trends that drive increases in applications for laser processing, the size and growth of our markets, our growth of foreign operations, our intent to reinvest foreign earnings, the effect on our business of new United States tax legislation and any deemed repatriation of our foreign earnings, our customer concentrations, overseas production capabilities, our ability to maintain and expand our core technologies and product applications, the adequacy of our liquidity and financing, our ability to resolve legal proceedings, our expectation that we will invest in new product development and enhancements, and working capital requirements and resources. From time to time, we may make other forward-looking statements. Investors are cautioned that such forward-looking statements involve estimates, assumptions, risks, and uncertainties and are subject to an inherent risk that actual results may differ materially. Factors that may cause or contribute to differences include those discussed below in Item 1A Risk Factors.
Overview of Business
Electro Scientific Industries, Inc. and its subsidiaries (ESI, we, our, or the Company) is a leading supplier of innovative laser-based microfabrication solutions for industries reliant on microtechnologies. ESI enables its customers to commercialize technology using precision laser processes. ESI's solutions produce the industry's highest quality and throughput, and targets the lowest total cost of ownership. Founded in 1944, ESI is headquartered in Portland, Oregon, with global operations and subsidiaries in Asia, Europe and North America.
Laser microfabrication is comprised of a set of precise micron-level processes, including drilling, scribing, dicing, singulation, cutting, ablating, trimming, and precision marking on multiple types of materials. These processes require application-specific laser systems that are able to meet our customers’ exacting performance and productivity requirements. Our laser-based systems are utilized in the production of flexible and rigid printed circuit board (PCB), semiconductor devices, advanced semiconductor packaging, consumer electronics, electronic sensors, touch-panel glass, flat panel liquid crystal displays (LCDs), organic light emitting diode (OLEDs) displays applications within the automotive, aerospace, medical and display end markets as well as other high-value components and devices to enable functionality, increase performance and improve production yields.
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.
The third quarter of 2018 ended December 30, 2017, the second quarter of 2018 ended September 30, 2017, and the third quarter of 2017 ended December 31, 2016 were all 13-week periods. Similarly, the three quarters ended December 30, 2017 and the three quarters ended December 31, 2016 each consisted of 39-week periods.

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Results of Operations

Third Quarter 2018 Highlights:

Orders at the highest level in over ten years in the third quarter of 2018 at $134.0 million, growing 204% over the third quarter of 2017. These levels are driven by orders for our laser drilling products, which more than quadrupled versus a year ago on demand from consumer electronics manufacturers. We believe these order levels reflect:

An overall strong market environment
Flexible PCB manufacturers ramping capacity due to unit growth of consumer electronics devices and more flexible circuit content per device
Adoption of new materials and technologies driving incremental capacity
Increased capacity spend by MLCC manufacturers driven by the strong global economy and the growth in consumer electronics, automotive and radio frequency (RF) end markets.
A healthy semiconductor capital spending environment

Total net sales increased by 228% year-over-year to $110.8 million in the third quarter of 2018, due to order levels. Backlog increased by $27.6 million during the quarter to $146.2 million.
Operating expenses of $19.9 million decreased by $1.6 million year-over-year on lower costs due to the corporate restructuring announced in February 2017, partially offset by higher variable expenses related to higher revenues and improved profitability.
Net income was $0.94 per diluted share, compared to a loss of $0.29 per share a year ago, on higher sales and gross profit combined with lower operating expenses.
Operating cash flow was $15.1 million, compared to a cash use of $3.7 million in the third quarter of 2017, on higher net income offset by higher working capital that resulted from our revenue growth.
Laser ablation assets were sold for $3.0 million in cash.
Third Quarter 2018 Ended December 30, 2017 Compared to Third Quarter 2017 Ended December 31, 2016
The following table presents results of operations data as a percentage of net sales:
 
Fiscal quarter ended
 
Dec 30, 2017
 
Dec 31, 2016
Net sales
100.0
%
 
100.0
 %
Cost of sales
52.0

 
66.1

Gross profit
48.0

 
33.9

Selling, general and administrative
10.0

 
39.3

Research, development and engineering
7.4

 
23.3

Acquisition and integration costs

 
0.1

Restructuring costs
0.6

 
1.0

Operating income (loss)
30.0

 
(29.8
)
Interest and other income, net
0.7

 
0.1

Total non-operating income
0.7

 
0.1

Income (loss) before income taxes
30.7

 
(29.7
)
Provision for (benefit from) income taxes

 
(1.0
)
Net income (loss)
30.7
%
 
(28.7
)%

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Net Sales
The following table presents net sales information by product group:
 
Fiscal quarter ended
  
Dec 30, 2017
 
Dec 31, 2016
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Printed Circuit Board
$
83,799

 
75.6
%
 
$
15,987

 
47.3
%
Component Test
7,473

 
6.8

 
5,407

 
16.0

Semiconductor
12,351

 
11.1

 
6,690

 
19.8

Industrial Machining
7,217

 
6.5

 
5,695

 
16.9

Net Sales
$
110,840

 
100.0
%
 
$
33,779

 
100.0
%
Net sales for the third quarter of 2018 of $110.8 million increased $77.1 million or 228% when compared to net sales for the third quarter of 2017.
Sales of products into the PCB market for the third quarter of 2018 increased $67.8 million or 424% compared to the third quarter of 2017. This was primarily driven by increased sales of our flex circuit drilling systems. The higher demand for flex drilling systems reflected a healthy market environment in 2018 compared to the very weak environment in the third quarter of 2017. The strong environment was driven by unit growth in consumer electronics and associated capacity additions plus new materials, technologies and applications that require increased levels of complex flexible circuits.
Sales of products into the Component Test market for the third quarter of 2018 increased $2.1 million or 38% compared to third quarter of 2017, primarily driven by increased use of MLCC components, particularly in consumer electronics and automotive applications, which require our tools for processing.
Sales of products into semiconductor applications for the third quarter of 2018 increased $5.7 million or 85% compared to the third quarter of 2017. This increase was primarily driven by sales of memory repair systems into the semiconductor industry, which had not occurred in the third quarter of 2017, customer acceptance which enabled revenue recognition on a unit of our new UltrusTM wafer scribing tool, as well as an increase in sales of our wafer mark and wafer trim products.
Sales of products into Industrial Machining applications for the third quarter of 2018 increased $1.5 million or 27% compared to the third quarter of 2017. This was primarily due to higher sales of our GarnetTM micromachining system into a PCB cutting application and increased service revenue.
The following table presents net sales information by geographic region:
 
Fiscal quarter ended
  
Dec 30, 2017
 
Dec 31, 2016
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Asia
$
103,069

 
93.0
%
 
$
26,015

 
77.0
%
Americas
2,431

 
2.2

 
6,210

 
18.4

Europe
5,340

 
4.8

 
1,554

 
4.6

Net Sales
$
110,840

 
100.0
%
 
$
33,779

 
100.0
%
Net sales to Asia increased by $77.1 million or 296% primarily due to higher sales of flex via drilling products. Net sales to Americas decreased due principally to lower sales of inspection products and laser ablation products. Europe sales increased due to higher wafer trim, circuit trim, and laser ablation product sales. We do not expect laser ablation sales to recur in the next quarters due to the sale of associated assets in the third quarter of 2018. Laser ablation comprised $1.0 million of current quarter sales and $1.9 million of prior year sales.

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Gross Profit
 
Fiscal quarter ended
  
Dec 30, 2017
 
Dec 31, 2016
(In thousands, except percentages)
Gross Profit
 
% of Net Sales
 
Gross Profit
 
% of Net Sales
Gross Profit
$
53,156

 
48.0
%
 
$
11,448

 
33.9
%
Gross profit was $53.2 million for the third quarter of 2018, an increase of $41.7 million compared to $11.4 million in the third quarter of 2017. The gross profit increase was primarily driven by higher net system sales, while the gross margin increase was primarily driven by favorable absorption of fixed costs on higher production volumes.
Operating Expenses
 
Fiscal quarter ended
  
Dec 30, 2017
 
Dec 31, 2016
(In thousands, except percentages)
Expense
 
% of Net Sales
 
Expense
 
% of Net Sales
Selling, general and administrative
$
11,040

 
10.0
%
 
$
13,280

 
39.3
%
Research, development and engineering
8,165

 
7.4

 
7,868

 
23.3

Restructuring costs
706

 
0.6

 
321

 
1.0

Acquisition and integration costs

 

 
31

 
0.1

Operating Expenses
$
19,911

 
18.0
%
 
$
21,500

 
63.7
%
Selling, general and administrative
Selling, general and administrative (SG&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. SG&A expenses for the third quarter of 2018 decreased $2.2 million compared to the third quarter of 2017. The decrease was primarily due to lower labor and facilities costs resulting from our corporate restructuring, partially offset by increased variable expenses due to higher revenues and improved profitability.
Research, Development and Engineering
Research, development and engineering (RD&E) expenses primarily comprise labor and other employee-related expenses, including share-based compensation expense, professional fees, project materials costs, equipment costs and facilities costs. RD&E expenses for the third quarter of 2018 increased $0.3 million compared to the third quarter of 2017, primarily due to increased compensation costs related to improved financial performance and to a lesser extent to increased labor costs related to investment in new products.
Restructuring and cost management plans
In the fourth quarter of 2017, we initiated a restructuring plan to improve business effectiveness, streamline operations and achieve a stated target profit level for the Company as a whole. The restructuring plan was largely complete by the end of the second quarter of 2018. However, we incurred restructuring costs of $0.7 million in the third quarter of 2018, which were severance payments made to a departed executive. See Note 17: Restructuring and Cost Management Plans for further discussion.
Non-operating Income and Expense
 
Fiscal quarter ended
  
Dec 30, 2017
 
Dec 31, 2016
(In thousands, except percentages)
Non-Operating (Expense)
Income
 
% of Net Sales
 
Non-Operating (Expense)
Income
 
% of Net Sales
Interest and other income, net
$
789

 
0.7
%
 
$
34

 
0.1
%
Total non-operating income
$
789

 
0.7
%
 
$
34

 
0.1
%
Non-operating income, net, consists of interest income and expense, market gains and losses on non-operating assets, realized and unrealized foreign exchange gains and losses, bank charges, investment management fees, and other miscellaneous non-operating items, such as investment impairment. Net non-operating income was $789 thousand in the third quarter of 2018 compared to income of $34 thousand in the third quarter of 2017. The increased income in the third quarter of 2018 was due

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primarily to a $0.9 million gain on the sale of our laser ablation assets partially offset by a $0.2 million charge taken as a result of a Value Added Tax (VAT) audit in Korea.
Income Taxes
On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act. The primary impact of the new tax legislation on our financial statements was the recognition of a $935 thousand discrete benefit related to the Alternative Minimum Tax (AMT) credits becoming refundable and the associated release of the valuation allowance against those credits. We do not expect other material net impacts on the Company's tax provision or annual effective tax rate, as long as the Company has a full valuation allowance in place as the expense arising from the re-measurement of deferred tax assets and liabilities is fully offset by an equivalent adjustment to the existing valuation allowance. Further, as it relates to the one-time transition tax, taxes on income arising from the deemed repatriation of foreign income are fully offset by historical net operating losses and credits.
 
Fiscal quarter ended
 
Dec 30, 2017
 
Dec 31, 2016
(In thousands, except percentages)
Income Tax Provision
 
Effective
Tax Rate
 
Income Tax Benefit
 
Effective
Tax Rate
Provision for (benefit from) income taxes
$
61

 
0.2
%
 
$
(325
)
 
3.2
%
The income tax provision for the third quarter of 2018 was $61 thousand on pretax income of $34.0 million for an effective tax rate of 0.2% and reflects increased foreign taxes related to higher profits largely offset by the discrete benefit described above. For the third quarter of 2017, the income tax benefit was $325 thousand on pretax loss of $10.0 million, for an effective tax rate of 3.2%. The 2017 benefit reflects a $0.4 million release of a previously unrecognized tax benefit resulting from the expiration of statute of limitation. The provision for taxes has not increased in proportion to the increase in pretax income due to the utilization of historical net operating losses currently subject to a valuation allowance and the mix of income subject to beneficial tax rates in certain jurisdictions.
Due to a history of losses, as of December 30, 2017, we maintain a full valuation allowance on our deferred tax assets. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Earnings in the third quarter of 2018 resulted in the utilization of a portion of our accumulated net operating loss carry-forwards. Given our current earnings levels and anticipated future earnings, we believe that there is a reasonable possibility that we will continue to utilize these tax assets, and within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. A release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded.
Three Quarters Ended December 30, 2017 Compared to Three Quarters Ended December 31, 2016
Results of Operations
The following table presents results of operations data as a percentage of net sales:
 
Three fiscal quarters ended
 
Dec 30, 2017
 
Dec 31, 2016
Net sales
100.0
%
 
100.0
 %
Cost of sales
58.3

 
61.1

Gross profit
41.7

 
38.9

Selling, general and administrative
13.9

 
35.0

Research, development and engineering
10.0

 
20.9

Acquisition and integration costs

 
0.3

Restructuring costs
1.6

 
0.3

Operating income (loss)
16.2

 
(17.7
)
Interest and other income, net
0.1

 
0.1

Total non-operating income
0.1

 
0.1

Income (loss) before income taxes
16.3

 
(17.5
)
Provision for (benefit from) income taxes
0.2

 

Net income (loss)
16.2
%
 
(17.5
)%

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Table of Contents

Net Sales
The following table presents net sales information by product group:
 
Three fiscal quarters ended
  
Dec 30, 2017
 
Dec 31, 2016
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Printed Circuit Board
$
179,658

 
70.6
%
 
$
60,432

 
54.4
%
Component Test
23,331

 
9.2

 
14,999

 
13.5

Semiconductor
31,116

 
12.2

 
21,521

 
19.4

Industrial Machining
20,386

 
8.0
%
 
14,153

 
12.7
%
Net Sales
$
254,491

 
100.0
%
 
$
111,105

 
100.0
%
Net sales for the first three quarters of 2018 increased $143.4 million or 129% from net sales for the first three quarters of 2017.
Sales of products into the PCB market for the first three quarters of 2018 increased $119.2 million or 197% compared to the first three quarters of 2017. This increase was primarily driven by increased demand for our flex drilling systems. The higher demand for flex drilling systems reflected a healthy manufacturing environment, as well as strong technology and market drivers, primarily in consumer electronics, compared to the unusually weak environment in the first three quarters of 2017.
Sales of products into the Component Test market for the first three quarters of 2018 increased $8.3 million or 56% compared to the first three quarters of 2017, primarily driven by stronger capacity buying by MLCC manufacturers, particularly for consumer electronics and automotive applications.
Sales of products into semiconductor applications for the first three quarters of 2018 increased $9.6 million or 45% compared to the first three quarters of 2017. The increase was primarily driven by higher sales of memory repair systems in 2018 compared to 2017, reflecting strength in the memory semiconductor market, and increased sales of semiconductor trim products. 2018 sales also included a unit of our new UltrusTM wafer scribing tool, which received customer acceptance in the third quarter.
Sales of products into Industrial Machining applications for the first three quarters of 2018 increased $6.2 million or 44% compared to the first three quarters of 2017. This was primarily due to higher GarnetTM system sales into industrial and PCB applications, and increased service revenue.
The following table presents net sales information by geographic region:
 
Three fiscal quarters ended
  
Dec 30, 2017
 
Dec 31, 2016
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Asia
$
233,685

 
91.8
%
 
$
92,184

 
83.0
%
Americas
9,537

 
3.7

 
11,464

 
10.3

Europe
11,269

 
4.4

 
7,457

 
6.7

Net Sales
$
254,491

 
100.0
%
 
$
111,105

 
100.0
%
Net sales in Asia increased to $233.7 million in the first three quarters of 2018, an increase of $141.5 million compared to $92.2 million in the first three quarters of 2017 primarily due to higher flex via drilling sales, but also due to higher sales of our MLCC test systems. Americas sales were $9.5 million in the first three quarters of 2018, a decrease of $1.9 million compared to $11.5 million in the first three quarters of 2017. This was primarily due to 2017 sales of our CornerStoneTM system which did not repeat in 2018, as we have discontinued selling the CornerStoneTM system in the first quarter of 2018.

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Gross Profit
 
Three fiscal quarters ended
  
Dec 30, 2017
 
Dec 31, 2016
(In thousands, except percentages)
Gross Profit
 
% of Net Sales
 
Gross Profit
 
% of Net Sales
Gross Profit
$
106,108

 
41.7
%
 
$
43,236

 
38.9
%
Gross profit was $106.1 million for the first three quarters of 2018, an increase of $62.9 million compared to the first three quarters of 2017. Gross profit increased primarily due to higher net sales and production volumes. Gross margin was 41.7% and 38.9% for the first three quarters of 2018 and 2017, respectively. Gross margins in 2018 benefited from favorable absorption of fixed costs due to higher production volumes, partially offset by $13.3 million of charges for the impairment of inventory and other assets related to discontinued products, as a result of our portfolio review and streamlining process.
Operating Expenses
 
Three fiscal quarters ended
  
Dec 30, 2017
 
Dec 31, 2016
(In thousands, except percentages)
Expense
 
% of Net Sales
 
Expense
 
% of Net Sales
Selling, general and administrative
$
35,496

 
13.9
%
 
$
38,917

 
35.0
%
Research, development and engineering
25,373

 
10.0

 
23,258

 
20.9

Restructuring costs
4,079

 
1.6

 
321

 
0.3

Acquisition and integration costs

 

 
366

 
0.3

Operating Expenses
$