Electro Scientific Industries, Inc.
Oct 27, 2010

ESI Announces Second Quarter Fiscal 2011 Results

Orders Grow 139% Year Over Year and 10% Sequentially

Electro Scientific Industries, Inc. (NASDAQ:ESIO), a leading supplier of innovative laser-based manufacturing solutions for the microtechnology industry, today announced results for its fiscal 2011 second quarter ended October 2, 2010. Financial measures are provided on both a GAAP and non-GAAP basis, which excludes the impact of purchase accounting, equity compensation and non-recurring items.

Revenue in the second quarter was $59.6 million, compared to $58.5 million in the first quarter of 2011 and $27.6 million in the same quarter one year ago. On a GAAP basis, net loss was $0.6 million or $0.02 per share, compared to net income of $0.2 million or $0.01 per diluted share in the prior quarter. On a non-GAAP basis, excluding the impact of purchase accounting, equity compensation and non-recurring items, second quarter net income was $2.9 million or $0.10 per diluted share, compared to net income of $0.8 million or $0.03 per diluted share in the first quarter.

"We saw excellent demand this quarter, with orders at $70 million. Solid revenue and improved gross margin yielded strong non-GAAP earnings," stated Nick Konidaris, president and CEO of ESI. For the first half of fiscal 2011, sales were $118 million, up 135% from the first half of last fiscal year.

Orders for the second quarter were $70.2 million, compared to $64.1 million in the prior quarter and up 139% from $29.3 million in the prior year's second quarter. Konidaris continued, "Our semiconductor and interconnect groups saw double-digit sequential order growth. We received orders from multiple customers in our DRAM repair business, including a large order from Hynix, and our flex circuit interconnect business had a record quarter." Revenues increased 2% sequentially driven by strong orders and reduction of backlog in the interconnect and micromachining business.

Gross margin for the quarter was 44%, the highest in over two years. Konidaris added, "We are pleased that our gross margins rebounded this quarter, on higher production levels and improved product mix."

Income tax expense for the quarter was $1.5 million, more than offsetting income before taxes of $0.9 million. The higher tax expense results in a year-to-date tax rate of approximately 32%, and is due to the timing of income between quarters and an increase in the expected annual level of income.

During the quarter ESI acquired the assets of PyroPhotonics Lasers Inc., a manufacturer of tailored-pulse fiber lasers based in Montreal, Canada. Konidaris stated, "We are enthusiastic about tailored-pulse technology and its capability. Tailored-pulse technology has provided significant differentiated value in our market-leading DRAM repair tools. In addition, PyroPhotonics will allow us to enter and strengthen our position across multiple markets and applications, including solar."

Balance Sheet and Cash Flow

At quarter end, cash and investments totaled $169.8 million. Cash used in operations was $1.9 million, reflecting higher inventory and receivables balances due to timing of shipments during the quarter.

Q3 2011 Outlook

Based on current business conditions, ESI expects revenues for the third quarter of fiscal 2011 in the mid-$60 million range. We expect the acquisition of PyroPhotonics will negatively impact earnings by two to three cents per share. As a result, non-GAAP earnings per share are expected to be $0.10 to $0.15 excluding the impact of purchase accounting, equity compensation and non-recurring items.

Konidaris concluded, "Our product portfolio and competitive position are strong. Our growth strategy is on track, as we work to expand our addressable market by introducing new breakthrough solutions in the semiconductor, LED, and advanced micromachining markets. I'm pleased with our progress toward building ESI into the established leader in the growing market of precision laser micromachining."

The company will hold a conference call today at 5:00 p.m. EDT. The session will include a review of the financial results, operational performance and business outlook, and also a question and answer period.

The conference call can be accessed by calling 888-419-5570 (domestic participants) or 617-896-9871 (international participants). The conference ID number is 94675422. A live audio webcast can be accessed at www.esi.com. Upon completion of the call, an audio replay will be accessible through November 7, 2010, at 888-286-8010 (domestic participants) or 617-801-6888 (international participants), passcode 17525614. The webcast will be available on ESI's website for one year.

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 financial measures exclude the impact of purchase accounting, equity compensation, restructuring costs, and non-recurring items. We believe that this presentation of non-GAAP financial measures allows investors to better 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 is a leading supplier of innovative laser-based manufacturing solutions for the microtechnology industry. Our systems enable precise structuring and testing of micron to submicron features in semiconductors, electronic devices, LEDs and other high-value components. We partner with our customers to make breakthrough technologies possible in the semiconductor, microelectronics and other emerging industries. Founded in 1944, ESI is headquartered in Portland, Ore., with global operations from the Pacific Northwest to the Pacific Rim. More information is available at www.esi.com.

Forward-Looking Statements

This press release includes forward-looking statements about the markets we serve, revenue, cash flow, growth, new products and markets, and earnings per share. These forward-looking statements are based on information available to us on the date of this release and we assume no obligation to update these forward-looking statements for any reason. Actual results may differ materially from those in the forward-looking statements. Risks and uncertainties that may affect the forward-looking statements 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 - which is dependent on many factors including component prices, global economic strength and political stability, and overall demand for electronic devices (such as capacitors, semiconductor memory devices and advanced electronic packages) used in wireless telecommunications equipment, computers and consumer and automotive electronics; the health of the financial markets and availability of credit for end customers and related effect on the global economy; the volatility associated with the semiconductor industry 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; the ability of the company to respond promptly to customer requirements; the risk that the company may not be able to ship products on the schedule required by customers, whether as a result of production delays, supply delays, or otherwise; the ability of the company 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; the company's need to continue investing in research and development; the company's ability to hire and retain key employees; the company's ability to create and sustain intellectual property protection around its products; risks related to the integration of the PyroPhotonics business; foreign currency fluctuations; the company's ability to utilize recorded deferred tax assets; taxes, interest or penalties resulting from tax audits; changes in tax laws or the interpretation of such tax laws; and future liquidity and valuation of auction rate securities.

 
Electro Scientific Industries, Inc.
                     
Second Quarter Fiscal 2011 Results
(In thousands, except per share data)
(Unaudited)
                     
                     
    Fiscal quarter ended   Two fiscal quarters ended
Operating Results:   Oct 2, 2010   Jul 3, 2010   Sep 26, 2009   Oct 2, 2010   Sep 26, 2009
Net sales   $

59,554
    $ 58,471     $ 27,638     $ 118,025     $ 50,241  
Cost of sales     33,553       36,998       18,212       70,551       34,854  
Gross profit     26,001       21,473       9,426       47,474       15,387  


Operating expenses:
                   

Selling, service and administration



    15,046       12,845       11,355       27,891      

23,326
 
Research, development and engineering     10,217       10,211       7,441      

20,428
      14,896  
Merger termination proceeds, net     -       -      

-
      -       (4,516 )


Net operating expenses
    25,263       23,056       18,796       48,319      

33,706
 
Operating income (loss)     738       (1,583

)
    (9,370 )     (845 )     (18,319 )
Non-operating income:                    
Interest and other income, net    

187
      58       357       245       699  
Total non-operating income     187       58       357       245       699  
Income (loss) before income taxes     925       (1,525 )     (9,013 )     (600 )     (17,620 )
Provision for (benefit from) income taxes     1,536      

(1,726
)     (2,893 )     (190 )     (5,970 )
Net (loss) income   $ (611 )   $ 201     $ (6,120 )   $ (410 )   $ (11,650 )
                     
Net (loss) income per share - basic   $ (0.02 )   $ 0.01    

$
(0.22 )  

$
(0.01 )  

$
(0.43 )
                     
Net (loss) income per share - diluted  

$
(0.02 )  

$
0.01     $ (0.22 )   $ (0.01 )   $ (0.43 )
 
Electro Scientific Industries, Inc.
             
Second Quarter Fiscal 2011 Results
(Amounts in thousands)
(Unaudited)
             
Financial Position As Of:   Oct 2, 2010   Jul 3, 2010   Apr 3, 2010
             
Assets            
Current assets:            
Cash and cash equivalents   $ 40,420   $ 54,225   $ 39,335
Restricted cash     10,769     10,824     10,824
Short-term investments     118,628     114,894     116,140
Total cash, restricted cash and investments     169,817     179,943     166,299
             
Trade receivables, net     46,388     33,482     38,061
Inventories     73,064     69,936     72,090
Shipped systems pending acceptance     6,285     3,412     4,106
Deferred income taxes, net     7,499     7,216     7,232
Other current assets     8,350     8,441     8,677
Total current assets     311,403     302,430     296,465
             
Non-current assets:            
Auction rate securities     5,215     4,630     5,021
Property, plant and equipment, net     39,575     39,732     40,590
Non-current deferred income taxes, net     32,909     33,984     31,079
Goodwill     4,014     -     -
Acquired intangible assets, net     10,895     7,734     8,255
Other assets     13,340     11,200     13,008
Total assets  

$
417,351   $

399,710
  $ 394,418
             
Liabilities and shareholders' equity            
Current liabilities:            
Accounts payable  

$
20,440   $

15,829
  $ 14,607
Accrued liabilities     22,683     18,554     14,937
Deferred revenue     16,373     10,591     13,193
Total current liabilities     59,496     44,974     42,737
             
Non-current income taxes payable     9,260     9,195     9,019
             
Shareholders' equity:            
Preferred and common stock    

147,785
    145,312    

142,369
Retained earnings    

199,076
    199,687    

199,486
Accumulated other comprehensive income    

1,734
    542    

807
Total shareholders' equity    

348,595
    345,541    

342,662
Total liabilities and shareholders' equity   $ 417,351   $ 399,710   $ 394,418
             
             


End of period shares outstanding
    28,072    

27,901
    27,665
 
Electro Scientific Industries, Inc.
                     
Analysis of Second Quarter Fiscal 2011 Results
(Dollars and shares in thousands)
(Unaudited)
                     
                     
    Fiscal quarter ended   Two fiscal quarters ended
    Oct 2, 2010   Jul 3, 2010   Sep 26, 2009   Oct 2, 2010   Sep 26, 2009
Sales detail:                    
                     
Semiconductor Group   $ 13,160     $ 19,057     $ 7,714     $ 32,217     $ 12,974  
                     
Components Group     13,304       18,803      

6,098
      32,107       11,248  
                     
Interconnect Micro-Machining Group     33,090       20,611       13,826       53,701       26,019  
                     
Total   $ 59,554     $ 58,471     $ 27,638     $ 118,025     $ 50,241  
                     
                     
                     
                     
Gross margin %     44 %     37 %     34 %     40 %     31 %
                     
Selling, service and administration expense %     25 %     22 %     41 %     24 %     46 %
                     
Research, development and engineering expense %     17 %     17 %     27 %     17 %     30 %
                     
Operating income (loss) %     1 %     (3 %)     (34 %)     (1 %)     (36 %)
                     
Effective tax rate %     166 %     113 %     32 %     32 %     34 %
                     
Average shares outstanding - basic     28,010       27,791       27,356       27,901       27,295  
                     
Average shares outstanding - diluted    

28,010
      28,212       27,356       27,901       27,295  
                     
End of period employees     627       597       569      

627
      569  
             
Electro Scientific Industries, Inc.
                     
Second Quarter Fiscal 2011 Results
(In thousands, except per share data)
(Unaudited)
                     
Reconciliation of GAAP to Non-GAAP Financial Measures:
             
    Fiscal quarter ended   Two fiscal quarters ended
    Oct 2, 2010   Jul 3, 2010   Sep 26, 2009   Oct 2, 2010   Sep 26, 2009
                     
Gross profit per GAAP   $ 26,001     $ 21,473     $ 9,426     $ 47,474     $ 15,387  


Add back:
                   
Purchase accounting included in cost of sales     289       289       289       578       578  
Equity compensation included in cost of sales     294       282       350       576       565  


Total non-GAAP adjustments to gross profit
    583       571       639       1,154      

1,143
 
Non-GAAP gross profit   $ 26,584     $ 22,044     $ 10,065     $ 48,628     $ 16,530  
Non-GAAP gross margin     44.6 %     37.7 %     36.4 %     41.2 %     32.9 %
                     
Operating expenses per GAAP   $ 25,263     $ 23,056     $ 18,796     $ 48,319     $ 33,706  


Less:
                   
Purchase accounting included in operating expenses:                    
Selling, service and administration     139       189       198       328       641  


Research, development and engineering
    36       36       36       72      

62
 
Subtotal - purchase accounting included in operating expenses     175       225       234      

400
      703  
Equity compensation included in operating expenses:                    
Selling, service and administration     1,638      

2,224
      1,460       3,862       3,238  
Research, development and engineering    

399
      377       337       776       651  
Subtotal - equity compensation included in operating expenses     2,037       2,601       1,797       4,638       3,889  
Acquisition costs (settlement proceeds) included in operating expenses:                
Selling, service and administration     280       (889 )    

-
      (609 )     -  


Subtotal - acquisition costs (settlement proceeds) included in operating expenses
    280       (889 )     -       (609 )     -  
Other non-recurring items included in operating expenses:                    
Merger termination proceeds, net    

-
      -       -       -       (4,516 )
Subtotal - other non-recurring items included in operating expenses     -       -      

-
      -       (4,516 )


Total non-GAAP adjustments to operating expenses
    2,492       1,937       2,031       4,429      

76
 
Non-GAAP operating expenses   $ 22,771     $ 21,119     $ 16,765     $ 43,890     $ 33,630  
                     
Operating income (loss) per GAAP   $

738
    $ (1,583 )   $ (9,370 )   $ (845 )   $ (18,319 )
Non-GAAP adjustments to gross profit     583       571       639      

1,154
      1,143  
Non-GAAP adjustments to operating expenses     2,492       1,937      

2,031
      4,429       76  
Non-GAAP operating income (loss)   $ 3,813     $ 925     $ (6,700 )   $ 4,738     $ (17,100 )
                     
Non-operating income, net per GAAP  

$
187     $ 58     $ 357     $ 245     $ 699  
Non-GAAP non-operating income   $ 187     $ 58     $ 357     $ 245     $ 699  
                     
Net (loss) income per GAAP   $ (611 )   $ 201     $ (6,120 )   $ (410 )   $ (11,650 )
Non-GAAP adjustments to gross profit     583      

571
      639       1,154       1,143  
Non-GAAP adjustments to operating expenses    

2,492
      1,937       2,031       4,429       76  
Income tax effect of non-GAAP adjustments     394       (1,941 )    

(406
)     (1,547 )     377  
Non-GAAP net income (loss)   $ 2,858     $ 768     $ (3,856 )   $ 3,626     $ (10,054 )
                     
Basic Non-GAAP net income (loss) per share   $ 0.10     $ 0.03     $ (0.14 )   $ 0.13     $ (0.37 )
                     
Diluted Non-GAAP net income (loss) per share   $ 0.10     $ 0.03     $ (0.14 )   $ 0.13     $ (0.37 )
         
Electro Scientific Industries, Inc.
                     
Second Quarter Fiscal 2011 Results
(Amounts in thousands)
(Unaudited)
                     
Consolidated Condensed Statements of Cash Flows:
 
    Fiscal quarter ended   Two fiscal quarters ended
    Oct 2, 2010   Jul 3, 2010   Sep 26, 2009   Oct 2, 2010   Sep 26, 2009
                     
Net (loss) income  

$
(611 )  

$
201     $ (6,120 )   $ (410 )   $ (11,650 )
Non-cash adjustments and changes in operating activities     (1,266 )     14,568       4,942       13,302      

9,561
 
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES     (1,877 )     14,769       (1,178 )     12,892       (2,089 )
                     
NET CASH USED IN INVESTING ACTIVITIES     (12,920 )     (198 )     (38,477 )     (13,118 )     (67,194 )
                     
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES     150       69       97       219       (116 )
                     
Effect of exchange rate changes on cash     842       250       375       1,092       1,152  
                     
NET CHANGE IN CASH AND CASH EQUIVALENTS     (13,805 )     14,890       (39,183 )     1,085       (68,247 )
                     
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     54,225       39,335       124,474       39,335       153,538  
                     
CASH AND CASH EQUIVALENTS AT END OF PERIOD   $ 40,420     $ 54,225     $ 85,291     $ 40,420     $ 85,291  

SOURCE: Electro Scientific Industries, Inc.

ESI
Brian Smith, 503-672-5760
smithb@esi.com