Electro Scientific Industries, Inc.
ELECTRO SCIENTIFIC INDUSTRIES INC (Form: 10-Q, Received: 11/07/2012 13:12:48)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended September 29, 2012

OR

 

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

For the transition period from             to            

Commission File Number: 0-12853

 

 

ELECTRO SCIENTIFIC INDUSTRIES, INC.

 

 

 

Oregon   93-0370304

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

13900 N.W. Science Park Drive, Portland,

Oregon

  97229
(Address of principal executive offices)   (Zip Code)

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

Registrant’s web address: www.esi.com

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

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

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

 

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

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

The number of shares outstanding of the Registrant’s Common Stock at October 31, 2012 was 29,395,318 shares.

 

 

 


Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

                PAGE NO.  

PART I. FINANCIAL INFORMATION

  

  Item 1.   

Financial Statements (Unaudited)

  
    

Condensed Consolidated Balance Sheets - at September 29, 2012 and March 31, 2012

     1   
    

Condensed Consolidated Statements of Operations - for the fiscal quarters ended September 29, 2012 and October 1, 2011

     2   
    

Condensed Consolidated Statements of Comprehensive Income - for the fiscal quarters ended September 29, 2012 and October 1, 2011

     2   
    

Condensed Consolidated Statements of Cash Flows - for the fiscal quarters ended September 29, 2012 and October 1, 2011

     3   
    

Notes to Condensed Consolidated Financial Statements

     4   
  Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     12   
  Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     21   
  Item 4.   

Controls and Procedures

     21   

PART II. OTHER INFORMATION

  

  Item 1.   

Legal Proceedings

     21   
  Item 1A.   

Risk Factors

     22   
  Item 4.   

Mine Safety Disclosures

     30   
  Item 6.   

Exhibits

     31   

SIGNATURES

     32   


Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In thousands)

   Sep 29, 2012      Mar 31, 2012  
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 70,956       $ 69,780   

Restricted cash

     22,269         22,269   

Short-term investments

     101,700         106,674   

Trade receivables, net of allowances of $443 and $390

     58,371         32,744   

Inventories

     79,318         68,055   

Shipped systems pending acceptance

     262         1,360   

Deferred income taxes, net

     9,046         10,021   

Other current assets

     4,539         4,060   
  

 

 

    

 

 

 

Total current assets

     346,461         314,963   

Non-current investments

     10,508         23,046   

Property, plant and equipment, net of accumulated depreciation of $105,144 and $101,716

     30,937         32,103   

Non-current deferred income taxes, net

     34,686         36,489   

Goodwill

     7,889         4,014   

Acquired intangible assets, net of accumulated amortization of $11,767 and $10,609

     12,714         8,332   

Other assets

     16,451         14,263   
  

 

 

    

 

 

 

Total assets

   $ 459,646       $ 433,210   
  

 

 

    

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY      

Current liabilities:

     

Accounts payable

   $ 30,559       $ 13,045   

Accrued liabilities

     27,824         21,635   

Deferred revenue

     9,456         10,751   
  

 

 

    

 

 

 

Total current liabilities

     67,839         45,431   

Non-current income taxes payable

     9,335         9,109   

Commitments and contingencies

     

Shareholders’ equity:

     

Preferred stock, without par value; 1,000 shares authorized; no shares issued

     —           —     

Common stock, without par value; 100,000 shares authorized; 29,391 and 28,970 issued and outstanding

     172,064         168,143   

Retained earnings

     209,615         210,021   

Accumulated other comprehensive income

     793         506   
  

 

 

    

 

 

 

Total shareholders’ equity

     382,472         378,670   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 459,646       $ 433,210   
  

 

 

    

 

 

 

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

 

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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Fiscal quarter ended     Two fiscal quarters ended  

(In thousands, except per share amounts)

   Sep 29, 2012      Oct 1, 2011     Sep 29, 2012     Oct 1, 2011  

Net sales

   $ 80,152       $ 81,884      $ 139,121      $ 158,930   

Cost of sales

     46,632         45,943        81,948        89,229   
  

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     33,520         35,941        57,173        69,701   

Operating expenses:

         

Selling, service and administration

     15,114         14,884        30,777        31,380   

Research, development and engineering

     10,527         10,742        20,061        21,976   

Legal settlement costs

     —           —          —          550   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net operating expenses

     25,641         25,626        50,838        53,906   
  

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     7,879         10,315        6,335        15,795   

Non-operating income (expense):

         

Gain on sale of previously impaired auction rate securities

     —           —          —          2,729   

Interest and other income (expense), net

     91         (406     (59     (543
  

 

 

    

 

 

   

 

 

   

 

 

 

Total non-operating income (expense)

     91         (406     (59     2,186   

Income before income taxes

     7,970         9,909        6,276        17,981   

Provision for income taxes

     2,759         1,372        2,009        3,531   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 5,211       $ 8,537      $ 4,267      $ 14,450   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income per share – basic

   $ 0.18       $ 0.30      $ 0.15      $ 0.51   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income per share – diluted

   $ 0.17       $ 0.29      $ 0.14      $ 0.49   
  

 

 

    

 

 

   

 

 

   

 

 

 

Weighted average number of shares – basic

     29,339         28,747        29,228        28,609   
  

 

 

    

 

 

   

 

 

   

 

 

 

Weighted average number of shares – diluted

     29,961         29,426        29,912        29,326   
  

 

 

    

 

 

   

 

 

   

 

 

 

Cash dividends paid per common share

   $ 0.08       $ —        $ 0.16      $ —     
  

 

 

    

 

 

   

 

 

   

 

 

 

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Fiscal quarter ended     Two fiscal quarters ended  

(In thousands)

   Sep 29, 2012      Oct 1, 2011     Sep 29, 2012      Oct 1, 2011  

Net income

   $ 5,211       $ 8,537      $ 4,267       $ 14,450   

Other comprehensive income:

          

Foreign currency translation adjustment, net of taxes of $41, $(215), $153 and $(12)

     74         (145     276         280   

Reclassification of unrealized gain on auction rate securities

     —           —          —           (1,445

Accumulated other comprehensive income related to benefit plan obligation, net of taxes of $1, $1, $3 and $3

     2         2        5         4   

Net unrealized gain (loss) on available-for-sale securities, net of taxes of $2, $(20), $4, and $(15)

     4         (24     6         (27
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income

   $ 5,291       $ 8,370      $ 4,554       $ 13,262   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Two fiscal quarters ended  

(In thousands)

   Sep 29, 2012     Oct 1, 2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 4,267      $ 14,450   

Adjustments to reconcile net income to cash provided by operating activities:

    

Depreciation and amortization

     4,598        5,411   

Amortization of acquired intangible assets

     1,155        894   

Share-based compensation expense

     4,650        7,153   

Provision for doubtful accounts

     —          50   

Gain on sale of previously impaired auction rate securities

     —          (2,729

Loss on disposal of property, plant and equipment

     —          2   

Deferred income taxes

     2,665        2,286   

Changes in operating accounts:

    

(Increase) decrease in trade receivables, net

     (25,254     14,545   

Increase in inventories

     (11,859     (9,704

Decrease in shipped systems pending acceptance

     1,098        3,950   

Decrease in other current assets

     130        2,598   

Increase (decrease) in accounts payable and accrued liabilities

     20,107        (16,680

Decrease in deferred revenue

     (1,407     (6,690
  

 

 

   

 

 

 

Net cash provided by operating activities

     150        15,536   

CASH FLOWS FROM INVESTING ACTIVITIES

    

Purchase of investments

     (559,927     (436,281

Proceeds from sales and maturities of investments

     577,733        394,023   

Proceeds from sale of auction rate securities

     —          6,450   

Increase in restricted cash

     —          (11,500

Purchase of property, plant and equipment

     (2,511     (3,445

Cash paid for acquisition of Eolite Systems, net of cash acquired

     (9,466     —     

(Increase) decrease in other assets

     (63     217   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     5,766        (50,536

CASH FLOWS FROM FINANCING ACTIVITIES

    

Cash dividends paid to shareholders

     (4,673     —     

Stock plan activity, net

     (478     1,686   

Excess tax benefit of share-based compensation

     54        519   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (5,097     2,205   

Effect of exchange rate changes on cash

     357        526   
  

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     1,176        (32,269

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     69,780        116,412   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 70,956      $ 84,143   
  

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

    

Cash paid for income taxes

   $ (550   $ (2,383

Income tax refunds received

   $ 650      $ 120   

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

 

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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

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

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

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

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

2. Recent Accounting Pronouncements

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

3. Restricted Cash

As of September 29, 2012, the Company had restricted cash of $22.3 million, which collateralizes commercial letters of credit substituted for the cash bond previously held by the Kaohsiung District Court of Taiwan. The total restricted cash balance of $22.3 million was included in Restricted cash on the Condensed Consolidated Balance Sheets at September 29, 2012 as a current asset. See Note 15 “Legal Proceedings” below for further discussion.

4. Share-Based Compensation

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

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

 

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The Company granted a total of 550,500 restricted stock unit awards and 5,000 stock options but did not grant any SARs during the first two quarters of 2013. The Company granted a total of 465,900 restricted stock unit awards and 194,000 SARs during the first two quarters of 2012, but did not grant any stock options in that period.

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

 

     Fiscal quarter ended      Two fiscal quarters ended  

(In thousands)

   Sep 29, 2012      Oct 1, 2011      Sep 29, 2012      Oct 1, 2011  

Cost of sales

   $ 217       $ 261       $ 433       $ 557   

Selling, service and administration

     1,017         1,599         3,278         5,537   

Research, development and engineering

     666         537         1,166         1,083   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 1,900       $ 2,397       $ 4,877       $ 7,177   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of September 29, 2012, no share-based compensation expense was capitalized. The Company has $11.6 million of total unrecognized share-based compensation costs, net of estimated forfeitures, which are expected to be recognized over a weighted-average period of 2.1 years.

5. Fair Value Measurements

Financial Assets Measured at Fair Value

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

 

   

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

 

   

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

 

   

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

 

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

 

September 29, 2012

   Level 1      Level 2     Level 3      Total  

Money market securities

   $ 12,761       $ —        $ —         $ 12,761   

Government agencies

     —           83,056        —           83,056   

Commercial paper

     —           30,346        —           30,346   

Corporate bonds

     —           22,797        —           22,797   

Forward purchase or (sale) contracts:

          

Japanese Yen

     —           (87     —           (87

Taiwan Dollar

     —           15        —           15   

Korean Won

     —           40        —           40   

Euro

     —           (90     —           (90

British Pound

     —           63        —           63   

Singapore Dollar

     —           15        —           15   

March 31, 2012

   Level 1      Level 2     Level 3      Total  

Money market securities

   $ 5,244       $ —        $ —         $ 5,244   

Commercial paper

     —           83,645        —           83,645   

Government agencies

     —           67,261        —           67,261   

Corporate Bonds

     —           20,121        —           20,121   

Forward purchase or (sale) contracts:

          

Japanese Yen

     —           202        —           202   

Taiwan Dollar

     —           (5     —           (5

Korean Won

     —           (17     —           (17

Euro

     —           (1     —           (1

British Pound

     —           20        —           20   

Chinese Renminbi

     —           (1     —           (1

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

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

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

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

 

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Investments

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

 

September 29, 2012

          Unrealized        
     Cost      Gain      Loss     Fair Value  

Available-for-sale securities (current):

          

Government agencies

   $ 72,539       $ 9       $ —        $ 72,548   

Commercial paper

     30,345         1         —          30,346   

Corporate bonds

     22,763         34         —          22,797   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 125,647       $ 44       $ —        $ 125,691   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities (non-current):

          

Government agencies

     10,499         9         —          10,508   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 10,499       $ 9       $ —        $ 10,508   
  

 

 

    

 

 

    

 

 

   

 

 

 

March 31, 2012

          Unrealized        
     Cost      Gain      Loss     Fair Value  

Available-for-sale securities (current):

          

Commercial paper

   $ 83,645       $ —         $ —        $ 83,645   

Government agencies

     46,293         5         —          46,298   

Corporate Bonds

     17,987         51         —          18,038   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 147,925       $ 56       $ —        $ 147,981   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities (non-current):

          

Government agencies

   $ 20,989       $ —         $ (26   $ 20,963   

Corporate Bonds

     2,070         13         —          2,083   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 23,059       $ 13       $ (26   $ 23,046   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

Underlying maturities of investments at September 29, 2012 were $125.7 million within one year and $10.5 million between one to five years.

6. Inventories

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

 

(In thousands)

   Sep 29, 2012      Mar 31, 2012  

Raw materials and purchased parts

   $ 57,237       $ 48,126   

Work-in-process

     12,634         10,511   

Finished goods

     9,447         9,418   
  

 

 

    

 

 

 
   $ 79,318       $ 68,055   
  

 

 

    

 

 

 

 

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7. Other Current Assets

Other current assets consisted of the following:

 

(In thousands)

   Sep 29, 2012      Mar 31, 2012  

Prepaid expenses

   $ 2,513       $ 2,687   

Value added tax receivable

     1,449         1,055   

Other

     577         318   
  

 

 

    

 

 

 
   $ 4,539       $ 4,060   
  

 

 

    

 

 

 

8. Other Assets

Other assets consisted of the following:

 

(In thousands)

   Sep 29, 2012      Mar 31, 2012  

Minority equity investment

   $ 8,966       $ 8,966   

Consignment and demo equipment, net

     6,233         4,394   

Other

     1,252         903   
  

 

 

    

 

 

 
   $ 16,451       $ 14,263   
  

 

 

    

 

 

 

9. Business Acquisitions

On June 14, 2012, the Company acquired Eolite Systems (Eolite), a designer and manufacturer of unique fiber lasers, for approximately $9.7 million in cash for all of their outstanding shares. During the first two quarters of 2013, the Company also incurred approximately $0.9 million in acquisition and integration related costs, which are included in Selling, service and administration expenses in the Condensed Consolidated Statements of Operations. Allocation of the purchase price to goodwill and identifiable assets is subject to the final determination of purchase price and valuation of the assets acquired and liabilities assumed. The Company preliminarily recorded approximately $5.5 million of identifiable intangible assets, $3.9 million of goodwill, $3.2 million of tangible assets, which included $0.5 million in cash and short-term investments, and assumed debt and other liabilities totaling approximately $2.9 million. The operating results of this acquisition are included in the Company’s results of operations since the date of acquisition. Pro forma financial information has not been provided for the acquisition of Eolite as it was not material to the Company’s overall financial position.

 

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10. Accrued Liabilities

Accrued liabilities consisted of the following:

 

(In thousands)

   Sep 29, 2012      Mar 31, 2012  

Payroll-related liabilities

   $ 8,772       $ 6,446   

Product warranty accrual

     6,096         4,187   

Freight accrual

     2,319         1,119   

Pension benefit liabilities

     2,150         2,110   

Professional fees payable

     2,127         2,011   

Purchase order commitments and receipts

     1,894         1,473   

Income taxes payable

     1,420         1,730   

Customer deposits

     1,180         385   

Value added taxes payable

     376         260   

Restructuring costs payable

     67         1,048   

Other

     1,423         866   
  

 

 

    

 

 

 
   $ 27,824       $ 21,635   
  

 

 

    

 

 

 

11. Product Warranty Accrual

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

 

     Fiscal quarter ended     Two fiscal quarters ended  

(In thousands)

   Sep 29, 2012     Oct 1, 2011     Sep 29, 2012     Oct 1, 2011  

Product warranty accrual, beginning

   $ 4,545      $ 4,708      $ 4,187      $ 4,415   

Warranty charges incurred, net

     (1,866     (1,800     (3,910     (3,951

Provision for warranty charges

     3,417        2,209        5,819        4,653   
  

 

 

   

 

 

   

 

 

   

 

 

 

Product warranty accrual, ending

   $ 6,096      $ 5,117      $ 6,096      $ 5,117   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

12. Deferred Revenue

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

 

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

 

     Fiscal quarter ended     Two fiscal quarters ended  

(In thousands)

   Sep 29, 2012     Oct 1, 2011     Sep 29, 2012     Oct 1, 2011  

Deferred revenue, beginning

   $ 10,676      $ 21,964      $ 10,751      $ 16,039   

Revenue deferred

     19,631        7,124        37,946        29,037   

Revenue recognized

     (20,851     (19,725     (39,241     (35,713
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred revenue, ending

   $ 9,456      $ 9,363      $ 9,456      $ 9,363   
  

 

 

   

 

 

   

 

 

   

 

 

 

13. Earnings Per Share

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

 

     Fiscal quarter ended      Two fiscal quarters ended  

(In thousands, except per share data)

   Sep 29, 2012      Oct 1, 2011      Sep 29, 2012      Oct 1, 2011  

Net income

   $ 5,211       $ 8,537       $ 4,267       $ 14,450   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares used for basic earnings per share

     29,339         28,747         29,228         28,609   

Incremental diluted shares

     622         679         684         717   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares used for diluted earnings per share

     29,961         29,426         29,912         29,326   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share:

           

Net income – basic

   $ 0.18       $ 0.30       $ 0.15       $ 0.51   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income – diluted

   $ 0.17       $ 0.29       $ 0.14       $ 0.49   
  

 

 

    

 

 

    

 

 

    

 

 

 

Awards of options, stock-settled stock appreciation rights (SARs), unvested restricted stock units (RSUs) and shares associated with the Company’s Employee Stock Purchase Plan (ESPP) representing an additional 2.5 million and 2.9 million shares for the second quarter ended September 29, 2012 and October 1, 2011, respectively, were not included in the calculation of diluted net earnings per share because their effect would have been antidilutive.

For the two quarters ended September 29, 2012 and October 1, 2011, awards of options, SARs, unvested RSUs and ESPP shares representing an additional 2.4 million and 2.8 million shares, respectively, were not included in the calculation of diluted net earnings per share because their effect would have been antidilutive.

14. Product and Geographic Information

Net sales by product type were as follows:

 

     Fiscal quarter ended      Two fiscal quarters ended  

(In thousands)

   Sep 29, 2012      Oct 1, 2011      Sep 29, 2012      Oct 1, 2011  

Interconnect & Microfabrication Group (IMG)

   $ 69,137       $ 51,227       $ 116,969       $ 99,439   

Components Group (CG)

     7,831         6,486         15,536         17,295   

Semiconductor Group (SG)

     3,184         24,171         6,616         42,196   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 80,152       $ 81,884       $ 139,121       $ 158,930   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     Fiscal quarter ended      Two fiscal quarters ended  

(In thousands)

   Sep 29, 2012      Oct 1, 2011      Sep 29, 2012      Oct 1, 2011  

Asia

   $ 73,580       $ 73,886       $ 126,034       $ 142,819   

Americas

     4,532         4,118         8,706         9,860   

Europe

     2,040         3,880         4,381         6,251   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 80,152       $ 81,884       $ 139,121       $ 158,930   
  

 

 

    

 

 

    

 

 

    

 

 

 

15. Legal Proceedings

All Ring Patent Infringement Prosecution

The Company’s proceedings against All Ring Tech Co., Ltd (All Ring) in Taiwan for alleged patent infringement are ongoing. As a part of these proceedings, the Company established three letters of credit for approximately $19.5 million in July 2009, September 2009 and June 2011, which are collateralized by $22.3 million of restricted cash. The total restricted cash balance was included in Restricted cash on the Condensed Consolidated Balance Sheets as of September 29, 2012.

In June 2011, the Kaohsiung District Court of Taiwan orally announced its judgment, finding that the Capacitor Tester Model RK-T6600, as well as All Ring’s RK-T2000 and RK-L50 systems, had infringed the 207469 patent, ordering All Ring to pay the Company approximately $24.0 million in damages, plus interest accrued from November 4, 2005 through the payment date at a rate of 5%, and enjoining All Ring from selling any system infringing the 207469 patent. On June 16, 2011, All Ring posted a cash bond for approximately $24.0 million to prevent the provisional execution of the judgment. All Ring appealed this judgment to the Intellectual Property Court on June 28, 2011 and on October 31, 2011, the Company filed its response to All Ring’s appeal. All Ring and the Company have each filed additional briefs with the Intellectual Property Court. See the Company’s Form 10-K for the year ended March 31, 2012 for further background and additional information related to these proceedings.

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

16. Restructuring and Cost Management Plans

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

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

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

 

Restructuring costs payable balance as of March 31, 2012

   $ 1,048   

Employee severance and related benefits:

  

Costs incurred and other adjustments

     (74

Cash payments

     (907
  

 

 

 

Restructuring costs payable balance as of September 29, 2012

   $ 67   
  

 

 

 

 

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17. Shareholders’ Equity

Share Repurchase Program

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

Dividends

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

 

Date Declared

  

Record Date

  

Payment Date

  

Amount per Share

August 9, 2012

  

August 24, 2012

  

September 10, 2012

   $0.08

May 10, 2012

  

June 4, 2012

  

June 18, 2012

   $0.08

December 9, 2011

  

January 27, 2012

  

February 17, 2012

   $0.08

During the first two quarters of 2013, the Company paid aggregate dividends of $4.7 million.

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

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

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

Business Overview

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

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

 

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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. We also produce products building on this technology that are used to test the electrical and optical characteristics, including color and intensity, of packaged LEDs.

Summary of Sequential Quarterly Results

The financial results of the quarter ended September 29, 2012, which represented the second quarter of 2013, reflected sequential growth in sales and earnings despite continued challenges in many of our markets. Revenue increased to $80.2 million from $59.0 million in the first quarter of 2013 which ended June 30, 2012. However, total order volume for the second quarter of 2013 declined from $74.1 million to $35.0 million, primarily due to large advanced microfabrication orders received in the first quarter that did not repeat in the second quarter. In addition, the slowing macro-economic environment and continued overcapacity led to continued low demand in our memory repair, LED and passive component businesses.

Net sales of $80.2 million for the second quarter of 2013 increased $21.2 million compared to $59.0 million for the prior quarter. Sales for our Interconnect & Microfabrication Group (IMG) products increased $21.3 million due to fulfillment of backlog orders from microfabrication customers. Components Group (CG) and Semiconductor Group (SG) sales levels remained fairly consistent with the previous quarter.

Gross margin improved to 41.8% on net sales of $80.2 million for the second quarter of 2013 compared to 40.1% on net sales of $59.0 million for the prior quarter. The increase was driven by higher production capacity levels partially offset by less favorable product mix.

Net operating expenses of $25.6 million in the second quarter of 2013 increased $0.4 million compared to the prior quarter. The increase was primarily due to an increase of $1.0 million in research, development and engineering (RD&E) which was partially offset by a decrease of $0.6 million in selling, service and administration (SS&A). RD&E expenses increased $1.0 million due to the inclusion of a full quarter of Eolite Systems (Eolite) operations, which added $0.5 million in incremental expense and an increase of $0.5 million in variable expenses. SS&A expense decreased primarily due to $1.2 million lower share-based compensation expense. Share-based compensation expense during the first quarter included the accelerated expensing associated with the annual grants to the Chief Executive Officer and the immediate vesting of the annual board of director share grants. SS&A expense also decreased $0.7 million due to acquisition and integration costs related to the purchase of Eolite which were significantly lower in the second quarter. These decreases are partially offset by a $1.2 million increase in variable expenses due to higher business volumes.

Operating income was $7.9 million in the second quarter of 2013, an increase of $9.4 million compared to operating loss of $1.5 million in the prior quarter. The increase was primarily due to higher sales and improved gross margin as discussed above.

The effective tax rate was 34.6% for the second quarter of 2013, resulting from an income tax provision of $2.8 million, compared to an effective rate of 44.3% for the prior quarter that resulted from an income tax benefit of $0.8 million. The decrease in the effective tax rate was primarily due to the fluctuation in quarterly net income between the first and second quarters of 2013, the mix of income and relative tax rates between jurisdictions, and an increase in certain foreign losses subject to a valuation allowance.

Net income for the second quarter of 2013 was $5.2 million compared to net loss of $0.9 million in the prior quarter due to the impact of the items discussed above.

 

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Quarter Ended September 29, 2012 Compared to Quarter Ended October 1, 2011

Results of Operations

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

 

     Fiscal quarter ended  
     Sep 29, 2012     Oct 1, 2011  

Net sales

     100.0     100.0

Cost of sales

     58.2        56.1   
  

 

 

   

 

 

 

Gross margin

     41.8        43.9   

Selling, service and administration

     18.9        18.2   

Research, development and engineering

     13.1        13.1   
  

 

 

   

 

 

 

Operating income

     9.8        12.6   

Interest and other income (expense), net

     0.1        (0.5
  

 

 

   

 

 

 

Income before income taxes

     9.9        12.1   

Provision for income taxes

     3.4        1.7   
  

 

 

   

 

 

 

Net income

     6.5     10.4
  

 

 

   

 

 

 

Net Sales

Net sales were $80.2 million for the second quarter of 2013, a decrease of $1.7 million or 2% compared to net sales of $81.9 million for the second quarter of 2012. The decrease in revenue was primarily driven by lower demand for SG products largely offset by an increase in shipments of microfabrication systems to fulfill orders driven by design wins and increased demand for smart phone and tablet devices.

The following table presents net sales information by product group:

 

     Fiscal quarter ended  

(In thousands, except percentages)

   Sep 29, 2012     Oct 1, 2011  
     Net Sales      % of Net Sales     Net Sales      % of Net Sales  

Interconnect & Microfabrication Group (IMG)

   $ 69,137         86.2   $ 51,227         62.6

Components Group (CG)

     7,831         9.8        6,486         7.9   

Semiconductor Group (SG)

     3,184         4.0        24,171         29.5   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 80,152         100.0   $ 81,884         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

IMG sales in the second quarter of 2013 increased $17.9 million or 35% compared to the second quarter of 2012. The increase was primarily driven by the shipment of large first quarter microfabrication orders in 2013 offset slightly by decreased demand for our flex interconnect products as customers digest capacity ordered in the fourth quarter of 2012.

CG sales in the second quarter of 2013 increased $1.3 million or 21% compared to the second quarter of 2012. The increase was a result of delivery of orders for our new 3510 microchip tester ordered in the first quarter of 2013.

SG sales in the second quarter of 2013 decreased $21.0 million or 87% compared to the second quarter of 2012. The decrease was driven by low demand for memory repair as customers continue to defer capacity additions. In addition, revenue declined in LED as a result of a continued overcapacity in the industry, especially for makers of LED backlights for display.

 

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The following table presents net sales information by geographic region:

 

     Fiscal quarter ended  

(In thousands, except percentages)

   Sep 29, 2012     Oct 1, 2011  
     Net Sales      % of Net Sales     Net Sales      % of Net Sales  

Asia

   $ 73,580         91.8   $ 73,886         90.3

Americas

     4,532         5.7        4,118         5.0   

Europe

     2,040         2.5        3,880         4.7   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 80,152         100.0   $ 81,884         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Compared to the second quarter of 2012, net sales for the second quarter of 2013 decreased $0.3 million in Asia, increased $0.4 million in the Americas and decreased $1.8 million in Europe. The slight dollar decrease in Asia was driven by lower demand for memory repair mostly offset by shipments of our microfabrication and flex interconnect products. Net sales in the Americas and Europe remain a lower percentage of total sales as purchases in these regions are primarily for specialized uses or research and development purposes, as compared to the trend by our Asian customers to source their high-volume manufacturing in that region.

Gross Profit

The following table presents gross profit information:

 

     Fiscal quarter ended  

(In thousands, except percentages)

   Sep 29, 2012     Oct 1, 2011  
     Gross Profit      % of Net Sales     Gross Profit      % of Net Sales  

Gross Profit

   $ 33,520         41.8   $ 35,941         43.9
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit for the second quarter of 2013 was $33.5 million, a decrease of $2.4 million compared to gross profit of $35.9 million for the second quarter of 2012. Gross profit as a percentage of net sales decreased to 41.8% for the second quarter of 2013 from 43.9% for the second quarter of 2012. These decreases were primarily related to less favorable product mix on higher volumes offset partially by the effect of efficiencies due to higher production capacity utilization.

Operating Expenses

The following table presents operating expense information:

 

     Fiscal quarter ended  

(In thousands, except percentages)

   Sep 29, 2012     Oct 1, 2011  
     Expense      % of Net Sales     Expense      % of Net Sales  

Selling, service and administration

   $ 15,114         18.9   $ 14,884         18.2

Research, development and engineering

     10,527         13.1        10,742         13.1   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 25,641         32.0   $ 25,626         31.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Selling, Service and Administration

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

SS&A expenses were $15.1 million for the second quarter of 2013, up slightly from $14.9 million in the second quarter of 2012. This increase was primarily attributable to variable expenses and acquisition and integration costs for Eolite largely offset by lower share-based compensation expense due to prior year accelerated expense associated with the Chief Executive Officer’s retirement eligibility date and the lower grant date fair value for new awards granted in 2013.

 

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Research, Development and Engineering

Research, development and engineering (RD&E) expenses are primarily comprised of labor and other employee-related expenses, professional fees, project materials, equipment costs and facilities costs. RD&E expenses totaled $10.5 million for the second quarter of 2013, a decrease of $0.2 million compared to the second quarter of 2012. This decrease was primarily due to labor costs associated with selective decreases in headcount partially offset by incremental expenses related to Eolite operations and an increase in variable expenses.

Non-operating Income and Expense

Interest and Other Income (Expense), net

Interest and other income (expense), net, consists of interest income and expense, market gains and losses on assets held for our deferred compensation plan, realized and unrealized foreign exchange gains and losses, bank charges, investment management fees and other miscellaneous non-operating items. Net interest and other income was $0.1 million during the second quarter of 2013 compared to net interest and other expense of $0.4 million for the second quarter of 2012. This increase was primarily attributable to market gains on assets held for our deferred compensation plan, and to a lesser extent, improvement in foreign currency results and interest income.

Income Taxes

The following table presents income tax information:

 

     Fiscal quarter ended  

(In thousands, except percentages)

   Sep 29, 2012     Oct 1, 2011  
     Income Tax
Provision
     Effective
Tax Rate
    Income Tax
Provision
     Effective
Tax Rate
 

Income tax provision

   $ 2,759         34.6   $ 1,372         13.8
  

 

 

    

 

 

   

 

 

    

 

 

 

The income tax provision for the second quarter of 2013 was $2.8 million on pretax income of $8.0 million, an effective tax rate of 34.6%. For the second quarter of 2012, the income tax provision was $1.4 million on pretax income of $9.9 million, an effective tax rate of 13.8%. The higher effective tax rate for second quarter of 2013 was primarily due to the relative quarterly income level, the mix of income between jurisdictions and their relative tax rates, an increase in certain foreign losses subject to valuation, and the expiration of the research and development tax credit on December 31, 2011.

Our effective tax rate is subject to fluctuation based upon the mix of income and relative tax rates between jurisdictions, and the occurrence and timing of numerous discrete events such as changes in tax laws or their interpretations, extensions or expirations of research and experimentation credits, closure of tax years subject to examination, finalization of income tax returns, the relationship of fixed deductions to overall changes in estimated and actual pretax income or loss and the tax jurisdictions where income or loss is generated, and the ability to fully utilize our deferred tax assets. Based on currently available information, we are not aware of any further discrete events which are likely to occur that would have a material effect on our financial position, expected cash flows or results of operations.

Net Income

The following table presents net income information:

 

     Fiscal quarter ended  

(In thousands, except percentages)

   Sep 29, 2012     Oct 1, 2011  
     Net Income      % of Net Sales     Net Income      % of Net Sales  

Net income

   $ 5,211         6.5   $ 8,537         10.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income for the second quarter of 2013 was $5.2 million, or $0.18 per basic share and $0.17 per diluted share, compared to a net income of $8.5 million, or $0.30 per basic share and $0.29 per diluted share for the second quarter of 2012. The decrease was primarily due to lower gross profit on lower revenues in the second quarter of 2013.

 

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Two Quarters Ended September 29, 2012 Compared to Two Quarters Ended October 1, 2011

Results of Operations

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

 

     Two fiscal quarters ended  
     Sep 29, 2012     Oct 1, 2011  

Net sales

     100.0     100.0

Cost of sales

     58.9        56.1   
  

 

 

   

 

 

 

Gross margin

     41.1        43.9   

Selling, service and administration

     22.1        19.9   

Research, development and engineering

     14.4        13.8   

Legal settlement costs

     —          0.3   
  

 

 

   

 

 

 

Operating income

     4.6        9.9   

Gain on sale of previously impaired auction rate securities

     —          1.7   

Interest and other expense, net

     (0.1     (0.3
  

 

 

   

 

 

 

Income before income taxes

     4.5        11.3   

Provision for income taxes

     1.4        2.2   
  

 

 

   

 

 

 

Net income

     3.1     9.1
  

 

 

   

 

 

 

Net Sales

Net sales were $139.1 million for the first two quarters of 2013, a decrease of $19.8 million or 12% compared to net sales of $158.9 million for the first two quarters of 2012. The decrease in revenue was primarily driven by lower demand for SG memory repair systems. In addition, orders and revenue declined in LED as a result of a significant overcapacity in the industry, especially for makers of LED backlights for display. The decrease in revenue from SG products was partially offset by increased demand for our microfabrication products.

The following table presents net sales information by product group:

 

     Two fiscal quarters ended  

(In thousands, except percentages)

   Sep 29, 2012     Oct 1, 2011  
     Net Sales      % of Net Sales     Net Sales      % of Net Sales  

Interconnect & Microfabrication Group (IMG)

   $ 116,969         84.1   $ 99,439         62.5

Components Group (CG)

     15,536         11.1        17,295         10.9   

Semiconductor Group (SG)

     6,616         4.8        42,196         26.6   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 139,121         100.0   $ 158,930         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

IMG sales in the first two quarters of 2013 increased $17.5 million or 18% compared to the first two quarters of 2012. The increase was primarily driven by increased shipments of microfabrication orders and demand for our flex via drilling products.

CG sales in the first two quarters of 2013 decreased $1.8 million or 10% compared to the first two quarters of 2012. The decrease was primarily driven by slowed demand for tooling products partially offset by demand for our new 3510 microchip tester from MLCC customers.

SG sales in the first two quarters of 2013 decreased $35.6 million or 84% compared to the first two quarters of 2012. The decrease was driven by low demand for memory repair as customers continue to defer capacity additions. In addition, revenue declined in LED as a result of a continued overcapacity in the industry, especially for makers of LED backlights for display.

 

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The following table presents net sales information by geographic region:

 

     Two fiscal quarters ended  

(In thousands, except percentages)

   Sep 29, 2012     Oct 1, 2011  
     Net Sales      % of Net Sales     Net Sales      % of Net Sales  

Asia

   $ 126,034         90.6   $ 142,819         89.9

Americas

     8,706         6.3        9,860         6.2   

Europe

     4,381         3.1        6,251         3.9   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 139,121         100.0   $ 158,930         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Compared to the first two quarters of 2012, net sales for the first two quarters of 2013 decreased across all geographic regions: $16.8 million in Asia, $1.2 million in the Americas and $1.9 million in Europe. The majority of our systems are sold into Asia as our customers’ manufacturing facilities primarily reside in that region. The decrease in Asia was driven by lower demand for memory repair partially offset by continued strong shipments of our microfabrication and flex interconnect products. Net sales in the Americas and Europe remain a lower percentage of total sales as purchases in these regions are primarily for specialized uses or research and development purposes, as compared to the trend by our Asian customers to source their high-volume manufacturing in that region.

Gross Profit

The following table presents gross profit information:

 

     Two fiscal quarters ended  

(In thousands, except percentages)

   Sep 29, 2012     Oct 1, 2011  
     Gross Profit      % of Net Sales     Gross Profit      % of Net Sales  

Gross Profit

   $ 57,173         41.1   $ 69,701         43.9
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit for the first two quarters of 2013 was $57.2 million, a decrease of $12.5 million compared to gross profit of $69.7 million for the first two quarters of 2012. Gross profit as a percentage of net sales decreased to 41.1% for the first two quarters of 2013 from 43.9% for the two quarters of 2012. These decreases were primarily related to lower revenue levels and a less favorable product mix.

Operating Expenses

The following table presents operating expense information:

 

     Two fiscal quarters ended  

(In thousands, except percentages)

   Sep 29, 2012     Oct 1, 2011  
     Expense      % of Net Sales     Expense      % of Net Sales  

Selling, service and administration

   $ 30,777         22.1   $ 31,380         19.9

Research, development and engineering

     20,061         14.4        21,976         13.8   

Legal settlement costs

     —           —          550         0.3   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 50,838         36.5   $ 53,906         34.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Selling, Service and Administration

SS&A expenses were $30.8 million for the first two quarters of 2013, a decrease of $0.6 million compared to the first two quarters of 2012. This decrease is primarily related to a $2.3 million decrease in share-based compensation expense and a $1.0 million decrease in labor and travel costs, partially offset by $0.9 million in acquisition and integration costs for Eolite Systems, $1.2 million increase in professional fees and $0.8 million increase in variable expenses. The decrease in share-based compensation expense primarily resulted from the prior year accelerated expense associated with the Chief Executive Officer’s retirement eligibility date and the lower grant date fair value for new awards granted during the first two quarters of 2013.

 

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Research, Development and Engineering

RD&E expenses totaled $20.1 million for the first two quarters of 2013, a decrease of $1.9 million compared to the first two quarters of 2012. This decrease was primarily due to lower labor costs associated with selective decreases in headcount and lower project material costs.

Legal Settlement Costs

There were no legal settlement costs in the first two quarters of 2013. Legal settlement costs for the first two quarters of 2012 were $0.6 million, which consisted of court and legal fees associated with the All Ring litigation and other non-recurring legal matters.

Non-operating Income and Expense

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

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

Interest and Other Income (Expense), net

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

Income Taxes

The following table presents income tax information:

 

     Two fiscal quarters ended  

(In thousands, except percentages)

   Sep 29, 2012     Oct 1, 2011  
     Income Tax
Provision
     Effective
Tax Rate
    Income Tax
Provision
     Effective
Tax Rate
 

Income tax provision

   $ 2,009         32.0   $ 3,531         19.6
  

 

 

    

 

 

   

 

 

    

 

 

 

The income tax provision for the first two quarters of 2013 was $2.0 million on pretax income of $6.3 million generating an effective tax rate of 32.0%. For the first two quarters of 2012, the income tax provision was $3.5 million on pretax income of $18.0 million generating an effective tax rate of 19.6%. The higher effective tax rate for the first two quarters of 2013 was primarily due to the relative level of income, the mix of income between jurisdictions and their relative tax rates, an increase in certain foreign losses subject to valuation, and the expiration of the research and development tax credit on December 31, 2011.

Our effective tax rate is subject to fluctuation based upon the mix of income and relative tax rates between jurisdictions, and the occurrence and timing of numerous discrete events such as changes in tax laws or their interpretations, extensions or expirations of research and experimentation credits, closure of tax years subject to examination, finalization of income tax returns, the relationship of fixed deductions to overall changes in estimated and actual pretax income or loss and the tax jurisdictions where income or loss is generated, and the ability to fully utilize our deferred tax assets. Based on currently available information, we are not aware of any further discrete events which are likely to occur that would have a material effect on our financial position, expected cash flows or results of operations.

 

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Net Income

The following table presents net income information:

 

     Two fiscal quarters ended  

(In thousands, except percentages)

   Sep 29, 2012     Oct 1, 2011  
     Net Income      % of Net Sales     Net Income      % of Net Sales  

Net income

   $ 4,267         3.1   $ 14,450         9.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income for the first two quarters of 2013 was $4.3 million, or $0.15 per basic share and $0.14 per diluted share, compared to a net income of $14.5 million, or $0.51 per basic share and $0.49 per diluted share for the first two quarters of 2012. The decrease in net income was primarily due to lower gross profit on lower revenues in the first two quarters of 2013, partially offset by lower operating expenses. Net income in 2012 was also higher in part due to the $2.7 million gain on the sale of previously impaired ARS investments with no similar activity in 2013.

Financial Condition and Liquidity

At September 29, 2012, our principal sources of liquidity were cash and cash equivalents of $71.0 million, short-term investments of $101.7 million and accounts receivable of $58.4 million. We also held $22.3 million in restricted cash which represented collateral for commercial letters of credit related to our ongoing legal proceedings against All Ring Tech Co., Ltd. At September 29, 2012, we had a current ratio of 5.11 and held no long-term debt. Working capital of $278.6 million increased compared to the March 31, 2012 balance of $269.5 million. We also held $10.5 million of non-current investments at September 29, 2012.

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

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

 

Date Declared

  

Record Date

  

Payment Date

  

Amount per Share

August 9, 2012    August 24, 2012    September 10, 2012    $0.08
May 10, 2012    June 4, 2012    June 18, 2012    $0.08
December 9, 2011    January 27, 2012    February 17, 2012    $0.08

During the first two quarters of 2013, we paid aggregate dividends of $4.7 million.

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

Sources and Uses of Cash

Net cash flows provided by operating activities totaled $0.2 million for the two quarters ended September 29, 2012 due to $4.3 million of net income and $13.1 million in non-cash changes offset significantly by $17.2 million of cash outflows from working capital. The cash outflow from working capital was primarily due to a $25.3 million increase in trade receivables and an $11.9 million increase in inventory partially offset by a $20.1 million increase in accounts payable and accrued liabilities.

 

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For the two quarters ended September 29, 2012, net cash provided by investing activities of $5.8 million was primarily due to $577.7 million of proceeds from sales and maturities of investments, partially offset by $559.9 million of purchases of investments, $9.5 million of net cash paid for acquisition of Eolite Systems, and $2.5 million of purchases of property, plant and equipment. Net cash used in financing activities of $5.1 million was primarily the result of $4.7 million of cash dividends paid to shareholders and $0.5 million used in net stock plan activity including employee tax deposits related to stock awards, partially offset by employee stock purchase activity.

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

Critical Accounting Policies and Estimates

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

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

Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

All Ring Patent Infringement Prosecution

Our proceedings against All Ring Tech Co., Ltd (All Ring) in Taiwan for alleged patent infringement are ongoing. As a part of these proceedings, we established three letters of credit for approximately $19.5 million in July 2009, September 2009 and June 2011, which are collateralized by $22.3 million of restricted cash. The total restricted cash balance was included in Restricted cash on the Condensed Consolidated Balance Sheets as of September 29, 2012.

 

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In June 2011, the Kaohsiung District Court of Taiwan orally announced its judgment, finding that the Capacitor Tester Model RK-T6600, as well as All Ring’s RK-T2000 and RK-L50 systems, had infringed the 207469 patent, ordering All Ring to pay us approximately $24.0 million in damages, plus interest accrued from November 4, 2005 through the payment date at a rate of 5%, and enjoining All Ring from selling any system infringing the 207469 patent. On June 16, 2011, All Ring posted a cash bond for approximately $24.0 million to prevent the provisional execution of the judgment. All Ring appealed this judgment to the Intellectual Property Court on June 28, 2011 and on October 31, 2011, we filed our response to All Ring’s appeal. We and All Ring have each filed additional briefs with the Intellectual Property Court. See our Form 10-K for the year ended March 31, 2012 for further background and additional information related to these proceedings.

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

Item 1A. Risk Factors

The statements contained in this report that are not statements of historical fact, including without limitation statements containing the words “believes,” “expects” and similar words, constitute forward-looking statements that are subject to a number of risks and uncertainties. From time to time, we may make other forward-looking statements. Investors are cautioned that such forward-looking statements are subject to an inherent risk that actual results may differ materially. The following information highlights some of the factors that could cause actual results to differ materially from the results expressed or implied by our forward-looking statements. Forward-looking statements should be considered in light of these factors. Factors that may result in such variances include, but are not limited to, the following:

Risks Related to Our Competition and Customers

Volatility of Our Customers’ Industries

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

Highly Competitive Markets

We face substantial competition from established competitors throughout the world, some of which have greater financial, engineering, manufacturing and marketing resources than we do. Those competitors with greater resources may, in addition to other things, be able to better withstand periodic downturns, compete more effectively on the basis of price and technology, or more quickly develop enhancements to, and new generations of, products that compete with the products we manufacture and market. Some competitors may be willing to sell competing products at lower margins than we would be willing to accept, increasing price-based competition. New companies may enter the markets in which we compete, or industry consolidation may occur, further increasing competition in those markets. We believe that to be competitive we must continue to expend significant financial resources in order to, among other things, invest in new product development and enhancements. We may not be able to compete successfully in the future and increased competition may result in price reductions, reduced profit margins and loss of market share.

 

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Increased Price Pressure

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

Revenues are Largely Dependent on Few Customers

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

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

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

 

   

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

 

   

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

 

   

timing and market acceptance of our new product introductions; and

 

   

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

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

Risks Related to Our Supply Chain and Production

Variability of Production Capacity

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

 

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Problems with Critical Suppliers

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

Problems with Contract Manufacturers

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

Charges for Excess or Obsolete Inventory

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

Risks Related to Our Organization

Operating a Global Business

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

 

   

periodic local or geographic economic downturns and unstable political conditions;

 

   

price and currency exchange controls;

 

   

fluctuation in the relative values of currencies;

 

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

 

   

difficulties protecting intellectual property;

 

   

compliance with labor laws and other laws governing employees;

 

   

local labor disputes;

 

   

shipping delays and disruptions;

 

   

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

 

   

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

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

 

   

future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities;

 

   

more frequent instances of shipping delays;

 

   

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

 

   

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

Implementation and Modification of Globalization Strategy

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

 

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Acquisitions and Divestitures

We may make acquisitions of, or significant investments in, other businesses with complementary products, services or technologies, such as our June 2012 acquisition of Eolite Systems. Acquisitions involve numerous risks, many of which are unpredictable and beyond our control, including:

 

   

difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of the acquired businesses;

 

   

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

 

   

diversion of management’s attention from other operational matters;

 

   

the potential loss of key employees of the acquired company;

 

   

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

 

   

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

 

   

difficulties establishing satisfactory internal controls at the acquired company;

 

   

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

 

   

acquiring unanticipated liabilities for which we will not be indemnified.

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

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

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

Hiring and Retention of Personnel

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

Risks Related to Technology

Markets Characterized by Rapid Technological Change

The markets for our products are characterized by rapid technological change and innovation, frequent new product introductions, changes in customer requirements and evolving industry standards. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address technological changes and the requirements of current and potential customers. The development of new, technologically advanced products is a complex and uncertain process, requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. The introduction by us or by our competitors of new or enhanced products, or alternative technologies, may cause our customers to defer, change or cancel orders for our existing products or cease purchasing our products altogether. For example, our semiconductor memory customers are exploring alternative redundancy technologies such as electrical redundancy technology. If our customers were to achieve sufficient yield improvement with one of these technologies and convert it into their manufacturing process, there could be a material adverse effect on the size of the addressable market of our memory yield improvement systems. Further, we cannot assure that our new products will gain market acceptance or that we will be able to respond effectively to product announcements by competitors, technology changes or emerging industry standards. If we are unable to develop new or enhanced products to address product or technology changes or new industry standards on a timely basis or at all, or if our new or enhanced products are not accepted by the market, or if our customers adopt alternative technologies, our business, financial condition and results of operations may be adversely affected.

 

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Need to Invest in Research and Development

Our industry is characterized by the need for continued investment in research and development. Because of intense competition in the industries in which we compete, if we were to fail to invest sufficiently in research and development, our products could become less attractive to our current and potential customers or obsolete, and our business and financial condition could be materially and adversely affected. As a result of our need to maintain our spending levels in this area, our operating results could be materially harmed if our net sales decline. In addition, as a result of our emphasis on research and development and technological innovation, our operating costs may increase in the future, and research and development expenses may increase as a percentage of total operating expenses and as a percentage of net sales.

Products are Highly Complex

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

Risks Related to Legal Matters

Protection of Proprietary Rights – Generally

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

Protection of Proprietary Rights – Foreign Jurisdictions

Our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as in the United States. Many United States companies have encountered substantial problems in protecting their proprietary rights against infringement in foreign countries. If we fail to adequately protect our intellectual property in these countries, it could be easier for our competitors to sell competing products in foreign countries, which could result in reduced sales and gross margins.

 

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Intellectual Property Infringement Claims

Several of our competitors hold patents covering a variety of technologies, applications and methods of use similar to some of those used in our products. While we attempt in our designs to avoid patent infringement, from time to time we and our customers have received correspondence from our competitors claiming that some of our products, as used by our customers, may be infringing one or more of these patents. Competitors or others have in the past and may in the future assert infringement claims against our customers or us with respect to current or future products or uses, and these assertions may result in costly litigation or require us to obtain a license to use intellectual property rights of others. If claims of infringement are asserted against our customers, those customers may seek indemnification from us for damages or expenses they incur.

If we become subject to infringement claims, we will evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question or defending our position. These licenses, however, may not be available on satisfactory terms or at all. If we are not able to negotiate the necessary licenses on commercially reasonable terms or successfully defend our position, our financial condition and results of operations could be materially and adversely affected.

Tax Audits and Changes in Tax Law

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

Legal Proceedings

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

Provisions Restricting Our Acquisition

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

Risks Related to Financial Matters

Unfavorable Currency Exchange Rate Fluctuations

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

 

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Fluctuations in Effective Tax Rate

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

Impairment of Intangible Assets

We held a total of $12.7 million in acquired intangible assets and $7.9 million in goodwill at September 29, 2012. We review our acquired intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill for impairment using a qualitative and quantitative approach at least annually or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below the carrying value.

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

Stock Price Volatility

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

 

   

variations in operating results from quarter to quarter;

 

   

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

 

   

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

 

   

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

 

   

general economic conditions;

 

   

political changes, hostilities or natural disasters;

 

   

low trading volume of our common stock;

 

   

the number of analysts covering our common stock; and

 

   

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

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

 

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Reduction or Cessation of Dividends

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

Impairment of Investments

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

Item 4. Mine Safety Disclosures

Not applicable.

 

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Item 6. Exhibits

This list is intended to constitute the exhibit index.

 

    3.1   Third Restated Articles of Incorporation, as amended. Incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K filed on June 15, 2010.
    3.2   2009 Amended and Restated Bylaws. Incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed on May 19, 2009 (the “May 19 8-K”).
    4.1   Rights Agreement, dated as of May 18, 2009, between Electro Scientific Industries, Inc. and Mellon Investor Services. Incorporated by reference to Exhibit 4.1 of the May 19 8-K.
  10.1**   Form of Performance-Based Restricted Stock Unit Agreement for August 2012 awards.
  31.1   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2   Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   XBRL Instance Document *
101.SCH   XBRL Taxonomy Extension Schema Document *
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB   XBRL Taxonomy Extension Label Linkbase Document *
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document *

 

 

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.
** Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: November 7, 2012     ELECTRO SCIENTIFIC INDUSTRIES, INC.
    By  

/s/ Nicholas Konidaris

    Nicholas Konidaris
    President and Chief Executive Officer
    (Principal Executive Officer)
    By  

/s/ Paul Oldham

    Paul Oldham
    Vice President of Administration,
    Chief Financial Officer and Corporate Secretary
    (Principal Financial Officer)
    By  

/s/ Kerry Mustoe

    Kerry Mustoe
    Vice President, Corporate Controller and Chief Accounting
    Officer
    (Principal Accounting Officer)

 

32

Exhibit 10.1

Executive 2012 PRSU Agreement

PERFORMANCE-BASED

RESTRICTED STOCK UNITS AWARD AGREEMENT

This Award Agreement (the “Agreement”) is entered into as of August              , 2012 by and between Electro Scientific Industries, Inc., an Oregon corporation (the “Company”), and                                                   (“Recipient”), for the grant of restricted stock units with respect to the Company’s Common Stock (“Common Stock”).

On August 8, 2012, the Compensation Committee of the Company’s Board of Directors made a restricted stock units award to Recipient pursuant to the Company’s 2004 Stock Incentive Plan (the “Plan”). The award is intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986. Recipient desires to accept the award subject to the terms and conditions of this Agreement.

IN CONSIDERATION of the mutual covenants and agreements set forth in this Agreement, the parties agree to the following:

1. Grant and Terms of Restricted Stock Units . The Company grants to Recipient under the Plan                  restricted stock units, subject to the restrictions, terms and conditions set forth in this Agreement.

(a) Rights under Restricted Stock Units . A restricted stock unit (a “RSU”) represents the unsecured right to require the Company to deliver to Recipient one share of Common Stock for each RSU. The number of shares of Common Stock deliverable with respect to each RSU is subject to adjustment as determined by the Board of Directors of the Company as to the number and kind of shares of stock deliverable upon any merger, reorganization, consolidation, recapitalization, stock dividend, spin-off or other change in the corporate structure affecting the Common Stock generally.

(b) Vesting . The RSUs issued under this Agreement shall initially be 100% unvested and subject to forfeiture as set forth below.

(i) Except as set forth in Section 1(d), if Recipient ceases to be employed by the Company for any reason or for no reason prior to the end of the Performance Period (as defined below), the unvested RSUs shall be forfeited to the Company.

(ii) To the extent that the number of RSUs first specified above are reduced in accordance with Section 1(b)(iii) upon achievement to any extent of the Performance Goals (as defined below) and except as provided in Section 1(d), the reduction shall be forfeited to the Company. The extent to which any Performance Goal is achieved, if at all, shall be determined by a date that is no later than December 31 of the calendar year in which the Performance Period ends (the “Determination Date”). Nothing contained in this Agreement shall confer upon Recipient any right to be employed by the Company or to continue to provide services to the Company or to interfere in any way with the right of the Company to terminate Recipient’s services at any time for any reason, with or without cause.

 

Executive 2012 PRSU Agreement  
 


(iii) The vesting of the RSUs shall be based on two “Performance Goals,” as follows:

(A)              [insert # equal to 33.3%] of the RSUs shall vest based on the Company’s fiscal 2014 sales, with 100% vesting on sales of $299.8 million, with additional vesting in 10% increments for each 10% increment in sales above that amount, up to a maximum of 200% vesting on sales of $599.6 million. For sales below $299.8 million, 90% vest on sales of $269.8 million and 95% vest on sales of $284.8 million. There is no vesting if sales are below $269.8 million.

(B)              [insert # equal to 66.7%] of the RSUs shall vest based on the Company’s fiscal 2015 sales, with 100% vesting on sales of $374.6 million, with additional vesting in 10% increments for each 10% increment in sales above that amount, up to a maximum of 200% vesting on sales of $749.2 million. For sales below $374.6 million, 90% vest on sales of $337.1 million and 95% vest on sales of $355.9 million. There is no vesting if sales are below $337.1 million.

(C) For purposes of determining the Company’s sales in each of fiscal 2014 and 2015, (i) sales from any lines of business or product lines acquired by the Company in fiscal 2013, 2014 or 2015 for which the Company paid more than $30 million in purchase price (including any assumed debt) in the transaction in which the line of business or product line was acquired shall be excluded, and (ii) if there shall occur a merger, consolidation or plan of exchange involving the Company pursuant to which the outstanding shares of Common Stock of the Company are converted into cash or other stock, securities or property, sales from lines of business or products which were not offered by the Company or under development by the Company immediately prior to such transaction shall be excluded, in either case with the amount of qualifying sales being determined by the Committee in its sole discretion.

(D) The Compensation Committee of the Board of Directors may, in its discretion, permit the vesting of any or all of the RSUs subject to this Agreement for sales below the Performance Goals described above.

(E) The number of RSUs determined pursuant to this Section 1(b)(iii) shall vest on the last day of the Performance Period, subject to Section 1(b)(i). Any RSUs not vested at that time shall be forfeited.

(c) Delivery Date . Except as set forth in Section 1(d)(iii) or (iv), the delivery date for a RSU subject to this Agreement shall be as soon as practicable on or after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends.

(d) Proration upon Termination for Certain Reasons Prior to End of Performance Period; Treatment on Change in Control.

 

Executive 2012 PRSU Agreement  
  2


(i) Proration on Death or Total Disability . If Recipient ceases to be an employee of the Company by reason of Recipient’s death or total disability prior to the end of the Performance Period, the RSUs shall not be forfeited under Section 1(b)(i) and the following shall apply:

(1) The number of RSUs Recipient would otherwise be entitled to receive pursuant to Section 1(b)(iii) if Recipient were employed through the end of the Performance Period (the “Base Payout”) shall be reduced to a number determined by multiplying the Base Payout by a percentage calculated by dividing the number of months elapsed from the beginning of the Performance Period to the date of termination of employment (rounded down to the whole month) by 36 (the “Pro Rata Percentage”). RSUs that exceed the reduced number shall be forfeited to the Company.

(2) The Board of Directors or the Compensation Committee of the Board of Directors, in its discretion, may increase the number of RSUs the Recipient would otherwise be entitled to receive under this Section 1(d)(i); the Recipient shall have no right to any increase.

(3) The amount of RSUs determined under (1) and (2) shall be delivered as soon as practicable on or after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends.

(4) The term “total disability” means a medically determinable mental or physical impairment mental or physical impairment that is expected to result in death or has lasted or is expected to last for a continuous period of 12 months or more and that, in the opinion of the Company and two independent physicians approved by the Company, causes Recipient to be unable to perform his or her duties as an employee, director, officer or consultant of the Company and unable to engage in any substantial gainful activity. Total disability shall be deemed to have occurred after both of the following have occurred:

(A) The two independent physicians have furnished their written opinion of total disability to the Company; and

(B) The Company has reached an opinion of total disability.

(ii) Proration on Normal Retirement . If Recipient terminates his employment with the Company following normal retirement under the Company’s retirement policy in place at such time but prior to the end of the Performance Period, the RSUs shall not be forfeited under Section 1(b)(i) and the following shall apply:

(1) The Base Payout shall be reduced to a number determined by multiplying the Base Payout by the Pro Rata Percentage. RSUs that exceed the reduced number shall be forfeited to the Company.

(2) The Board of Directors or the Compensation Committee of the Board of Directors, in its discretion, may increase the number of RSUs the Recipient would otherwise be entitled to receive under this Section 1(d)(ii); the Recipient shall have no right to any increase.

 

Executive 2012 PRSU Agreement  
  3


(3) The amount of RSUs determined under (1) and (2) shall be delivered as soon as practicable on or after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends.

(iii) Double Trigger Acceleration on Change in Control .

(1) All of the RSUs shall immediately vest based on deemed attainment or actual performance achieved, if greater, if a Change in Control (as defined below) occurs and at any time after the Change in Control and on or before the first anniversary of the Change in Control, (i) the Recipient’s employment or service is terminated by the Company (or its successor) without Cause (as defined below), or (ii) the Recipient’s employment or service is terminated by the Recipient for Good Reason (as defined below); provided, however, that the RSUs may also immediately vest in connection with a Change in Control as provided in Section 1(c)(iv) below.

(2) For purposes of this Agreement, a “Change in Control” of the Company shall mean the occurrence of any of the following events:

(A) At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (“Incumbent Directors”) shall cease for any reason to constitute at least a majority thereof; provided, however, that the term “Incumbent Director” shall also include each new director elected during such two-year period whose nomination or election was approved by two-thirds of the Incumbent Directors then in office;

(B) Any “person” or “group” (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) shall, as a result of a tender or exchange offer, open market purchases or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of more than fifty percent (50%) of the then outstanding Common Stock of the Company;

(C) A consolidation, merger or plan of exchange involving the Company (“Merger”) as a result of which the holders of outstanding securities of the Company ordinarily having the right to vote for the election of directors (“Voting Securities”) immediately prior to the Merger do not continue to hold at least fifty percent 50% of the combined voting power of the outstanding Voting Securities of the surviving corporation or a parent corporation of the surviving corporation immediately after the Merger, disregarding any Voting Securities issued to or retained by such holders in respect of securities of any other party to the Merger; or

(D) A sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company.

(3) For purposes of this Agreement, “Cause” shall mean (a) the willful and continued failure to perform substantially the Recipient’s reasonably assigned duties with the Company (or its successor) (other than any such failure resulting from

 

Executive 2012 PRSU Agreement  
  4


incapacity due to physical or mental illness) after a demand for substantial performance is delivered to the Recipient by the Company (or its successor) which specifically identifies the manner in which the Company (or its successor) believes that the Recipient has not substantially performed the Recipient’s duties, (b) the willful engagement in illegal conduct which is materially and demonstrably injurious to the Company (or its successor), or (c) the commission of an act by Recipient, or the failure of Recipient to act, which constitutes gross negligence or gross misconduct. No act, or failure to act, shall be considered “willful” if the Recipient reasonably believed that the action or omission was in, or not opposed to, the best interests of the Company (or its successor).

(4) For purposes of this Agreement, “Good Reason” shall mean:

(A) the assignment of a different title, job or responsibilities that results in a decrease in the level of responsibility of the Recipient after the Change in Control when compared to the Recipient’s level of responsibility for the Company’s operations prior to the Change in Control; provided that Good Reason shall not exist if the Recipient continues to have the same or a greater general level of responsibility for Company operations after the Change in Control as the Recipient had prior to the Change in Control even if the Company operations are a subsidiary or division of the surviving company,

(B) a reduction in the Recipient’s base pay as in effect immediately prior to the Change in Control,

(C) a material reduction in total benefits available to the Recipient under cash incentive, stock incentive and other employee benefit plans after the Change in Control compared to the total package of such benefits as in effect prior to the Change in Control, or

(D) the Recipient is required to be based more than 50 miles from where the Recipient’s office is located immediately prior to the Change in Control except for required travel on company business to an extent substantially consistent with the business travel obligations which the Recipient undertook on behalf of the Company prior to the Change in Control.

(iv) Sale of the Company . If there shall occur a merger, consolidation or plan of exchange involving the Company pursuant to which the outstanding shares of Common Stock of the Company are converted into cash or other stock, securities or property, or a sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company, then, as determined by the Committee or the Board of Directors, either:

(1) the unvested RSUs shall be converted into restricted stock units for stock of the surviving or acquiring corporation in the applicable transaction, with the amount and type of shares subject thereto to be conclusively determined by the Committee, taking into account the relative values of the companies involved in the

 

Executive 2012 PRSU Agreement  
  5


applicable transaction and the exchange rate, if any, used in determining shares of the surviving corporation to be held by the former holders of the Company’s Common Stock following the applicable transaction, and disregarding fractional shares;

(2) the unvested RSUs shall be converted into a cash payment obligation of the surviving or acquiring corporation in an amount equal to the proceeds a holder of the underlying Shares would have received in proceeds from such transaction with respect to those Shares; or

(3) all of the unvested RSUs shall immediately vest and all underlying Shares shall be delivered simultaneously with the closing of the applicable transaction such that the Recipient will participate as a shareholder in receiving proceeds from such transaction with respect to those Shares.

(e) Forfeiture of RSUs on Other Terminations of Service . If Recipient ceases to be an employee of the Company for any reason that does not result in acceleration or payment pursuant to Section 1(d), Recipient shall immediately forfeit all outstanding but unvested RSUs granted pursuant to this Agreement and Recipient shall have no right to receive the related Common Stock.

(f) Restrictions on Transfer and Delivery on Death . Recipient may not sell, transfer, assign, pledge or otherwise encumber or dispose of the RSUs. Recipient may designate beneficiaries to receive stock if Recipient dies before the delivery date by so indicating on Exhibit A, which is incorporated into and made a part of this agreement. If Recipient fails to designate beneficiaries on Exhibit A, the shares will be delivered to Recipient’s estate.

(g) Reinvestment of Dividend Equivalents . On each date on which the Company pays a dividend on a share of Common Stock with respect to an RSU, the number of RSUs subject to this Agreement shall be increased by a number equal to the number of whole or fractional shares of Common Stock with a value equal to the value of the dividends that would have been paid on the stock deliverable pursuant to the RSUs (if such shares were outstanding), divided by the closing stock price on the dividend payment date. If the vesting date for any RSUs subject to this Agreement occurs between the record date and the payment date for a dividend, the Company, at its option, may elect to pay to Recipient cash, net of withholding, equal to the cash dividend payable on the RSUs which so vest in lieu of increasing the number of RSUs subject to this Agreement.

(h) Delivery on Delivery Date . As soon as practicable following the delivery date for a share of Common Stock, the Company shall deliver a certificate for the number of shares represented by all RSUs having a delivery date on the same date, rounded down to the whole share. No fractional shares of Common Stock shall be issued. The Company shall pay to Recipient in cash an amount equal to the value of any fractional shares that would otherwise have been issued, valued as of the delivery date. If shares or cash are to be delivered on a particular date, the shares or cash shall be deemed delivered on that date for purposes of compliance with the terms of this Agreement if the cash or shares are actually delivered within 45 days after the specified date as determined in the Company’s discretion with the Recipient having no right to determine the delivery date. Recipient shall not have any right to determine or direct the date of actual delivery.

 

Executive 2012 PRSU Agreement  
  6


(i) Recipient’s Rights as Shareholder . Recipient shall have no rights as a shareholder with respect to the RSUs or the shares underlying them until the Company delivers the shares to Recipient on the delivery date.

(j) Tax Withholding . Recipient acknowledges that, at the actual delivery date, the value of delivered shares of Common Stock will be treated as ordinary compensation income for federal and state income and FICA tax purposes, and that the Company will be required to withhold taxes on this income amount. Promptly following the delivery date, the Company will notify Recipient of the required withholding amount. Concurrently with or prior to the delivery of the certificate referred to in Section 1(h), Recipient shall pay to the Company the required withholding amount in cash or, at the election of Recipient (which election must be made on or before the vesting date), by surrendering to the Company for cancellation shares of the Company’s Common Stock to be delivered with respect to the RSUs or other shares of the Company’s Common Stock valued at the closing market price for the Company’s Common Stock on the vesting date. If Recipient pays the withholding amount in shares of Common Stock, the Company shall pay to Recipient in cash the amount of any resulting over payment.

(k) Section 409A . The award made pursuant to this Agreement shall be interpreted in accordance with Section 409A and Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance issued after the grant of the award. For example, a termination of employment shall be determined with respect to standards for “separation from service” within the meaning of applicable regulations.

(i) Notwithstanding any provision of the award to the contrary, the Company may adopt such amendments to the award or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Company determines are necessary or appropriate to (1) exempt the award from the application of Section 409A or preserve the intended tax treatment of the benefits provided with respect to the award, or (2) comply with the requirements of Section 409A.

(ii) If an amount is determined to be subject to applicable provisions of Section 409A of the Code, payment in connection with termination of employment for a reason other than death or total disability may not start or be made to Recipient if the Company determines Recipient is a “key employee” as defined in Section 416(i) of the Code, without regard to Section 416(i)(5) of the Code, before the date which is six months after the date of termination, notwithstanding any other provisions for time of payment in this Agreement, if such delay in payment is necessary to comply with Section 409A of the Code. The Company may determine that Recipient is a key employee in the event of doubt or to avoid impractical efforts or expense to make an exact determination of key employees. Recipient shall have no claim, rights or remedy if the determination is not correct.

 

Executive 2012 PRSU Agreement  
  7


2. Miscellaneous .

(a) Entire Agreement; Amendment . This Agreement and the Plan (including without limitation Section 17 thereof) constitute the entire agreement of the parties with regard to the subjects hereof and may be amended only by written agreement between the Company and the Recipient.

(b) Notices . Any notice required or permitted under this Agreement shall be in writing and shall be deemed sufficient when delivered personally to the party to whom it is addressed or when deposited into the United States mail as registered or certified mail, return receipt requested, postage prepaid, addressed to Electro Scientific Industries, Inc., Attention: Corporate Secretary, at its principal executive offices or to the Recipient at the address of Recipient in the Company’s records, or at such other address as such party may designate by ten (10) days’ advance written notice to the other party.

(c) Rights and Benefits . The rights and benefits of this Agreement shall inure to the benefit of and be enforceable by the Company’s successors and assigns and, subject to the restrictions on transfer of this Agreement, be binding upon the Recipient’s heirs, executors, administrators, successors and assigns.

(d) Further Action . The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement.

(e) Applicable Law; Attorneys’ Fees . The terms and conditions of this Agreement shall be governed by the laws of the State of Oregon. In the event either party institutes litigation hereunder, the prevailing party shall be entitled to reasonable attorneys’ fees to be set by the trial court and, upon any appeal, the appellate court.

(f) Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original.

 

ELECTRO SCIENTIFIC INDUSTRIES, INC.
By:  

 

  Authorized Officer

 

                                                                  ,Recipient

 

 

 

Executive 2012 PRSU Agreement  
  8


EXHIBIT A

DESIGNATION OF BENEFICIARY

 

Name                                                                                              

  Social Security Number                  -                  -                  

I designate the following person(s) to receive any restricted stock units outstanding upon my death under the Performance-Based Restricted Stock Units Award Agreement with Electro Scientific Industries, Inc.:

Primary Beneficiary(ies)

 

Name                                                                                  

     Social Security Number                -              -             

Birth Date                                                                         

     Relationship                                                                    

Address                                                                                 

     City                    State                    Zip                           

Name                                                                                  

    

Social Security Number              -              -             

Birth Date                                                                        

     Relationship                                                                 

Address                                                                             

     City                    State                    Zip                       
Name                                                                                      

Social Security Number              -              -             

Birth Date                                                                            

     Relationship                                                                    

Address                                                                             

     City                    State                    Zip                           

If more than one primary beneficiary is named, the units will be divided equally among those primary beneficiaries who survive the undersigned.

Secondary Beneficiary(ies)

In the event no Primary Beneficiary is living at the time of my death, I designate the following the person(s) as my beneficiary(ies):

 

Name                                                                                  

     Social Security Number                -              -             

Birth Date                                                                         

     Relationship                                                                    

Address                                                                                 

     City                    State                    Zip                           

Name                                                                                  

    

Social Security Number              -              -             

Birth Date                                                                        

     Relationship                                                                 

Address                                                                             

     City                    State                    Zip                       
Name                                                                                      

Social Security Number              -              -             

Birth Date                                                                            

     Relationship                                                                    

Address                                                                             

     City                    State                    Zip                           

If more than one Secondary Beneficiary is named, the units will be divided equally among those Secondary beneficiaries who survive the undersigned.

This designation revokes and replaces all prior designations of beneficiaries under the Performance-Based Restricted Stock Units Award Agreement.

 

 

      Date signed:                                                         , 20         

Signature

     

 

Executive 2012 PRSU Agreement  
  A-1

Exhibit 31.1

CERTIFICATION PURSUANT TO

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

I, Nicholas Konidaris, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Date: November 7, 2012

 

/s/ Nicholas Konidaris

Nicholas Konidaris

President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION PURSUANT TO

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

I, Paul Oldham, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Date: November 7, 2012

 

/s/ Paul Oldham

Paul Oldham

Vice President of Administration, Chief Financial Officer and Corporate Secretary

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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

 

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

 

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

 

/s/ Nicholas Konidaris

Nicholas Konidaris

President and Chief Executive Officer

Date: November 7, 2012

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

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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

 

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

 

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

 

/s/ Paul Oldham

Paul Oldham

Vice President of Administration, Chief Financial Officer and Corporate Secretary

Date: November 7, 2012

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