Electro Scientific Industries, Inc.
ELECTRO SCIENTIFIC INDUSTRIES INC (Form: 10-K, Received: 06/12/2013 12:58:59)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K  
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-12853
ELECTRO SCIENTIFIC INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oregon
 
93-0370304
(State or other jurisdiction of incorporation
or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
13900 N.W. Science Park Drive, Portland, Oregon
 
97229
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: 503-641-4141
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Series A No Par Preferred Stock Purchase Rights
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No   ý
Indicate by check mark if the Registrant is not required to file reports pursuant Section 13 or Section 15(d) of the Act.    Yes   ¨     No   ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.   ¨
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   ý         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 Act).    Yes   ¨     No   ý


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The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the last sales price ( $12.22 ) as reported by the NASDAQ Stock Market, as of the last business day of the Registrant’s most recently completed second fiscal quarter ( September 29, 2012 ) was $313,920,997 .
The number of shares outstanding of the Registrant’s Common Stock as of June 5, 2013 was 29,732,681 shares.
Documents Incorporated by Reference
The Registrant has incorporated into Part III of this Form 10-K, by reference, portions of its Proxy Statement for its 2013 Annual Meeting of Shareholders.



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ELECTRO SCIENTIFIC INDUSTRIES, INC.
2013 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
 
Part I
Part II
Part III
Part IV
 
 
 



Table of Contents

PART I
Item 1. Business
This annual report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below in Item 1A Risk Factors.
Where You Can Find More Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 as amended (Exchange Act). You can inspect and copy our reports, proxy statements and other information filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC maintains an Internet site at www.sec.gov where you can obtain most of our SEC filings. We also make available, free of charge on our website at www.esi.com , our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC. The information found on our website is not part of this Form 10-K. You can also obtain copies of these reports by contacting Investor Relations at (503) 641-4141.
Fiscal Year
Our fiscal year consists of 52 or 53 weeks ending on the Saturday nearest March 31. Accordingly, our fiscal 2013 reporting period consisted of a 52 -week period ending on March 30, 2013 , our fiscal 2012 consisted of a 52 -week period ending on March 31, 2012 and our fiscal 2011 reporting period consisted of a 52 -week period ending on April 2, 2011 . All references to years or quarters relate to fiscal years or fiscal quarters unless otherwise noted.
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, semiconductor, communications and other markets. 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 drilling, scribing, dicing, singulation, cutting, ablating, trimming, and precision marking on multiple types of materials. These processes require application-specific laser systems that are able to meet our customers’ exacting performance and productivity requirements. Our laser-based systems improve production yields or enable improved performance for flexible and rigid high density interconnect printed circuit boards, semiconductor devices, light emitting diodes (LEDs), advanced semiconductor packaging, touch-panel glass, flat panel liquid crystal displays (LCDs) and other high value components.
Additionally, we produce high-capacity test and inspection equipment that is critical to the quality control process during the production of multilayer ceramic capacitors (MLCCs). Our equipment ensures that each component meets the electrical and physical tolerances required to perform properly. Lastly, we produce systems that use photonic technology to perform precision inspection for quality control and defect identification.
Industry Overview
The microelectronics and semiconductor industries continue to be driven by demand for advanced features and improved functionality in increasingly smaller and smarter consumer devices. The technologies for consumer electronic devices such as smart phones, tablets, personal computers, mobile computing devices, video game systems and high-definition televisions have developed rapidly as increasingly affordable products have been introduced that offer more functionality in smaller packages. In addition, semiconductor and other advanced technologies are being used in a broadening set of markets and applications, including general lighting, energy, automotive, medical and security.
These dynamics in turn are driving the need for faster, smaller, more complex, less expensive and higher-quality electronic devices and components. To achieve these improvements, component and other device manufacturers are increasing the circuit densities in these devices and investing in new technologies.

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For example, smaller and lighter semiconductor devices are driving the need to shrink the physical dimensions of the semiconductor packaging and the high density interconnect (HDI) circuit board on which they are mounted. Higher operating speeds of computers and communication products require more input and output channels within packages and between the packages and the HDI circuit board. These trends require smaller, more accurate, and precisely tapered or shaped holes, known as vias, to create connections between layers and interconnecting devices. The continual trend toward smaller and smarter devices requires the use of an increasing amount of flexible interconnect material between PCBs and other components. These flexible circuits require the smallest and most accurate vias to create the connections between these devices.
In addition, the ability to shrink the actual dimensions of a device is becoming increasingly more difficult, and producers are investing in new technologies, such as stacking thin silicon wafers to create advanced three dimensional (3D) chip packages. We believe this trend will drive additional applications for laser processing, including scribing and dicing of ultra-thin wafers, drilling of through silicon vias (TSV) and scribing of next generation thin films.
Smaller and more complex devices also require more capacitance to be designed into the circuit. This has resulted in a significant increase in the use of smaller, higher-capacitance passive components such as MLCCs. In calendar year 2012, estimated production of MLCCs was nearly 3 trillion units. These MLCCs must be tested electrically and optically to characterize performance and ensure reliability. Automated equipment to test these MLCCs in the manufacturing environment, like our high capacitance tester, can test and sort up to one million parts per hour on parts with dimensions as small as 0.4 by 0.2 millimeters.
Variations of advanced semiconductor technologies and manufacturing processes are increasingly being employed in the production of other types of devices and components, including LEDs. Automated laser-based systems, like our AccuScribe 2210 series, are used to scribe the sapphire wafer to separate individual devices in the production of LEDs. LEDs are increasingly utilized in electronics, display, automotive and general lighting applications.
A significant portion of our business is derived from specialized microfabrication applications. Any material that can be cut, drilled, etched, or otherwise surface treated using a mechanical process can be microfabricated with greater precision and accuracy using a laser-based solution. As consumer electronics and other products or devices become more compact, mechanical processes will not be able to meet the stringent specifications demanded by producers. We believe the capabilities of laser-based solutions for microfabrication will enable our customers to continue to move beyond the limitations of mechanical processes and generate significant growth for us in the future.
Our Solutions
We believe our products address the needs of microelectronics and semiconductor manufacturers by providing them with a high return on their investment due to measurable production benefits such as improved yield, lower cost, higher performance, continued miniaturization and greater reliability.
Our core competencies enable us to design, manufacture, and market a variety of integrated laser-based solutions for microfabrication applications in high-volume manufacturing environments. These core competencies include a deep understanding of laser/material interaction, laser beam positioning, optics and illumination including image processing and optical character recognition, high-speed motion control, small parts handling, proprietary laser technology and systems engineering. We combine this technology expertise with a thorough understanding of our customers’ processes, proprietary laser capabilities, and manufacturing agility to respond rapidly to customer demand to develop and deliver integrated solutions and products that address multiple markets and applications.
Our customers manufacture components, semiconductors, interconnect/packaging devices, displays, LEDs or other parts that serve a wide range of electronic applications. Our systems enable the manufacturing of these components and devices. The primary end-market applications for our customers are consumer electronics, including smart mobile devices such as smart phones and tablets, computers, semiconductor, and LED.
Our Strategy
Our strategy is to leverage our core competencies to be a market leader in laser-based microfabrication for microtechnology industries, including microelectronics, semiconductor and LED. These core competencies, combined with an understanding of our customers’ processes and the use of common platforms, enable us to address a broad range of laser-based applications and end markets within these industries. We intend to focus our efforts on businesses and applications where our differentiated capability enables us to be a market leader. The elements of our strategy are to (1) capture expanding opportunities driven by technology changes and growth in consumer electronics, (2) invest in emerging applications in 3D semiconductor and LED packaging, (3) leverage proprietary laser technology to create competitive advantage, (4) focus on large opportunities with strategic customers, and (5) leverage our flexible platforms into new applications.

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Capture expanding opportunities in consumer electronics
Growth in consumer electronics, smart phones, tablets, notebook computers and other smart devices is driving increased miniaturization and complexity of the underlying components and materials, which in turn is creating additional opportunities for laser-based microfabrication. Our strategy is to expand the number of applications we address in the areas of components, enclosures and display technologies within these devices. For example, in 2013 we introduced new capabilities for de-paneling or cutting micro PCB's, low cost laser microfabrication on enclosures, and singulation of next generation strengthened cover glass. We believe growth from consumer electronics applications will be driven by overall growth in the market for these devices, new technologies, and expanding our addressable applications.
Invest in emerging applications in 3D semiconductor and LED packaging
Next generation 3D semiconductor and LED packaging technologies create new opportunities for laser-based processing. Our strategy is to leverage our core competencies and industry experience to invest in development of laser-based tools in the areas of ultra-thin wafers dicing, next generation thin films scribing, advanced packaging micromachining and LED wafer and package singulation. While these technologies are emerging in nature, we believe that they represent significant growth opportunities in the future.
Leverage proprietary laser technology
ESI has been a pioneer in laser/material interaction and has developed deep expertise in the use of multiple types of laser technology to develop customer solutions. Over the last two years we have invested in proprietary laser technology through the acquisitions of Pyrophotonics Lasers Inc. and Eolite Systems. These acquisitions, combined with internally developed capability, provide us with access to tailored pulse fiber technology, high power UV nanosecond, and low cost picosecond fiber lasers with a unique, scalable architecture. Our strategy is to utilize these technologies to enable differentiated capability with our systems, lower cost, and generate incremental revenue for the company.
Focus on large opportunities with key strategic customers
We work with our market-leading, global customers through high-level, multi-disciplinary management and employee teams to define and produce the next generation of manufacturing systems. This requires confidential interaction between the customer and ESI, sharing technology and product roadmaps. Our strategy is to focus on large opportunities within these customers and we believe that growth will be driven both by expanding applications within existing customers and penetrating new customers.
Leverage flexible platforms into new applications
Our key technological capabilities include laser/material interaction, laser beam positioning, optics and illumination, including image processing and optical character recognition, high-speed motion control systems, small parts handling systems and systems integration. These capabilities are incorporated into a series of flexible platforms that have multiple common elements but are tailored to specific applications. Our strategy is to leverage our investment in these platforms to address multiple new applications and market opportunities.
Our Products
We operate in one segment, high-technology manufacturing equipment, which is comprised of products that are organized in three groups: interconnect & microfabrication, semiconductor and components.
Interconnect & Microfabrication Group (IMG)
Our Interconnect & Microfabrication Group products address an expanding number of applications and materials on a broad set of substrates, including panels, continuous-feed reels, and discrete three dimensional components or devices.
Interconnect Via Drilling
For electrical interconnect applications, our laser via micro fabrication systems target applications that require the highest accuracy and smallest via (hole) dimensions to create electrical connections between layers in flexible circuits, high-density circuit boards and IC packages. Our microvia drilling technology addresses the rapidly changing applications in IC packages, multichip modules and HDI circuit boards. Our ultraviolet (UV) laser processing systems employ state-of-the-art technology in lasers, optics and motion control. These products include single-beam and multi-beam systems that produce high-quality vias with the best-in-class placement accuracy for improved yield of packages and substrates.

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Advanced Microfabrication
As technologies enable consumer electronics and other devices to become more compact, mechanical processes are not able to meet the stringent specifications demanded by manufacturers. We offer several platforms that enable customers to perform precision drilling, scribing, cutting, etching, routing or marking on many different types of materials and devices including glass, metal, plastic, paint and ceramics. We also offer laser ablation systems that ablate material for identification and analysis applications, including forensics, mineral analysis and research.
In June 2012, we acquired Eolite Systems, a designer and manufacturer of unique high-power fiber lasers in Pessac, France. The acquisition of Eolite provides us access to high power UV nanosecond and low cost picoseconds lasers with a unique, scalable architecture. We believe these lasers can be used internally in a variety of laser microfabrication applications as well as provide potential additional commercial revenue for the company with the ability to customize lasers to specific customer applications with differentiated capability and lower cost.
Semiconductor Group (SG)
Our Semiconductor Group products address multiple applications that utilize laser energy to process materials on wafer-based substrates. This includes traditional silicon wafers, LEDs wafers, and new ultrathin silicon wafers used in the three-dimensional (3D) packaging applications.
Semiconductor Memory Yield Improvement Systems
Our semiconductor memory yield improvement products are designed to cost-effectively enable significant post-repair yield improvements in the manufacturing of dynamic random access memory (DRAM) memory devices. However, slowing bit growth, industry consolidation, and adoption of alternative technologies have resulted in a near saturation of the market. As a result, during fiscal 2013 we announced that this product line would not be significant for us in the future and we took several restructuring actions to refocus our business which resulted in part in a charge against our inventory for these products.
3D Semiconductor Wafer Processing
The advent of 3D chip packaging technologies is driving the need for silicon wafers to become thinner in order to allow for stacking of wafers within the same packaging geometry. As wafers become thinner, they become more challenging to cut into discrete chips using traditional mechanical saws. Our model 9900 uses a laser to dice ultra-thin silicon wafers, those with a thickness of 50 microns or below, and to singulate interposers. In addition, this platform can be used to scribe next generation thin film materials that lend themselves to laser processing. As 3D technologies are developed, we believe the use of lasers will become increasingly important to productivity and performance.
LED Wafer Scribing
Our AccuScribe line of sapphire wafer scribing systems is a key component in the manufacture of LEDs. During production, LEDs are created on a thin wafer of synthetic sapphire crystal that must be broken into individual units at the end of the process. The brittle nature of the sapphire wafer requires that it be carefully cut in order to prevent unwanted fractures, yield losses, and lower light output when the wafer is broken apart into discrete LEDs. The AccuScribe systems use a laser to scribe the wafer with a precise groove between individual LEDs. When mechanical force is applied to the wafer, it fractures along these grooves and allows the wafer to be split apart into discrete LEDs. These systems are capable of scribing both standard and high brightness designs for general illumination applications. In addition, this platform can be used to address singulation of various LED packaging materials.
LCD Repair
Our laser LCD repair systems are critical to improving yields in the manufacture of flat panel displays. During production, individual pixels of a display may develop electrical defects that result in no light emission or the emission of only a steady white light. To correct these defects, flat panel display producers employ a laser repair process to isolate the electrical defects during production by cutting the inputs to the pixel. Our laser systems are primarily sold to the manufacturers of LCD repair tools as a key component of their products.
Semiconductor Systems
Subsequent to the end of fiscal year, we acquired the assets of the semiconductor systems business from GSI Group Inc. These products include industry leading wafer marking equipment, wafer and circuit trim tools, and LCD repair tools. Wafer marking equipment is used for serialization and wafer identification by both manufacturers of semiconductor wafers and within

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semiconductor fabs. Wafer and circuit trim tools are laser systems that adjust the electrical performance of semiconductor devices or hybrid circuits by removing a precise amount of material from one or more circuit components.
Components Group (CG)
We design and manufacture products that combine high-speed small parts handling technology with real-time control systems to provide highly automated, cost-effective inspection solutions for manufacturers of MLCCs and other passive components such as capacitor arrays, inductors, resistors, varistors and hybrid circuits. These components, produced in quantities of trillions of units per year, process analog, digital and high-frequency signals and are used extensively in nearly all electronic products.
We provide several types of products and solutions in this market. Our MLCC test systems employ high-speed handling and positioning techniques to precisely load, test and sort MLCCs based on their electrical energy storage capacity, or capacitance, and their electrical energy leakage, or dissipation factor. Our 35XX series is the most productive tester in the market today. Our latest 3510 model enables high speed testing of the industry’s smallest metric 0402 capacitors used primarily in advanced cell phone and tablet designs. We also produce consumable products such as carrier plates and termination belts, both of which are used to hold MLCCs during the manufacturing and testing process.
Customers
Our top ten customers for 2013 , 2012 and 2011 accounted for approximately 61% , 56% and 62% of total net sales, respectively. One customer, Apple Inc. and its affiliates, accounted for approximately 31% , 29% and 24% of total net sales in 2013 , 2012 and 2011 , respectively. In 2011 , Hynix Semiconductor Inc. and Taiyo Yuden Co., Ltd., each individually accounted for approximately 11% of total net sales. No other customer individually accounted for more than 10% of total net sales in 2013 , 2012 or 2011 .
Sales, Marketing and Service
We sell our products worldwide through direct sales and service offices, value-added resellers and independent representatives located around the world. ESI has direct sales and service personnel in Oregon, California and several other states; China, Japan, Korea, Singapore and Taiwan in Asia; and France, Germany and the United Kingdom in Europe. We serve selected customers in the Americas, Europe, Israel and additional countries through manufacturers’ representatives.
We have a substantial base of installed products in use by leading microelectronics and semiconductor manufacturers. We emphasize strong working relationships with these customers to meet their needs for additional systems and to facilitate the successful development and sale of new products to these customers.
We generally employ service personnel wherever we have a significant installed base. We offer a variety of warranty, maintenance and parts replacement programs to service the requirements of our customers’ high-volume manufacturing environments.
Backlog
Backlog consists of purchase orders for products and spare parts that we expect to ship within 12 months and service contracts for performance generally within 24 months. Backlog does not include deferred system revenue. Backlog was $32.8 million at March 30, 2013 compared to $69.1 million at March 31, 2012 , representing a decrease of 52% primarily due to shipping of the significant flex via drilling orders received late in fiscal 2012. The stated backlog is not necessarily indicative of sales for any future period, because of possible order cancellations or deferrals, shipping or acceptance delays, nor does backlog represent any assurance that we will realize a profit from filling the orders.
Research, Development and Technology
We believe that our ability to compete effectively and deliver customer solutions depends, in part, on our ability to maintain and expand our expertise in core technologies and product applications. Our primary core competencies and capabilities include:
laser/material interaction;
proprietary laser technology;
high-speed, micron-level motion control systems;
precision optics;
image processing and optical character recognition;
high-speed, small parts handling;

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real-time production-line electronic measurement;
real-time operating systems; and
systems integration.
Our research and development expenditures for 2013 , 2012 and 2011 were $37.2 million ( 17% of net sales), $42.6 million ( 17% of net sales) and $41.1 million ( 16% of net sales), respectively.
Competition
Our markets are dynamic, cyclical and highly competitive. The principal competitive factors in our markets are product performance, cost of ownership, ease of use, reliability, service, technical support, product roadmap, price, proprietary technology, manufacturing responsiveness and relationships with customers. We believe that our products compete favorably with respect to these factors. Some of our competitors have greater financial, engineering and manufacturing resources and larger distribution networks than we do. Some of our customers develop, or have the ability to develop, manufacturing equipment similar to our products. Competition in our markets may intensify and our technological advantages may be reduced or lost as a result of technological advances by competitors or customers or changes in electronic device processing technology.
Our Interconnect & Microfabrication Group competes with laser systems provided by Hitachi Via Mechanics, Ltd., LPKF Laser & Electronics AG, Mitsubishi Electric Corporation, Orbotech Ltd., InnoLas Systems GmbH and several Chinese and Korean companies who compete within their local markets. The principal competitors for our Semiconductor Group are DISCO Corporation, and Laser Solutions, Inc. LCD repair competitors include Quantel USA, Inc. and HOYA Corporation. For the Components Group, our competitors include Humo Laboratory, Ltd. as well as component manufacturers that develop systems for internal use.
Manufacturing and Supply
Our primary production facilities are located in Singapore; Portland, Oregon; and Klamath Falls, Oregon. Our Singapore facility is our primary systems manufacturing facility and manufactures certain IMG, LED, CG and laser ablation products. The Portland facility primarily provides advanced manufacturing and prototype capability. The Klamath Falls facility manufactures CG consumable products. Our Singapore operation is located in a leased facility. As we continue our efforts to streamline the organization and improve efficiencies, we expect a growing percentage of final systems will be shipped from Singapore.
We use qualified manufacturers to supply many components and sub-system modules for our products. Our systems use high-performance computers, peripherals, lasers and other components from various suppliers. Some of the components we use are obtained from a single source or a limited group of suppliers. An interruption in the supply of a particular component would have a temporary adverse impact on us. We believe our relationships with our suppliers are good.
Patents and Other Intellectual Property
We have a policy of seeking patents, when appropriate, on inventions relating to new products and improvements that are discovered or developed as part of our ongoing research, development and manufacturing activities. We own 259 United States patents and 524 patents issued outside of the United States as of March 30, 2013 . Additionally, as of March 30, 2013 , we had 482 patent applications pending in the United States and 1,711 patent applications pending outside of the United States. Although our patents are important, we believe that the competitiveness of our products also depends on the technical competence and innovation of our employees.
We rely on copyright protection for our proprietary software. We also rely upon trade secret protection for our confidential and proprietary information. Others may independently develop substantially equivalent proprietary information and techniques, and we may be unable to meaningfully protect our trade secrets.
Employees
As of March 30, 2013 , we employed 599 people of whom 579 were permanent and 20 were temporary. Many of our employees are highly skilled, and our success will depend in part upon our ability to attract and retain such employees, who are in great demand. We have never had a work stoppage or strike, and no employees are represented by a labor union or covered by a collective bargaining agreement. We consider our employee relations to be good.
Environmental Compliance
During fiscal 2013 , we retained ISO 14001 certification via a recertification audit for our environmental management system for our Portland, Oregon operations. We do not expect compliance with international, federal, state and local provisions

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that have been enacted or adopted related to the discharge of materials into the environment or otherwise relating to protection of the environment to have a material effect on our capital expenditures, earnings or competitive position.
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 and continued to decline in 2013. In addition, due to changes in the memory repair industry, we do not expect to experience materially increased sales of memory repair systems in future up cycles. 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. New companies may enter the markets in which we compete, or industry consolidation may occur, further increasing competition in those markets. We believe that to be competitive we must continue to expend significant financial resources in order to, among other things, invest in new product development and enhancements. We may not be able to compete successfully in the future and increased competition may result in price reductions, reduced profit margins and loss of market share.
Increased Price Pressure
We have experienced and continue to experience pricing pressure in the sale of our products, from both competitors and customers. Pricing pressures typically have become more intense during cyclical downturns when competitors seek to maintain or increase market share, reduce inventory or introduce more technologically advanced products. In addition, we may agree to pricing concessions with our customers in connection with volume orders. Our business, financial condition, margins or results of operations may be materially and adversely affected by competitive pressure and intense price-based competition.
Revenues are Largely Dependent on Few Customers
We depend on a few significant customers for a large portion of our revenues. In 2013 , our top ten customers accounted for approximately 61% of total net sales, with one customer, Apple Inc. and its affiliates accounting for approximately 31% 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,

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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.
Reliance on 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.
Utilization of 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

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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 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 2013, we recorded $21.0 million of charges in cost of sales for an inventory write-off associated with discontinued products.
Uncertainties Resulting from Conflict Minerals Regulation
On August 22, 2012, the SEC adopted a new rule requiring disclosures of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured by companies filing public reports. The new rule, which is effective for the 2013 calendar year and requires a disclosure report to be filed by May 31, 2014, will require companies to perform due diligence, disclose, and report whether such minerals originate from the Democratic Republic of Congo or an adjoining country. The new rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products, including tantalum, tin, gold, and tungsten. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. Since our supply chain is complex, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.
Risks Related to Our Organization
Operating a Global Business
International shipments accounted for 90% of net sales in 2013 , with 85% 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 Singapore and China, research and development facilities in Canada, France and Taiwan, and sales and service offices in various countries. Under our globalization strategy, we intend to increase our foreign operations in the future. Our non-U.S. sales, purchases and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including the following:
periodic local or geographic economic downturns and unstable political conditions;
price and currency exchange controls;
fluctuation in the relative values of currencies;
difficulty in repatriating money, whether as a result of tax laws or otherwise;
difficulties protecting intellectual property;
compliance with labor laws and other laws governing employees;
local labor disputes;
shipping delays and disruptions;
unexpected changes in trading policies, regulatory requirements, tariffs and other barriers; and
difficulties in managing a global enterprise, including staffing, collecting accounts receivable, and managing suppliers, distributors and representatives.

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Our business and operating results could also be impacted, directly or indirectly, by natural disasters, outbreaks of infectious disease, military action, international conflicts, terrorist activities, civil unrest and associated political instability. Many of our facilities, including our Portland, Oregon headquarters, are in areas with known earthquake risk. Some of these events or circumstances may also result in heightened security concerns with respect to domestic and international travel and commerce, which may further affect our business and operating results. In particular, due to these uncertainties, we are subject to the following additional risks:
future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities;
more frequent instances of shipping delays;
demand for our products may not increase or may decrease; and
our customers or suppliers may experience financial difficulties or cease operations.
We currently benefit from a tax incentive program in Singapore pursuant to which we pay no Singapore income tax with respect to our manufacturing income. The incentive commenced on July 1, 2006 and will continue through June 30, 2016 assuming we are able to satisfy applicable requirements. There is no assurance we will be able to satisfy these requirements. Failure to meet such requirements may lead to reduction in future benefits.
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 of a new facility;
re-qualifications and other procedures that may be required by our customers;
our ability to bring up local suppliers to meet our quality and cycle-time needs;
our ability to reduce costs in the United States as we add costs in Asia;
rapidly changing business conditions that may require plans to be changed or abandoned before they are fully implemented; and
challenges posed by distance and by differences in language and culture.
These and other factors could delay the development and implementation of our strategy, as well as impair our gross margins, delay shipments and deliveries, cause us to lose sales, require us to write off investments already made, damage our reputation and harm our business, financial condition and results of operations. If we decide to change our current globalization strategy, we may incur charges for certain costs incurred.
Acquisitions and Divestitures
We may make acquisitions of, or significant investments in, other businesses with complementary products, services or technologies, such as our June 2012 acquisition of Eolite Systems. In addition, subsequent to the end of the fiscal year, we acquired the assets of the Semiconductor Systems business from GSI, Group Inc. Acquisitions involve numerous risks, many of which are unpredictable and beyond our control, including:
difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of the acquired businesses;
implementation of our enterprise resource planning (ERP) system into the acquired company’s operations;
diversion of management’s attention from other operational matters;
the potential loss of key employees of the acquired company;
lack of synergy or inability to realize expected synergies resulting from the acquisition;

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acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance by the acquired company;
difficulties establishing satisfactory internal controls at the acquired company;
risks and uncertainties relating to the performance of the combined company following the transaction; and
acquiring unanticipated liabilities for which we will not be indemnified.
Furthermore, the accounting for an acquisition could result in significant charges resulting from amortization or write-off of intangible assets we acquire. Our inability to effectively manage these risks could result in our inability to realize the anticipated benefits of an acquisition on a timely basis, or at all, and materially and adversely affect our business, financial condition and results of operations. In addition, all acquisition transaction costs must be expensed as incurred rather than capitalized, which may have a material adverse effect on our results of operations.
The means by which we finance an acquisition may also significantly affect our business or the value of the shares of our common stock. If we issue common stock to pay for an acquisition, the ownership percentage of our existing shareholders will be diluted and the value of the shares held by our existing shareholders could be reduced. If we use cash on hand to pay for an acquisition, the payment could significantly reduce the cash that would be available to fund our operations or to use for other purposes. If we borrow funds in connection with an acquisition, we would be required to use cash to service the debt and to comply with financial and other covenants.
We may from time to time also make strategic investments in development stage companies. Investments in development stage companies are subject to a high degree of risk. We could lose all or a portion of our investment in any such company.
Hiring and Retention of Personnel
Our continued success depends in part upon the services of our key managerial, financial and technical personnel. The loss of key personnel, or our inability to attract, assimilate and retain qualified personnel, could result in the loss of customers, inhibit our ability to operate and grow our business and otherwise have a material adverse effect on our business and results of operations. We have previously had to, and may in the future have to, impose salary reductions on employees during economic downturns in an effort to maintain our financial position. These actions may have an adverse effect on employee loyalty and may make it more difficult for us to attract and retain key personnel. Competition for qualified personnel in the industries in which we compete is intense, and we may not be successful in attracting and retaining qualified personnel. We may incur significant costs in our efforts to recruit and retain key personnel, which could affect our financial position and results of operations.
Risks Related to Technology
Markets Characterized by Rapid Technological Change
The markets for our products are characterized by rapid technological change and innovation, frequent new product introductions, changes in customer requirements and evolving industry standards. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address technological changes and the requirements of current and potential customers. The development of new, technologically advanced products is a complex and uncertain process, requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. The introduction by us or by our competitors of new or enhanced products, or alternative technologies, may cause our customers to defer, change or cancel orders for our existing products or cease purchasing our products altogether. For example, our semiconductor memory customers are exploring alternative redundancy technologies such as electrical redundancy technology. We believe our historical semiconductor memory customers are converting these technologies into their manufacturing process for newer products, thereby materially reducing 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.
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

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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.
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.

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Legal Proceedings
From time to time we are subject to various legal proceedings, including breach of contract claims and claims that involve possible infringement of patent or other intellectual property rights of third parties. It is inherently difficult to assess the outcome of litigation matters, and there can be no assurance that we will prevail in any litigation. Any litigation could result in substantial cost and diversion of management’s attention, which by itself could have a material adverse effect on our financial condition and results of operations. Further, adverse determinations in such litigation could result in loss of our property rights, subject us to significant liabilities, require us to seek licenses from others or prevent us from manufacturing or selling our products, any of which could materially adversely affect our business, financial condition, results of operations or cash flows.
Provisions Restricting Our Acquisition
Our articles of incorporation and bylaws contain provisions that could make it harder for a third party to acquire us without the consent of our Board of Directors. Our Board of Directors has also adopted a shareholder rights plan, or “poison pill,” which would significantly dilute the ownership of a hostile acquirer. In addition, the Oregon Control Share Act and the Oregon Business Combination Act limit the ability of parties who acquire a significant amount of voting stock to exercise control over us. These provisions may have the effect of lengthening the time required for a person to acquire control of us through a proxy contest or the election of a majority of our Board of Directors, may deter efforts to obtain control of us and may make it more difficult for a third party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by our shareholders.
Risks Related to Financial Matters
Unfavorable Currency Exchange Rate Fluctuations
Currency exchange rate fluctuations could have an adverse effect on our sales and results of operations and we could experience losses with respect to forward exchange contracts into which we may enter. Unfavorable currency fluctuations could require us to increase prices to foreign customers, which could result in lower net sales by us to those customers. Alternatively, if we do not adjust the prices for our products in response to unfavorable currency fluctuations, our results of operations could be materially and adversely affected. In addition, some of our foreign sales are denominated in the currency of the country in which these products are sold and the currency we receive in payment for such sales could be less valuable at the time of receipt as a result of exchange rate fluctuations. From time to time, we enter into forward exchange contracts to hedge the value of accounts receivable primarily denominated in Japanese yen and other currencies. However, we cannot be certain that our efforts will be adequate to protect us against significant currency fluctuations or that such efforts will not expose us to additional exchange rate risks, which could adversely affect our results of operations.
Fluctuations in Effective Tax Rate
As a global company, we are subject to taxation in the United States and numerous foreign jurisdictions. Our effective tax rate is subject to fluctuation from one period to the next because the income tax rates for each year are a function of many factors, including: (a) taxable income levels and the effects of a mix of profits (losses) earned by ESI and our subsidiaries in numerous tax jurisdictions with a broad range of income tax rates; (b) our ability to utilize deferred tax assets; (c) taxes, refunds, interest or penalties resulting from tax audits; (d) the magnitude of various credits and deductions as a percentage of total taxable income; and (e) changes in tax laws or the interpretation of such tax laws. 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 $9.1 million in acquired intangible assets and $7.9 million in goodwill at March 30, 2013 . 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 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 a review of our acquired intangible assets in the fourth quarter of 2013. We identified intangible assets relating to acquired in-process research and development programs from which we no longer expect to derive value. As a result, we accelerated amortization of $2.3 million on acquired intangible assets. There were no other events or circumstances during 2013 that would indicate the carrying value of our long-lived assets may not be recoverable.
We performed our annual goodwill impairment analysis during the fourth quarter of 2013 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. If at any time management determines that an impairment exists, we will be required to reflect the impaired value as part of operating

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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 2013 , our stock price fluctuated between a high of $15.20 per share and a low of $9.46 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 semiconductor and other industries into which we sell products;
general economic conditions;
political changes, hostilities or natural disasters;
low trading volume of our common stock;
the number of analysts covering our common stock; and
the number of firms making a market in our common stock.
In addition, the stock market has recently experienced significant price and volume fluctuations. These fluctuations have particularly affected the market prices of the securities of high-technology companies like ours. These market fluctuations could adversely affect the market price of our common stock.
Reduction or Cessation of 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. Further, the special dividend declared by the Board of Directors in December 2012 should not be considered a recurring event. A reduction or cessation in our 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 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our executive and administrative headquarters, which houses our primary engineering and marketing functions , advanced manufacturing capability for new products, and manufacturing of select legacy products are located in a four-building complex with 250,800 square feet of space on 15 acres in Portland, Oregon. Additionally, our Components Group (CG) consumable products are manufactured at a 53,000 square foot plant on 31 acres in Klamath Falls, Oregon. We own all of these buildings. We believe the productive capacity of these facilities to be adequate and suitable for the requirements of our business for the foreseeable future.
Our primary system manufacturing facilities are located in leased facilities in Singapore. We lease approximately 26,000 square feet of facilities in Singapore where we manufacture certain Interconnect & Microfabrication Group (IMG), LED, CG and laser ablation products. We also lease approximately 65,000 square feet of facilities in Fremont, California that are used primarily for engineering and marketing of our LED products and as a demonstration center for our microfabrication systems. We additionally lease approximately 20,150 square feet of facilities in Beijing, China, where we manufacture certain laser

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products. Additionally, we lease other office and facility space in various locations throughout the United States and various foreign countries.
Item 3. Legal Proceedings
In the ordinary course of business, we are involved in various 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 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Common Stock Prices
Our common stock trades on the NASDAQ Stock Market under the symbol ESIO. There were approximately 533 shareholders of record as of June 5, 2013 , and on that date there were 29,732,681 common shares outstanding. The closing price on June 5, 2013 was $11.30 .
The following table shows the high and low closing prices for our common stock as reported on the NASDAQ Stock Market for the fiscal quarters indicated:
Fiscal 2013
High
 
Low
Quarter 1
$
15.20

 
$
10.89

Quarter 2
13.16

 
10.49

Quarter 3
12.84

 
9.46

Quarter 4
11.63

 
9.74

 
Fiscal 2012
High
 
Low
Quarter 1
$
19.30

 
$
15.19

Quarter 2
19.88

 
11.81

Quarter 3
14.68

 
11.10

Quarter 4
16.65

 
13.84

Share Repurchase Program
On December 9, 2011, the Board of Directors authorized a 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 in 2013 . There is no fixed completion date for the repurchase program.
Disclosures related to securities authorized for issuance under our Equity Compensation Plans are incorporated by reference into Item 12 of this annual report on Form 10-K, Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters, from our Proxy Statement for our fiscal 2013 annual meeting.

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Dividends
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 quarterly dividend declared and paid by us since the adoption of the dividend policy:
Date Declared
 
Record Date
 
Payable Date
 
Amount per Share
February 7, 2013
 
February 28, 2013
 
March 14, 2013
 
$
0.08

November 8, 2012
 
November 21, 2012
 
December 5, 2012
 
$
0.08

August 9, 2012
 
August 24, 2012
 
September 10, 2012
 
$
0.08

May 10, 2012
 
June 4, 2012
 
June 18, 2012
 
$
0.08

December 9, 2011
 
January 27, 2012
 
February 17, 2012
 
$
0.08

A special dividend of $2.00 per share was declared by the Board of Directors on December 3, 2012 after the successful patent settlement. The special dividend should not be considered a recurring event.
We paid aggregate dividends of $68.1 million and $2.3 million in 2013 and 2012 , respectively. Subsequent to the year ended March 30, 2013 , the Board of Directors declared an $0.08 per outstanding common share cash dividend on May 9, 2013 , payable June 19, 2013 to shareholders of record on June 5, 2013 . The estimated amount to be paid as a result of the May 9, 2013 declaration is $2.4 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.

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Stock Performance Graph
The graph below compares the cumulative 58-month total return to holders of Electro Scientific Industries, Inc. common stock with the cumulative total returns of the S&P 500 Index and the S&P Information Technology Index for the same period. The graph assumes that the value of the investment in Electro Scientific Industries, Inc. common stock and in each of the indices (including reinvestment of dividends) was $100.00 on March 29, 2008 and tracks it through March 30, 2013 .
Historical stock price performance should not be relied upon as indicative of future stock price performance.
*$100 invested on 3/29/08 in stock or 3/31/08 index, including reinvestment of dividends. Indexes calculated on month-end basis.

   
Cumulative Total Return 1
   
March 29, 2008
 
March 28,
2009
 
April 3,
2010
 
April 2,
2011
 
March 31,
2012
 
March 30, 2013
Electro Scientific Industries, Inc.
100.00

 
38.81

 
79.17

 
105.32

 
93.22

 
84.33

S&P 500
100.00

 
61.91

 
92.72

 
107.23

 
116.39

 
132.64

S&P Information Technology Index
100.00

 
69.93

 
110.50

 
123.63

 
148.62

 
146.95

 
1. Copyright© 2013 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.


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  Item 6. Selected Financial Data
(In thousands, except per share data)
2013
 
2012
 
2011
 
2010
 
2009
Statement of Operations Data
 
 
 
 
 
 
 
 
 
Net sales
$
216,625

 
$
254,229

 
$
256,811

 
$
148,893

 
$
157,313

Provision for (benefit from) income taxes 2,6
39,851

 
(1,417
)
 
390

 
(9,778
)
 
(13,627
)
Net (loss) income 1,2,3,4,5,6
(54,716
)
 
4,904

 
7,934

 
(11,984
)
 
(51,050
)
Net (loss) income per share—basic 1,2,3,4,5,6
(1.86
)
 
0.17

 
0.28

 
(0.44
)
 
(1.89
)
Net (loss) income per share—diluted 1,2,3,4,5,6
(1.86
)
 
0.17

 
0.28

 
(0.44
)
 
(1.89
)
Cash dividends paid per outstanding common share
2.32

 
0.08

 

 

 

Balance Sheet Data
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, restricted cash, short-term investments and auction rate securities 7,8,9,10
$
145,057

 
$
198,723

 
$
201,592

 
$
171,320

 
$
161,925

Working capital
194,406

 
269,532

 
259,739

 
253,728

 
246,910

Net property, plant and equipment
27,894

 
32,103

 
39,661

 
40,590

 
43,005

Total assets
322,208

 
433,210

 
440,167

 
394,418

 
384,247

Long-term debt

 

 

 

 

Shareholders’ equity
264,142

 
378,670

 
362,299

 
342,662

 
343,523


1.
Fiscal 2013 included $2.6 million for restructuring costs, which primarily consisted of $1.5 million of employee severance costs and $1.1 million of charges related to asset write-offs. Fiscal 2013 also included $21.0 million of charges in cost of sales for inventory write-offs, $8.1 million for share-based compensation expense, $4.8 million for amortization of acquired intangible assets, including $2.3 million of accelerated amortization, $1.2 million for net gain on sale of property and equipment, and $15.3 million for net legal settlement proceeds.
2.
Fiscal 2013 included a $46.9 million valuation allowance on deferred tax assets.
3.
Fiscal 2012 included $3.8 million for restructuring costs, which primarily consisted of $1.9 million of employee severance costs and $1.7 million of accelerated depreciation for certain assets. Fiscal 2012 also included $2.0 million of charges in cost of sales for an inventory write-off, $11.5 million for share-based compensation expense, $1.7 million for amortization of acquired intangible assets, $1.2 million for loss on disposal of assets and the write-off of engineering materials, $0.6 million for legal settlement costs, and a gain of $2.7 million from sale of previously impaired auction rate securities.
4.
Fiscal 2011 included $9.3 million for share-based compensation expense, $1.4 million for legal settlement costs, $0.8 million for restructuring costs, $2.0 million for amortization of acquired intangible assets, and a gain of $0.7 million from sale of previously impaired auction rate securities.
5.
Fiscal 2010 included $7.7 million for share-based compensation expense, $2.1 million for amortization of acquired intangible assets, a charge of $1.3 million for other-than-temporary impairment of auction rate securities, and a benefit of $4.5 million for net merger termination proceeds.
6.
Fiscal 2009 included $17.4 million for a goodwill impairment charge, $13.6 million for other-than-temporary impairment of auction rate securities, and $6.0 million for increases to the valuation allowance on deferred tax assets. Fiscal 2009 also included $4.4 million for share-based compensation expense, $4.1 million for the write-off of materials from a research, development and engineering program due to a change in product development strategy, $4.0 million for restructuring costs, and $2.3 million for amortization of acquired intangible assets.
7.
No investments in auction rate securities were held at the end of fiscal 2012 and fiscal 2013.
8.
Fiscal 2011 included auction rate securities at a fair value of $5.2 million.
9.
Fiscal 2010 included auction rate securities at a fair value of $5.0 million.
10.
Fiscal 2009 included auction rate securities at a fair value of $6.0 million.


21

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview of Business
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, semiconductor, communications and other markets. 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 drilling, scribing, dicing, singulation, cutting, ablating, trimming, and precision marking on multiple types of materials. These processes require application-specific laser systems that are able to meet our customers’ exacting performance and productivity requirements. Our laser-based systems improve production yields or enable improved performance for flexible and rigid high density interconnect printed circuit boards, semiconductor devices, light emitting diodes (LEDs), advanced semiconductor packaging, touch-panel glass, flat panel liquid crystal displays (LCDs) and other high value components.
Additionally, we produce high-capacity test and inspection equipment that is critical to the quality control process during the production of multilayer ceramic capacitors (MLCCs). Our equipment ensures that each component meets the electrical and physical tolerances required to perform properly. Lastly, we produce systems that use photonic technology to perform precision inspection for quality control and defect identification.
Overview of Financial Results
Our fiscal year consists of 52 or 53 weeks ending on the Saturday nearest March 31. Accordingly, our fiscal 2013 reporting period consisted of a 52 -week period ending on March 30, 2013 , our fiscal 2012 reporting period consisted of a 52 -week period ending on March 31, 2012 and our fiscal 2011 reporting period consisted of a 52 -week period ending on April 2, 2011 . All references to years or quarters relate to fiscal years or fiscal quarters unless otherwise noted.
In 2013, we saw a decline in orders primarily due to overcapacity in the semiconductor memory repair, LED, MLCC, and Flex drilling markets. Our total order volume in 2013 was $179.5 million , down approximately 30% , compared to orders of $255.5 million in 2012 . While revenue increased from the prior year, orders for our Interconnect & Microfabrication (IMG) products declined due to absorption of capacity for our flex-circuit via drilling products following record orders the prior year and timing of service contract orders. Orders for our Semiconductor Group (SG) decreased on overcapacity, and orders for our Components Group (CG) products increased driven by technology buys for new systems to test next generation capacitors.
Total shipments were $215.8 million in 2013 compared to $251.5 million in 2012 . By product group, SG shipments decreased by approximately 69% following capacity buys in 2012 for DRAM memory repair and LED systems while IMG and CG shipments remained relatively flat. Backlog was $32.8 million as of March 30, 2013 compared to $69.1 million as of March 31, 2012 primarily as a result of shipping the record flex via drilling orders received late in fiscal 2012.
Net sales were $216.6 million in 2013 compared to $254.2 million in 2012 . This decrease was primarily due to lower demand in SG and CG for memory repair, LED and passive component products, partially offset by increases in IMG sales as a result of shipments of our flex-circuit via drilling following record orders in the fourth quarter of 2012 and demand for our advanced microfabrication systems.
Gross profit was $64.3 million in 2013 compared to $107.7 million in 2012 . This decrease was primarily due to $23.3 million of charges in cost of sales for inventory write-offs and accelerated amortization of acquired intangible assets related to our corporate restructuring program, lower production and sales volumes, and product mix. Gross margins were 29.7% on net sales of $216.6 million in 2013 compared to 42.4% on net sales of $254.2 million in 2012 .
Net operating expenses of $79.4 million in 2013 decreased $27.1 million from $106.5 million in 2012 . This decrease was primarily due to $15.8 million in net legal settlement proceeds, reflected as a credit offset to operating expenses. Additionally, operating expenses decreased from 2012 as a result of a $5.4 million reduction in research, development and engineering, a $2.5 million decrease in selling, service and administration, a $1.2 million decrease in restructuring costs, and a $2.2 million increase in net gain on sale of property. The decrease in research and development was primarily due to lower labor costs from selective headcount reductions, declines in project material costs, and lower depreciation. The decrease in selling, service and administration was primarily attributable to a $2.9 million decrease in share-based compensation expenses. Operating loss was $15.1 million in 2013 compared to operating income of $1.2 million in 2012 , a decrease of $16.3 million .

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Table of Contents

Non-operating income was $0.3 million in 2013 compared to $2.3 million in 2012 . The decrease was primarily due to a $2.7 million gain on sale of previously impaired auction rate securities (ARS) included in 2012.
Provision for income taxes was $39.9 million in 2013 compared to a benefit from income taxes of $1.4 million in 2012, due primarily to a $46.9 million valuation allowance recorded in the fourth quarter on our federal and state deferred tax assets. Net loss was $54.7 million in 2013 compared to net income of $4.9 million in 2012 , primarily the result of the tax valuation allowance, inventory write-offs, and accelerated amortization of acquired intangible assets recorded in 2013.
Results of Operations
The following table presents results of operations data as a percentage of net sales for the years ended March 30, 2013 March 31, 2012 and April 2, 2011 :
 
2013
 
2012
 
2011
Net sales
100.0
 %
 
100.0
 %
 
100.0
%
Cost of sales
70.3

 
57.6

 
57.6

Gross profit
29.7

 
42.4

 
42.4

Selling, service and administration
25.9

 
23.0

 
22.7

Research, development and engineering
17.2

 
16.8

 
16.0

Restructuring costs
1.2

 
1.5

 
0.3

(Gain) loss on sale of property and equipment, net
(0.6
)
 
0.4

 

Legal settlement (proceeds) costs, net
(7.0
)
 
0.2

 
0.5

Operating (loss) income
(7.0
)
 
0.5

 
2.9

Gain on sale of previously impaired auction rate securities

 
1.1

 
0.3

Interest and other income (expense), net
0.1

 
(0.2
)
 
0.1

(Loss) income before income taxes
(6.9
)
 
1.4

 
3.3

Provision for (benefit from) income taxes
18.4

 
(0.5
)
 
0.2

Net (loss) income
(25.3
)%
 
1.9
 %
 
3.1
%
Fiscal Year Ended March 30, 2013 Compared to Fiscal Year Ended March 31, 2012
Net Sales
The following table presents net sales information by product group:
   
2013
 
2012
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Interconnect & Microfabrication Group (IMG)
$
170,360

 
78.6
%
 
$
166,477

 
65.5
%
Components Group (CG)
27,511

 
12.7

 
28,976

 
11.4

Semiconductor Group (SG)
18,754

 
8.7

 
58,776

 
23.1

 
$
216,625

 
100.0
%
 
$
254,229

 
100.0
%
Net sales for 2013 decreased $37.6 million or 14.8% from net sales for 2012 . Sales in IMG increased by 2% while CG and SG decreased by 5% and 68% , respectively.
IMG sales for 2013 increased $3.9 million compared to 2012 . The increase in IMG sales was driven by higher sales of our flex-circuit via drilling and advanced microfabrication systems especially in the first half of 2013. Shipments in the flex-circuit and integrated circuit packaging segments of the market has continued to strengthen as a result of growth in portable consumer electronics such as smart phones and tablet computers. Additionally, increased demand for our advanced microfabrication products were driven by new design wins and follow-on orders to expand capacity for existing applications.
CG sales for 2013 decreased $1.5 million compared to 2012 . The decrease was primarily driven by end user utilization of existing capacity reflecting only modest growth in the demand for overall electronics, partially offset by technology buys for new systems for next generation MLCC's.
SG sales for 2013 decreased $40.0 million compared to 2012 . The decrease in SG revenues was primarily driven by overcapacity and lower sales of our memory repair and LED systems. Within DRAM memory repair, slowing bit growth, industry consolidation, and adoption of alternative technologies have resulted in a near saturation of the market. As a result,

23

Table of Contents

during fiscal 2013 we announced that this product line would not be significant for us in the future and took several restructuring actions to refocus our business which resulted in part in a charge against our inventory for these products.
The following table presents net sales information by geographic region:
   
2013
 
2012
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Asia
$
186,346

 
86.0
%
 
$
224,100

 
88.2
%
Americas
20,907

 
9.7

 
19,448

 
7.6

Europe
9,372

 
4.3

 
10,681

 
4.2

 
$
216,625

 
100.0
%
 
$
254,229

 
100.0
%
Gross Profit
   
2013
 
2012
(In thousands, except percentages)
Gross Profit
 
% of Net Sales
 
Gross Profit
 
% of Net Sales
Gross Profit
$
64,253

 
29.7
%
 
$
107,691

 
42.4
%
Gross profit was $64.3 million for 2013 , a decrease of $43.4 million compared to 2012 . This decrease was primarily due to $23.3 million of charges in cost of sales for inventory write-offs and accelerated amortization of acquired intangible assets related to our corporate restructuring program, lower sales and production volumes, and product mix. Gross profit as a percentage of net sales was 29.7% and 42.4% for 2013 and 2012 , respectively.
Operating Expenses
   
2013
 
2012
(In thousands, except percentages)
Expense
 
% of Net Sales
 
Expense
 
% of Net Sales
Selling, service and administration
$
56,051

 
25.9
 %
 
$
58,555

 
23.0
%
Research, development and engineering
37,196

 
17.2

 
42,640

 
16.8

Restructuring costs
2,612

 
1.2

 
3,785

 
1.5

(Gain) loss on sale of property and equipment, net
(1,226
)
 
(0.6
)
 
966

 
0.4

Legal settlement (proceeds) costs, net
(15,262
)
 
(7.0
)
 
550

 
0.2

 
$
79,371

 
36.7
 %
 
$
106,496

 
41.9
%
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 for 2013 decreased $2.5 million compared to 2012 . This decrease was primarily attributable to a $2.9 million decrease in share-based compensation expenses, which was driven by accelerated expenses associated with the Chief Executive Officer's retirement eligibility date in 2012 and decreased attainment in 2013 of performance-based grants. In addition, labor and other variable expenses declined in 2013, but were offset by certain restructuring and Eolite integration expenses.
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 costs, equipment costs and facilities costs. RD&E expenses for 2013 decreased $5.4 million compared to 2012 . This decrease was primarily due to lower labor costs from selective headcount reductions, combined with declines in project material costs and depreciation.
Restructuring Costs
In 2013, we initiated a restructuring plan to improve efficiency, transition from memory repair and other legacy products, and focus on laser microfabrication for consumer electronics, emerging technologies related to semiconductor 3D, and proprietary laser technology. The planned completion date for actions to be taken under the plan is December 31, 2013.

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Table of Contents

The restructuring costs of $2.6 million recognized in 2013 were comprised primarily of $1.5 million of employee severance and related benefits and $1.1 million of charges related to accelerated depreciation on assets that will no longer be utilized.
As part of our globalization strategy, during 2011, we initiated a restructuring plan to reduce our worldwide cost structure through transition of certain procurement and manufacturing activities to Asia. In 2012, we continued our globalization efforts and we additionally identified and initiated other cost reduction actions. As a result of these actions, we recognized $3.8 million of restructuring costs in 2012. We completed these actions December 29, 2012.
The restructuring costs of $3.8 million incurred in 2012 were comprised primarily of $1.9 million in employee severance and related benefits and $1.7 million of accelerated depreciation for certain assets. We shortened the depreciable lives of these assets in the fourth quarter of 2012 largely as a result of consolidating facilities in the United States and Asia.
(Gain) Loss on Sale of Property and Equipment, net
In 2013, we sold a facility located in China, for $2.0 million, resulting in a pre-tax gain of $1.3 million, partially offset by loss on disposal of certain fixed assets primarily used in testing and development. In 2012, as a part of our globalization strategy and cost reduction actions discussed above, we recognized a loss of $1.0 million resulting from disposal of certain fixed assets primarily used in testing and development.
Legal Settlement (Proceeds) Costs, net
Legal settlement proceeds net of costs, were $15.3 million in 2013, which consisted of the All Ring litigation settlement proceeds of $16.3 million partially offset by court and legal fees associated with the All Ring litigation and other non-recurring legal matters. The settlement of these proceedings allowed for the release of $22.3 million of restricted cash in the fourth quarter of 2013.
In 2012, we recognized $0.6 million in legal settlement costs arising from the settlement of an arbitration matter with James Dooley, our former Chief Executive Officer.
Share-Based Compensation
The table of operating expenses shown above includes $7.2 million and $10.4 million of share-based compensation expense for 2013 and 2012 , respectively. The decrease in share-based compensation expense was driven by accelerated expenses associated with the Chief Executive Officer's retirement eligibility date in 2012 and decreased attainment in 2013 of performance-based grants.
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. See Note 5 “Fair Value Measurements” to the Consolidated Financial Statements in Item 8 Financial Statements and Supplementary Data for further discussion.
Interest and Other Income (Expense), net
Interest and other expense, net, consists of interest income and expense, market gains and losses on assets held in employees’ deferred compensation accounts, realized and unrealized foreign exchange gains and losses, bank charges, investment management fees, and other miscellaneous non-operating items. Net interest and other income (expense) were as follows:
 
2013
 
2012
(In thousands, except percentages)
Interest and Other Income, net
 
% of Net Sales
 
Interest and Other Expense, net
 
% of Net Sales
Interest and other income (expense), net
$
253

 
0.1
%
 
$
(437
)
 
(0.2
)%
Net interest and other income was $0.3 million in 2013 compared to net interest and other expense of $0.4 million in 2012 . The increase was primarily attributable to smaller foreign exchange losses compared to 2012 and increases on market gains on assets held for our deferred compensation plan.

25

Table of Contents

Income Taxes
 
2013
 
2012
(In thousands, except percentages)
Income Tax Provision
 
Effective
Tax Rate
 
Income Tax Benefit
 
Effective
Tax Rate
Provision for (benefit from) income taxes
$
39,851

 
(268.1
)%
 
$
(1,417
)
 
(40.6
)%
The income tax provision for 2013 was $39.9 million on pretax loss of $14.9 million , an effective tax rate of 268.1% . For 2012 , the income tax benefit was $1.4 million on pretax income of $3.5 million , an effective rate of 40.6% . In 2013 , our effective tax rate was significantly impacted by the valuation allowance established against U.S. deferred tax assets and attributes. We recorded this valuation allowance based on the operating results of the company, significant restructuring of the business, changes in our future forecast for the U.S. jurisdiction, our continued transition of production overseas, and consideration of available tax planning strategies. These factors led us to provide a valuation allowance against our deferred tax assets and attributes, which we believe no longer meet the threshold for recognition.
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. 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 (Loss) Income
 
2013
 
2012
(In thousands, except percentages)
Net Loss
 
% of Net Sales
 
Net Income
 
% of Net Sales
Net (loss) income
$
(54,716
)
 
(25.3
)%
 
$
4,904

 
1.9
%
As a result of the factors discussed above, net loss for 2013 was $54.7 million , or $1.86 per basic and diluted share, compared to net income of $4.9 million , or $0.17 per basic and diluted share for 2012 .

Fiscal Year Ended March 31, 2012 Compared to Fiscal Year Ended April 2, 2011
Net Sales
The following table presents net sales information by product group:
 
2012
 
2011
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Interconnect & Microfabrication Group (IMG)
$
166,477

 
65.5
%
 
$
123,888

 
48.2
%
Semiconductor Group (SG)
58,776

 
23.1

 
78,739

 
30.7

Components Group (CG)
28,976

 
11.4

 
54,184

 
21.1

 
$
254,229

 
100.0
%
 
$
256,811

 
100.0
%
Net sales for 2012 decreased $2.6 million or 1% from net sales for 2011 . Sales in IMG increased by 34% while SG and CG decreased by 25% and 47% , respectively.
IMG sales for 2012 increased $42.6 million compared to 2011 . The increase in IMG sales was driven by higher sales of our flex-circuit via drilling and advanced microfabrication systems. Demand from the flex-circuit and integrated circuit packaging segments of the market continued to strengthen as a result of growth in portable consumer electronics such as smart phones and tablet computers. Additionally, increased shipments for our advanced microfabrication products were driven by follow-on orders to expand capacity for existing applications.
SG sales for 2012 decreased $20.0 million compared to 2011 . The increase in IMG sales was driven by higher sales of our flex-circuit via drilling and advanced microfabrication systems. Demand from the flex-circuit and integrated circuit packaging segments of the market continued to strengthen as a result of growth in portable consumer electronics such as smart phones and tablet computers. Additionally, increased shipments for our advanced microfabrication products were driven by follow-on orders to expand capacity for existing applications.

26


CG sales for 2012 decreased $25.2 million compared to 2011 . The decrease in SG revenues was primarily driven by lower sales of our memory repair systems as a result of slower demand for DRAM and related overcapacity in the DRAM market.
The following table presents net sales information by geographic region:
 
2012
 
2011
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Asia
$
224,100

 
88.2
%
 
$
229,420

 
89.3
%
Americas
19,448

 
7.6

 
15,647

 
6.1

Europe
10,681

 
4.2

 
11,744

 
4.6

 
$
254,229

 
100.0
%
 
$
256,811

 
100.0
%
Gross Profit
 
2012
 
2011
(In thousands, except percentages)
Gross Profit
 
% of Net Sales
 
Gross Profit
 
% of Net Sales
Gross Profit
$
107,691

 
42.4
%
 
$
108,949

 
42.4
%
Gross profit was $107.7 million for 2012 , a decrease of $1.3 million or 1% compared to 2011 . Gross profit decreased primarily due to $2.0 million of charges in cost of sales for an inventory write-off associated with discontinued products in the fourth quarter. Gross profit as a percentage of net sales was 42.4% for both 2012 and 2011 . While overall gross margins remained flat year over year on similar volumes, excluding the inventory write-off, they improved slightly on favorable product mix.
Operating Expenses
 
2012
 
2011
(In thousands, except percentages)
Expense
 
% of Net Sales
 
Expense
 
% of Net Sales
Selling, service and administration
$
58,555

 
23.0
%
 
$
58,262

 
22.7
%
Research, development and engineering
42,640

 
16.8

 
41,095

 
16.0

Restructuring costs
3,785

 
1.5

 
797

 
0.3

Loss on disposal of assets
966

 
0.4

 

 

Legal settlement costs
550

 
0.2

 
1,367

 
0.5

 
$
106,496

 
41.9
%
 
$
101,521

 
39.5
%
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 for 2012 increased $0.3 million compared to 2011 . This increase was primarily attributable to a $1.6 million increase in share-based compensation expense, which was driven by accelerated expenses associated with the Chief Executive Officer’s retirement eligibility date and increased estimated attainment of performance-based grants. This increase was largely offset by lower compensation expense.
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 costs, equipment costs and facilities costs. RD&E expenses for 2012 increased $1.5 million compared to 2011 . This increase was primarily due to higher project materials costs and increased professional fees associated with patent activity.
Share-Based Compensation
The table of operating expenses shown above includes $10.4 million and $8.2 million of share-based compensation expense for 2012 and 2011 , respectively. The increase in share-based compensation expense was primarily driven by accelerated expenses associated with the Chief Executive Officer’s retirement eligibility date and increased estimated attainment of performance-based grants.

27


Restructuring Costs
As part of our globalization strategy, during 2011, we initiated a restructuring plan to reduce our worldwide cost structure through transition of certain procurement and manufacturing activities to Asia. In 2012, we continued our globalization efforts and we additionally identified and initiated other cost reduction actions. As a result of these actions, we recognized $3.8 million of restructuring costs in 2012. We completed these actions on December 29, 2012.
The restructuring costs of $3.8 million incurred in 2012 were comprised primarily of $1.9 million of employee severance and related benefits and $1.7 million of accelerated depreciation for certain assets. We shortened the depreciable lives of these assets in the fourth quarter of 2012 largely as a result of consolidating facilities in the United States and Asia. Restructuring costs were $0.8 million in 2011 primarily due to employee severance and related benefits.
Loss on Disposal of Assets
As a part of our on-going globalization strategy and cost reduction actions discussed above, in 2012, we recognized a loss of $1.0 million resulting from disposal of certain fixed assets primarily used in testing and development.
Legal Settlement Costs
In 2012, we recognized $0.6 million in legal settlement costs arising from the settlement of an arbitration matter with James Dooley, our former Chief Executive Officer.
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. See Note 5 “Fair Value Measurements” to the Consolidated Financial Statements in Item 8 Financial Statements and Supplementary Data for further discussion.
Interest and Other Income (Expense), net
Interest and other expense, net, consists of interest income and expense, market gains and losses on assets held in employees’ deferred compensation accounts, realized and unrealized foreign exchange gains and losses, bank charges, investment management fees, and other miscellaneous non-operating items. Net interest and other income (expense) were as follows:

 
2012
 
2011
(In thousands, except percentages)
Interest and Other Expense, net
 
% of Net Sales
 
Interest and Other Income, net
 
% of Net Sales
Interest and other (expense) income, net
$
(437
)
 
(0.2
)%
 
$
188

 
0.1
%
Net interest and other expense was $0.4 million in 2012 compared to net interest and other income of $0.2 million in 2011 . The decrease was primarily attributable to lower interest yields on our investments and market losses on assets held for our deferred compensation plan. We sold our remaining ARS in the fourth quarter of 2011 and early in the first quarter of 2012, which were earning above market interest rates.
Income Taxes
 
2012
 
2011
(In thousands, except percentages)
Income Tax Benefit
 
Effective
Tax Rate
 
Income Tax Provision
 
Effective
Tax Rate
(Benefit from) provision for income taxes
$
(1,417
)
 
(40.6
)%
 
$
390

 
4.7
%
The income tax benefit for 2012 was $1.4 million on pretax income of $3.5 million , an effective rate of 40.6% . For 2011 , the income tax provision was $0.4 million on pretax income of $8.3 million , an effective rate of 4.7% . In 2012 , our effective tax rate was favorably impacted by the increased tax advantages from growth in our Singapore manufacturing operations as well as higher tax credits.
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

28


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. 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
 
2012
 
2011
(In thousands, except percentages)
Net Income
 
% of Net Sales
 
Net Income
 
% of Net Sales
Net income
$
4,904

 
1.9
%
 
$
7,934

 
3.1
%
As a result of the factors discussed above, net income for 2012 was $4.9 million , or $0.17 per basic and diluted share, compared to net income of $7.9 million , or $0.28 per basic and diluted share for 2011 .
Financial Condition and Liquidity
At March 30, 2013 , our principal sources of liquidity were cash and cash equivalents of $88.9 million , short-term investments of $56.1 million and accounts receivable of $31.8 million . At March 30, 2013 , we had a current ratio of 4.73 and held no long-term debt. Working capital of $194.4 million decreased $75.1 million compared to the March 31, 2012 balance of $269.5 million . We also held approximately $12.3 million of non-current investments at March 30, 2013 . As of March 30, 2013 , we have permanently reinvested $25.8 million of foreign earnings primarily related to manufacturing operations in Singapore.
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 quarterly dividend declared and paid by us since adoption of the dividend policy:
Date Declared
 
Record Date
 
Payable Date
 
Amount per Share
February 7, 2013
 
February 28, 2013
 
March 14, 2013
 
$
0.08

November 8, 2012
 
November 21, 2012
 
December 5, 2012
 
$
0.08

August 9, 2012
 
August 24, 2012
 
September 10, 2012
 
$
0.08

May 10, 2012
 
June 4, 2012
 
June 18, 2012
 
$
0.08

December 9, 2011
 
January 27, 2012
 
February 17, 2012
 
$
0.08

A special dividend of $2.00 per share was declared by the Board of Directors on December 3, 2012 after the successful patent settlement. The special dividend should not be considered a recurring event.
We paid aggregate dividends of $68.1 million and $2.3 million in 2013 and 2012 , respectively. Subsequent to the year ended March 30, 2013 , the Board of Directors declared an $0.08 per outstanding common share cash dividend on May 9, 2013 . The estimated amount to be paid as a result of the May 9, 2013 declaration is $2.4 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.
In December 2011, the Board of Directors authorized a 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 in 2013 or 2012 . There is no fixed completion date for the repurchase program.
As of March 30, 2013 , we did not hold any ARS investments. During the first quarter of 2012, we sold all of the remaining ARS for approximately $6.0 million and all of the preferred stock for approximately $0.5 million. We 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.

29


Sources and Uses of Cash
Net cash provided by operating activities totaled $17.1 million for 2013 due to $9.4 million from net income and non-cash items and $7.7 million from net changes within working capital, net of acquisitions. Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities within working capital. In 2013 , the primary sources of cash inflow from working capital consisted of $3.6 million decreases in inventories, $2.6 million increases in accounts payable and accrued liabilities, $1.2 million decreases in trade receivables, $0.6 million from decreases in other current assets, and $0.4 million decreases in shipped systems pending acceptance, partially offset by $0.7 million decreases in deferred revenue.
In 2013 , net cash provided by investing activities of $70.7 million primarily resulted from $61.5 million of proceeds from sales and maturities of investments, net of purchases, and $22.3 million due to the release of restricted cash, partially offset by $9.5 million for the acquisition of Eolite and $4.2 million of net purchases and sales of property, plant and equipment.
In 2013 , net cash used by financing activities of $67.1 million primarily resulted from $68.1 million of cash dividends paid to shareholders partially offset by $0.9 million from stock plan 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.
Contractual Obligations
The contractual commitments and obligations below represent our estimates of future payments under fixed contractual obligations and commitments. The actual payments may differ from these estimates due to changes in our business needs, cancellation provisions, and other factors. We cannot provide certainty regarding the timing of the payment schedule and the amounts of payments.
The following table summarizes our contractual commitments and obligations as of March 30, 2013 , by the fiscal year in which they are due:
(In thousands)
Total
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
Purchase commitments
$
23,359

 
$
23,318

 
$
41

 
$

 
$

 
$

 
$

Operating leases
4,719

 
2,043

 
1,381

 
776

 
172

 
168

 
179

 
$
28,078

 
$
25,361

 
$
1,422

 
$
776

 
$
172

 
$
168

 
$
179

This table does not include $9.2 million of unrecognized tax benefits due to the uncertainty with respect to the timing of future cash flows as of March 30, 2013 . We are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities and the total amounts of income tax payable and the timing of such tax payments may depend on the resolution of current and future tax examinations which cannot be estimated.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our estimates are based on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Our critical accounting policies and estimates include the following:
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.

30


Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to the customer at the time of delivery of the product to a common carrier. Revenue is recognized upon such delivery, provided that fulfillment of acceptance criteria can be demonstrated prior to shipment. Where the acceptance criteria cannot be demonstrated prior to shipment, or in the case of substantially new products, revenue is deferred until acceptance has been received. For multiple element arrangements, the relative fair values of any undelivered elements are deferred until the elements are delivered and acceptance criteria are met. Revenues are recorded net of taxes collected which are required to be submitted to government authorities. Installation services are not essential to the functionality of the delivered equipment and installation revenue is deferred until installation is complete. Historically, neither the costs of installation accrued nor the fair value of installation service revenue deferred has been material.
Revenues associated with sales to customers under local contracts in Japan are recognized upon title transfer, which generally occurs upon customer acceptance. Revenues related to spare parts and consumable sales are generally recognized upon shipment. Revenues related to maintenance and service contracts are recognized ratably over the duration of the contracts.
Inventory Valuation
We regularly evaluate the value of our inventory based on a combination of factors including, but not limited to, the following: forecasted sales or usage, historical usage rates, estimated service period, product end-of-life dates, estimated current and future market values, service inventory requirements and new product introductions. Purchasing requirements and alternative uses for the inventory are explored within these processes to mitigate inventory exposure. Inventory materials with quantities in excess of forecasted usage are reviewed quarterly for obsolescence. Obsolescence write-downs are typically caused by engineering change orders or product life cycle changes.
Research and development product costs are generally expensed as incurred. Engineering materials that are expected to provide future value are generally classified as raw materials inventory.
Finished goods are reviewed quarterly by product marketing and operating personnel to determine if inventory carrying costs exceed market selling prices. When necessary, we record inventory write-downs as an increase to cost of sales based on the above factors and take into account worldwide quantities on hand and forecasted demand into our analysis. Additionally, from time to time, we make strategic decisions to exit or alter product lines which may result in an inventory write-down. If circumstances related to our inventories change, our estimates of the value of inventory could materially change.
Product Warranty Reserves
We evaluate obligations related to product warranties quarterly. A standard one-year warranty is provided on most products. Warranty charges are comprised of costs to service the warranty, including labor to repair the system and replacement parts for defective items, as well as other costs incidental to the repairs. Warranty charges are recorded net of any cost recoveries resulting from either successful repair of damaged parts or from warranties offered by our suppliers for defective components. Using historical data, we estimate average warranty cost per system or part type and record the provision for such charges as an element of cost of goods sold upon recognition of the related revenue. Additionally, the overall warranty accrual balance is separately analyzed using the remaining warranty periods outstanding on systems and items under warranty, and any resulting changes in estimates are recorded as an adjustment to cost of sales. If circumstances change, or if a significant change in warranty-related incidents occurs, the impact of the change in the warranty accrual could be material. Accrued product warranty is included on the Consolidated Balance Sheets as a component of accrued liabilities.
Allowance for Doubtful Accounts
Credit limits are established by reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer to establish and modify their credit limits. On certain foreign sales, we require letters of credit. We regularly evaluate the collectability of our trade receivable balances based on a combination of factors. When a customer’s account becomes past due, we talk with the customer to determine the cause. If we determine that a customer will be unable to fully meet its financial obligation to us, such as in the case of a bankruptcy filing or other material events impacting its business, we record a specific reserve for bad debt to reduce the related receivable to the amount we expect to recover given all information then available. If circumstances related to specific customers change, our estimates of the recoverability of receivables could materially change. We record estimated bad debt expense as an increase to selling, service and administration expenses.

31


Accrued Restructuring Costs
We have engaged, and may continue to engage, in restructuring actions, which require us to make estimates in certain areas including expenses for severance and other employee separation costs. Because we have a history of paying severance benefits, expenses and liabilities associated with exit or disposal activities are recognized when probable and estimable. For further discussion on the restructuring activities and related charges in 2013 , refer to our discussion of “Restructuring Costs” in the “Results of Operations” section above.
Share-Based Compensation
We measure and recognize compensation expense for all share-based payment awards granted to our employees and directors, including employee stock options, stock-settled stock appreciation rights (SARs), non-vested restricted stock units and purchases under the employee stock purchase plan, based on the estimated fair value of the award on the grant date. We use the Black-Scholes valuation model as our method of valuation for stock option and SAR awards.
The use of the Black-Scholes valuation model to estimate the fair value of stock option and SAR awards requires us to make assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates based on our historical data, but these estimates involve inherent uncertainties and the recognition of expense could be materially different in the future.
Compensation expense is only recognized on awards that are estimated to ultimately vest. Therefore, based on historical forfeiture rates and patterns, the estimated future forfeitures are factored into the compensation expense to be recognized over the vesting period. We update our forfeiture estimates at least annually and recognize any changes to accumulated compensation expense in the period of change. If actual forfeitures differ significantly from our estimates, our results of operations could be materially impacted.
Income Taxes
We are subject to income taxes in the United States and in numerous foreign jurisdictions and in the ordinary course of business, there are transactions and calculations where the ultimate tax determination is uncertain. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to the unrecognized tax benefits in income tax expense.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those assets and liabilities are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. When management determines that it is more likely than not that a deferred tax asset will not be fully realized, a valuation allowance is established to reduce deferred tax assets to the amount expected to be realized. In the fourth quarter of 2013 , we recorded a valuation allowance established against U.S. deferred tax assets and attributes. We recorded this valuation allowance based on the operating results of the company, significant restructuring of the business, changes in our future forecast for the U.S. jurisdiction, our continued transition of production overseas, and consideration of available tax planning strategies. These factors led us to provide a valuation allowance against our deferred tax assets and attributes, which we believe no longer meet the threshold for recognition. Should management’s assumptions and expectations be inaccurate, our financial condition and results of operations could be adversely affected in future periods.
Fair Value Measurements
Fair value is defined under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820 “Fair Value Measurements and Disclosures” (ASC Topic 820). When determining fair value on the financial assets and liabilities, we consider the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
Valuation of Cost Method Equity Investments
As of March 30, 2013 , minority equity investments included $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, we determine 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 March 30, 2013 , we had

32


not identified any events or circumstances that indicated the investments were impaired; therefore, the full carrying value of $9.0 million was included in Other assets on the Consolidated Balance Sheets.
Valuation of Long-Lived Assets
Long-lived assets, principally property and equipment and identifiable intangibles held and used by us, are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to estimated future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. In the fourth quarter of 2013, we identified intangible assets relating to acquired in-process research and development programs that we no longer expect to derive value from and as a result recorded $2.3 million of accelerated amortization. There were no other events or circumstances during 2013 that would indicate the carrying value of our long-lived assets may not be recoverable.
Valuation of Goodwill
We account for goodwill pursuant to Accounting Standards Codification (ASC) Topic 350 as amended in September 2011 by Accounting Standard Update (ASU) 2011-08, “Intangibles- Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (ASC ASU 2011-08). ASC Topic 350 requires that goodwill be tested for impairment at least annually. ASC ASU 2011-08 permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. We test goodwill for impairment using a 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. Goodwill was tested for impairment in the fourth quarter of 2013 and as fair value was substantially in excess of book value it was determined that there was no impairment as of March 30, 2013 .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The primary objectives of our investment activities are to preserve principal and maintain liquidity to meet operating needs. To achieve these objectives, we maintain an investment portfolio of cash, cash equivalents, and investments in a variety of securities, including commercial paper, corporate bonds and U.S. government agency notes.
Interest Rate Risk
Our investment securities are subject to interest rate risk and will decline in value if interest rates increase. The majority of these securities are classified as available-for-sale securities; therefore, the impact on fair value of interest rate changes is reflected as a separate component of shareholders’ equity. Due to the short duration of our investment portfolio, an immediate 10% change in interest rates would not have a material effect on the fair value of our invested assets.
Investment Risk
Our marketable securities are classified as available-for-sale securities measured at fair value. The market value of our investments is influenced by market risks, liquidity risk and the credit worthiness of underlying issuers of our investment. We strive to minimize the investment risk by investing in high quality securities and by utilizing experienced and high credit quality financial institutions to manage the investment portfolio.
As of March 30, 2013 , we did not hold any auction rate securities (ARS) investments. 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 and recorded a total gain of $2.7 million in the first quarter of 2012 including $1.4 million in reclassification of previously recorded unrealized net gains out of accumulated other comprehensive income.
Foreign Currency Exchange Rate Risk
We purchase derivative financial instruments on a limited basis and do not use them for trading purposes. We do, however, use derivatives to manage well-defined foreign currency risks. We enter into forward exchange contracts to hedge the value of material non-functional currency monetary asset and liability balances. The net effect of an immediate 10% change in exchange rates on the forward exchange contracts and the underlying hedged positions would not be material to our financial position or the results of our operations.

33


The table below summarizes, by currency, the notional amounts of our forward exchange contracts in U.S. dollars as of March 30, 2013 and March 31, 2012 . The “bought” amounts represent the net U.S. dollar equivalents of commitments to purchase foreign currencies, and the “sold” amounts represent the net U.S. dollar equivalents of commitments to sell foreign currencies. The foreign currency amounts have been translated into a U.S. dollar equivalent value using the exchange rates at the reporting date.
 
Bought (Sold)
(In thousands)
2013
 
2012
Japanese Yen
$
4,136

 
$
6,893

Euro
6,471

 
192

New Taiwan Dollar
(783
)
 
(600
)
Korean Won
(2,654
)
 
(1,438
)
British Pound
(4,272
)
 
(2,771
)
Chinese Renminbi
(1,542
)
 
(3,562
)
Singapore Dollar
$
(204
)
 
$

 
$
1,152

 
$
(1,286
)



34


Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Electro Scientific Industries, Inc.:

We have audited the accompanying consolidated balance sheets of Electro Scientific Industries, Inc. and subsidiaries as of March 30, 2013 and March 31, 2012 , and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended March 30, 2013 . These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Electro Scientific Industries, Inc. and subsidiaries as of March 30, 2013 and March 31, 2012 , and the results of their operations and their cash flows for each of the years in the three-year period ended March 30, 2013 , in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Electro Scientific Industries, Inc.’s internal control over financial reporting as of March 30, 2013 , based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 12, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Portland, Oregon
June 12, 2013


35


ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 30, 2013 and March 31, 2012
(In thousands)
2013
 
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
88,913

 
$
69,780

Restricted cash

 
22,269

Short-term investments
56,144

 
106,674

Trade receivables, net of allowances of $442 and $390
31,779

 
32,744

Inventories
63,067

 
68,055

Shipped systems pending acceptance
1,007

 
1,360

Deferred income taxes, net
1,682

 
10,021

Other current assets
3,898

 
4,060

Total current assets
246,490

 
314,963

Non-current assets:
 
 
 
Non-current investments
12,329

 
23,046

Property, plant and equipment, net
27,894

 
32,103

Non-current deferred income taxes, net
3,766

 
36,489

Goodwill
7,889

 
4,014

Acquired intangible assets, net
9,088

 
8,332

Other assets
14,752

 
14,263

Total assets
$
322,208

 
$
433,210

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
16,958

 
$
13,045

Accrued liabilities
24,930

 
21,635

Deferred revenue
10,196

 
10,751

Total current liabilities
52,084

 
45,431

Non-current liabilities:
 
 
 
Income taxes payable
5,982

 
9,109

Commitments and contingencies (Notes 18  and 21 )


 


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

 

Common stock, without par value; 100,000 shares authorized; 29,583 and 28,970 issued and outstanding
176,631

 
168,143

Retained earnings
87,228

 
210,021

Accumulated other comprehensive income, other
283

 
506

Total shareholders’ equity
264,142

 
378,670

Total liabilities and shareholders’ equity
$
322,208

 
$
433,210

See Accompanying Notes to Consolidated Financial Statements


36

Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 30, 2013 March 31, 2012 and April 2, 2011
(In thousands, except per share amounts)
2013
 
2012
 
2011
Net sales
$
216,625

 
$
254,229

 
$
256,811

Cost of sales
152,372

 
146,538

 
147,862

Gross profit
64,253

 
107,691

 
108,949

Operating expenses:
 
 
 
 
 
Selling, service and administration
56,051

 
58,555

 
58,262

Research, development and engineering
37,196

 
42,640

 
41,095

Restructuring costs
2,612

 
3,785

 
797

(Gain) loss on sale of property and equipment, net
(1,226
)
 
966

 

Legal settlement (proceeds) costs, net
(15,262
)
 
550

 
1,367

Net operating expenses
79,371

 
106,496

 
101,521

Operating (loss) income
(15,118
)
 
1,195

 
7,428

Non-operating income (expense):
 
 
 
 
 
Gain on sale of previously impaired auction rate securities

 
2,729

 
708

Interest and other income (expense), net
253

 
(437
)
 
188

Total non-operating income
253

 
2,292

 
896

(Loss) income before income taxes
(14,865
)
 
3,487

 
8,324

Provision for (benefit from) income taxes
39,851

 
(1,417
)
 
390

Net (loss) income
$
(54,716
)
 
$
4,904

 
$
7,934

Net (loss) income per share—basic
$
(1.86
)
 
$
0.17

 
$
0.28

Net (loss) income per share—diluted
$
(1.86
)
 
$
0.17

 
$
0.28

Weighted average number of shares—basic
29,357

 
28,749

 
28,045

Weighted average number of shares—diluted
29,357

 
29,461

 
28,608

Cash dividends paid per outstanding common share
$
2.32

 
$
0.08

 
$


See Accompanying Notes to Consolidated Financial Statements


37

Table of Contents


ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME (LOSS)
For the years ended March 30, 2013 March 31, 2012 and April 2, 2011

(In thousands)
2013
 
2012
 
2011
Net (loss) income
$
(54,716
)
 
$
4,904

 
$
7,934

Other comprehensive (loss) income:
 
 
 
 
 
Foreign currency translation adjustment, net of taxes of $0, $12, and ($449)
(198
)
 
277

 
715

Reclassification of unrealized gain on auction rate securities

 
(1,445
)
 
144

Accumulated other comprehensive income related to benefit plan obligation, net of taxes of $8, ($15), and $4
9

 
(23
)
 
(3
)
Net unrealized (loss) gain on available-for-sale securities, net of taxes of $0, ($3), and ($15)
(34
)
 
7

 
27

Comprehensive (loss) income
$
(54,939
)
 
$
3,720

 
$
8,817


See Accompanying Notes to Consolidated Financial Statements

38

Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended March 30, 2013 March 31, 2012 and April 2, 2011

 
Common Stock
 
Retained
Earnings
 
Accumulated
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
(In thousands)
Shares
 
Amount
 
Balance at April 3, 2010
27,665

 
142,369

 
199,486

 
807

 
342,662

Employee stock plans
634

 
10,568

 

 

 
10,568

Tax impact of stock options exercised

 
252

 

 

 
252

Net income

 

 
7,934

 

 
7,934

Net unrealized gain on securities (net of tax)

 

 

 
27

 
27

Net unrealized gain on auction rate securities

 

 

 
144

 
144

Cumulative translation adjustment (net of tax)

 

 

 
715

 
715

Accumulated other comprehensive loss related to benefit plan obligations (net of tax)

 

 

 
(3
)
 
(3
)
Comprehensive income
 
 
 
 
 
 
 
 
8,817

Balance at April 2, 2011
28,299

 
153,189

 
207,420

 
1,690

 
362,299

Cash dividends paid ($0.08 per outstanding common share)

 

 
(2,303
)
 

 
(2,303
)
Employee stock plans
671

 
14,449

 

 

 
14,449

Tax impact of stock options exercised

 
505

 

 

 
505

Net income

 

 
4,904

 

 
4,904

Net unrealized gain on securities (net of tax)

 

 

 
7

 
7

Reclassification of unrealized gain on auction rate securities to earnings

 

 

 
(1,445
)
 
(1,445
)
Cumulative translation adjustment (net of tax)

 

 

 
277

 
277

Accumulated other comprehensive loss related to benefit plan obligations (net of tax)

 

 

 
(23
)
 
(23
)
Comprehensive income
 
 
 
 
 
 
 
 
3,720

Balance at March 31, 2012
28,970

 
168,143

 
210,021

 
506

 
378,670

Cash dividends paid ($2.32 per outstanding common share)

 

 
(68,077
)
 

 
(68,077
)
Employee stock plans
613

 
8,488

 

 

 
8,488

Tax impact of stock options exercised

 

 

 

 

Net loss

 

 
(54,716
)
 

 
(54,716
)
Net unrealized loss on securities (net of tax)

 

 

 
(34
)
 
(34
)
Cumulative translation adjustment (net of tax)

 

 

 
(198
)
 
(198
)
Accumulated other comprehensive income related to benefit plan obligations (net of tax)

 

 

 
9

 
9

Comprehensive loss
 
 
 
 
 
 
 
 
(54,939
)
Balance at March 30, 2013
29,583

 
$
176,631

 
$
87,228

 
$
283

 
$
264,142


See Accompanying Notes to Consolidated Financial Statements


39

Table of Contents


ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 30, 2013 March 31, 2012 and April 2, 2011
(In thousands)
2013
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
Net (loss) income
$
(54,716
)
 
$
4,904

 
$
7,934

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
9,905

 
12,489

 
10,317

Amortization of acquired intangible assets
4,746

 
1,722

 
1,964

Share-based compensation expense
7,861

 
11,451

 
9,309

Provision for (recovery of) doubtful accounts

 
50

 
(150
)
Gain on sale of previously impaired auction rate securities

 
(2,729
)
 

Loss on sale of property and equipment, net
680

 
1,007

 
106

Decrease (increase) in deferred income taxes
40,971

 
(5,724
)
 
(2,752
)
Changes in operating accounts, net of acquisitions:
 
 
 
 
 
Decrease (increase) in trade receivables, net
1,232

 
11,191

 
(5,755
)
Decrease (increase) in inventories
3,564

 
(4,389
)
 
3,108

Decrease (increase) in shipped systems pending acceptance
353

 
3,929

 
(1,183
)
Decrease in other current assets
633

 
2,559

 
2,228

Increase (decrease) in accounts payable and accrued liabilities
2,550

 
(16,886
)
 
22,706

(Decrease) increase in deferred revenue
(672
)
 
(5,261
)
 
2,758

Net cash provided by operating activities
17,107

 
14,313

 
50,590

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
Purchase of investments
(1,061,654
)
 
(929,201
)
 
(471,112
)
Proceeds from sales and maturities of investments
1,123,156

 
876,822

 
509,935

Proceeds from sale of auction rate securities

 
6,450

 

Purchase of property, plant and equipment
(6,213
)
 
(4,937
)
 
(6,556
)
Proceeds from sale of property, plant and equipment
2,030

 
26

 

Decrease (increase) in restricted cash
22,269

 
(11,500
)
 
55

Cash paid to acquire subsidiaries
(9,466
)
 

 
(8,075
)
Minority equity investment

 

 
(782
)
Decrease (increase) in other assets
625

 
(131
)
 
487

Net cash provided by (used in) investing activities
70,747

 
(62,471
)
 
23,952

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
Cash dividends paid to shareholders
(68,077
)
 
(2,303
)
 

Stock plan activity, net
627

 
2,999

 
1,259

Excess tax benefit of share-based compensation
307

 
546

 
252

Net cash (used in) provided by financing activities
(67,143
)
 
1,242

 
1,511

Effect of exchange rate changes on cash
(1,578
)
 
284

 
1,024

NET CHANGE IN CASH AND CASH EQUIVALENTS
19,133

 
(46,632
)
 
77,077

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
69,780

 
116,412

 
39,335

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
88,913

 
$
69,780

 
$
116,412

SUPPLEMENTAL CASH FLOW INFORMATION