Electro Scientific Industries, Inc.
ELECTRO SCIENTIFIC INDUSTRIES INC (Form: 10-Q, Received: 02/03/2015 15:08:10)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 27, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-12853
 
 
 
ELECTRO SCIENTIFIC INDUSTRIES, INC.
 
 
 

Oregon
 
93-0370304
(State or other jurisdiction of incorporation
or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
13900 N.W. Science Park Drive, Portland, Oregon
 
97229
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: 503-641-4141
Registrant’s web address: www.esi.com
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, 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 Exchange Act).    Yes   ¨     No   ý
The number of shares outstanding of the Registrant’s Common Stock as of February 2, 2015 was 30,394,188 shares.
 


Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC.
2015 FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
 
Part I
FINANCIAL INFORMATION
 
Financial Statements (Unaudited)
 
 
 
 
 
 
Part II
OTHER INFORMATION
 
 





Table of Contents


ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
Dec 27, 2014
 
Mar 29, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
70,066

 
$
68,461

Short-term investments
9,565

 
38,444

Trade receivables, net of allowances of $410 and $404
40,503

 
37,813

Inventories
59,424

 
58,902

Shipped systems pending acceptance
948

 
2,054

Deferred income taxes, net
145

 
161

Other current assets
3,812

 
4,674

Total current assets
184,463

 
210,509

Non-current assets:
 
 
 
Non-current investments

 
3,985

Property, plant and equipment, net of accumulated depreciation of $101,347 and $98,333
27,187

 
27,930

Non-current deferred income taxes, net
628

 
704

Goodwill
7,889

 
7,889

Acquired intangible assets, net of accumulated amortization of $19,488 and $18,378
5,733

 
6,845

Other assets
13,200

 
12,347

Total assets
$
239,100

 
$
270,209

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
14,175

 
$
14,465

Accrued liabilities
19,429

 
20,524

Deferred income tax liability, net
170

 
170

Deferred revenue
7,823

 
10,515

Total current liabilities
41,597

 
45,674

Non-current liabilities:
 
 
 
Income taxes payable
1,298

 
1,654

Commitments and contingencies


 


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

 

Common stock, without par value; 100,000 shares authorized; 30,606 and 30,155 issued and outstanding
184,696

 
183,193

Retained earnings
11,200

 
39,336

Accumulated other comprehensive income, other
309

 
352

Total shareholders’ equity
196,205

 
222,881

Total liabilities and shareholders’ equity
$
239,100

 
$
270,209

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


3

Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands, except per share amounts)
Dec 27, 2014
 
Dec 28, 2013
 
Dec 27, 2014
 
Dec 28, 2013
Net sales
$
43,661

 
$
38,267

 
$
121,547

 
$
144,086

Cost of sales
27,884

 
21,986

 
76,754

 
83,787

Gross profit
15,777

 
16,281

 
44,793

 
60,299

Operating expenses:
 
 
 
 
 
 
 
Selling, service and administration
13,397

 
12,408

 
39,412

 
41,206

Research, development and engineering
8,383

 
9,768

 
25,952

 
27,912

Gain on sale of property and equipment, net

 
(1,301
)
 

 
(1,301
)
Gain on acquisition of Semiconductor Systems business

 

 

 
(499
)
Net operating expenses
21,780

 
20,875

 
65,364

 
67,318

Operating loss
(6,003
)
 
(4,594
)
 
(20,571
)
 
(7,019
)
Non-operating income (expense):
 
 
 
 
 
 
 
Other-than-temporary impairment of cost based investments

 

 

 
(3,588
)
Interest and other income (expense), net
64

 
95

 
(134
)
 
115

Total non-operating income (expense)
64

 
95

 
(134
)
 
(3,473
)
Loss before income taxes
(5,939
)
 
(4,499
)
 
(20,705
)
 
(10,492
)
Provision for income taxes
437

 
141

 
165

 
209

Net loss
$
(6,376
)
 
$
(4,640
)
 
$
(20,870
)
 
$
(10,701
)
Net loss per share—basic
$
(0.21
)
 
$
(0.15
)
 
$
(0.68
)
 
$
(0.36
)
Net loss per share—diluted
$
(0.21
)
 
$
(0.15
)
 
$
(0.68
)
 
$
(0.36
)
Weighted average number of shares—basic
30,617

 
30,054

 
30,507

 
29,922

Weighted average number of shares—diluted
30,617

 
30,054

 
30,507

 
29,922

Cash dividends paid per outstanding common share
$
0.08

 
$
0.08

 
$
0.24

 
$
0.24



ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)

 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands)
Dec 27, 2014
 
Dec 28, 2013
 
Dec 27, 2014
 
Dec 28, 2013
Net loss
$
(6,376
)
 
$
(4,640
)
 
$
(20,870
)
 
$
(10,701
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of taxes of $179, $(86), $0 and $22
(359
)
 
(153
)
 
(41
)
 
39

Accumulated other comprehensive income related to benefit plan obligation, net of taxes of $(2), $2, $(6) and $5
3

 
3

 
10

 
9

Net unrealized (loss) gain on available-for-sale securities, net of taxes of $0, $(2), $5 and $3
(5
)
 
(3
)
 
(12
)
 
5

Comprehensive loss
$
(6,737
)
 
$
(4,793
)
 
$
(20,913
)
 
$
(10,648
)

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

4

Table of Contents


ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three fiscal quarters ended
(In thousands)
Dec 27, 2014
 
Dec 28, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(20,870
)
 
$
(10,701
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
5,880

 
5,636

Amortization of acquired intangible assets
1,112

 
2,133

Share-based compensation expense
3,402

 
5,130

Gain on sale of property and equipment, net
(8
)
 
(1,264
)
Gain on acquisition of Semiconductor Systems business

 
(499
)
Other-than-temporary impairment of cost based investments

 
3,588

Decrease (increase) in deferred income taxes
2

 
(317
)
Changes in operating accounts, net of acquisitions:

 

(Increase) decrease in trade receivables, net
(3,284
)
 
8,047

Increase in inventories
(2,169
)
 
(1,389
)
Decrease (increase) in shipped systems pending acceptance
1,106

 
(172
)
Decrease (increase) in other current assets
783

 
(924
)
Increase (decrease) in accounts payable and accrued liabilities
217

 
(9,460
)
Decrease in deferred revenue
(2,692
)
 
(3,681
)
Net cash used in operating activities
(16,521
)
 
(3,873
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of investments
(357,046
)
 
(237,113
)
Proceeds from sales and maturities of investments
389,900

 
253,265

Purchase of property, plant and equipment
(3,608
)
 
(5,344
)
Proceeds from sale of property, plant and equipment
154

 
3,617

Cash paid for business acquisitions

 
(9,731
)
Minority equity investment

 
(5,000
)
Increase in other assets
(980
)
 
(408
)
Net cash provided by (used in) investing activities
28,420

 
(714
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Cash dividends paid to shareholders
(7,266
)
 
(7,158
)
Payment of withholding taxes on stock-based compensation
(1,850
)
 
(1,587
)
Proceeds from issuance of common stock
1,407

 
1,670

Share repurchases
(1,456
)
 

Net cash used in financing activities
(9,165
)
 
(7,075
)
Effect of exchange rate changes on cash
(1,129
)
 
(77
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
1,605

 
(11,739
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
68,461

 
88,913

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
70,066

 
$
77,174

SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Cash paid for interest
$
(2
)
 
$

Cash paid for income taxes
$
(863
)
 
$
(3,072
)
Income tax refunds received
$
564

 
$
65

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

5

Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation

These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted in these interim statements. Accordingly, these condensed consolidated financial statements are to be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for its fiscal year ended March 29, 2014 . These interim statements include all adjustments (consisting of only normal recurring adjustments and accruals) necessary for a fair presentation of results for the interim periods presented. The results for interim periods are not necessarily indicative of the results of operations for the entire year.

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

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

There have been no significant changes to the Company's significant accounting policies from those presented in Note 2 “Summary of Significant Accounting Policies” to the consolidated financial statements included in the Company's Annual Report on Form 10-K for its fiscal year ended March 29, 2014 . All references to years or quarters relate to fiscal years or fiscal quarters unless otherwise noted.
2. Recent Accounting Pronouncements
Recent Accounting Pronouncements issued by the financial accounting standards board (FASB) and the SEC did not have a material impact on the Company's financial statements.
3. Share-Based Compensation

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

Stock-settled stock appreciation rights (SARs) grant the right to receive shares of the Company's stock equivalent to the increase in stock value of a specified number of shares over a specified period of time, divided by the stock price at the time of exercise. The Company uses the Black-Scholes model to estimate the fair value of SARs. Similar to options, SARs are recorded at the fair value of the award at grant date and the expense is recognized on a straight-line basis over the requisite service period of the award.
The Company granted a total of 827,700 RSUs and 634,523 SARs during the first three quarters of 2015 , but did not grant any stock options. The Company granted 621,000 RSUs and did not grant any SARs or stock options during the first three quarters of 2014 .
Share-based compensation expense was included in the Company’s Condensed Consolidated Statements of Operations as follows:

6


 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands)
Dec 27, 2014
 
Dec 28, 2013
 
Dec 27, 2014
 
Dec 28, 2013
Cost of sales
$
154

 
$
184

 
$
474

 
$
558

Selling, service and administration
629

 
728

 
2,096

 
3,488

Research, development and engineering
256

 
350

 
832

 
1,084

Total share-based compensation expense
$
1,039

 
$
1,262

 
$
3,402

 
$
5,130

No share-based compensation costs were capitalized in the first three quarters of 2015 . As of December 27, 2014 , the Company had $6.8 million of total unrecognized share-based compensation costs, net of estimated forfeitures, which are expected to be recognized over a weighted average period of 2.1 years.
4. Fair Value Measurements
Financial Assets Measured at Fair Value
ASC Topic 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include the following:
Level 1 , defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2 , defined as inputs that are observable either directly or indirectly such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and other inputs that can be corroborated by observable market data; and
Level 3 , defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

7


The Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of December 27, 2014 and March 29, 2014 was as follows (in thousands):
December 27, 2014
Level 1
 
Level 2
 
Level 3
 
Total
Money market securities
$
1,215

 
$

 
$

 
$
1,215

Municipal bonds

 
3,871

 

 
3,871

Commercial paper

 
3,400

 

 
3,400

Government agencies

 
3,001

 

 
3,001

Corporate Bonds

 
852

 

 
852

Forward purchase or (sale) contracts:
 
 
 
 
 
 
 
Japanese Yen

 
149

 

 
149

New Taiwan Dollar

 
24

 

 
24

Korean Won

 
(9
)
 

 
(9
)
Euro

 
287

 

 
287

British Pound

 
(19
)
 

 
(19
)
Chinese Renminbi

 
3

 

 
3

Singapore Dollar

 
(19
)
 

 
(19
)
March 29, 2014
Level 1
 
Level 2
 
Level 3
 
Total
Money market securities
$
9,456

 
$

 
$

 
$
9,456

Commercial paper

 
6,700

 

 
6,700

Government agencies

 
8,037

 

 
8,037

Corporate bonds

 
17,328

 

 
17,328

Municipal bonds

 
12,725

 

 
12,725

Forward purchase or (sale) contracts:
 
 
 
 
 
 
 
Japanese Yen

 
25

 

 
25

New Taiwan Dollar

 
(6
)
 

 
(6
)
Korean Won

 
(44
)
 

 
(44
)
Euro

 
39

 

 
39

British Pound

 
(19
)
 

 
(19
)
Chinese Renminbi

 
(2
)
 

 
(2
)
Singapore Dollar

 
1

 

 
1

For Level 1 assets, the Company utilized quoted prices in active markets for identical assets.
For Level 2 assets, exclusive of forward contracts, the Company utilized quoted prices in active markets for similar assets. For forward contracts, spot prices at December 27, 2014 and March 29, 2014 were utilized to calculate fair values.
During the first three quarters of 2015 , there were no transfers between Level 1, 2 or 3 assets.


8


Investments
Certain information regarding the Company’s investments at December 27, 2014 and March 29, 2014 was as follows (in thousands):  
 
 
 
Unrealized
 
 
December 27, 2014
Cost
 
Gain
 
Loss
 
Fair Value
Available-for-sale securities (current):
 
 
 
 
 
 
 
Municipal Bonds
$
3,865

 
$
6

 
$

 
$
3,871

Commercial paper
3,400

 

 

 
3,400

Government agencies
3,001

 

 

 
3,001

Corporate Bonds
852

 

 

 
852

 
$
11,118

 
$
6

 
$

 
$
11,124

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

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
Unrealized
 
 
March 29, 2014
Cost
 
Gain
 
Loss
 
Fair Value
Available-for-sale securities (current):
 
 
 
 
 
 
 
Commercial paper
$
6,700

 
$

 
$

 
$
6,700

Government agencies
8,035

 
2

 

 
8,037

Corporate Bonds
17,321

 
7

 

 
17,328

Municipal Bonds
8,737

 
4

 

 
8,741

 
$
40,793

 
$
13

 
$

 
$
40,806

Available-for-sale securities (non-current):
 
 
 
 
 
 
 
Municipal Bonds
3,976

 
9

 

 
3,985

 
$
3,976

 
$
9

 
$

 
$
3,985

For purposes of determining gross realized gains and losses and reclassification out of accumulated other comprehensive income (loss), the cost of securities sold is based on specific identification. Net unrealized holding gains and losses on current available-for-sale securities included in accumulated other comprehensive income (loss) were insignificant as of December 27, 2014 and March 29, 2014 .
At December 27, 2014 , $11.1 million in investments had maturities within one year.
5. Business Acquisitions
Fiscal 2014
On May 3, 2013, the Company purchased the assets related to the Semiconductor Systems business of GSI Group Inc. for a total purchase price of $9.7 million . The acquisition provided the Company with direct access to industry-leading wafer marking, wafer trimming and circuit trimming laser systems. The purchase price was allocated to the underlying assets acquired and liabilities assumed based on their fair values and resulted in a net gain on bargain purchase of $0.5 million . The fair value of the acquired net assets of $10.5 million was in excess of the total purchase consideration of $9.7 million , primarily due to the recognition of certain intangible assets. The resulting gain of $0.8 million was partially offset by $0.3 million of deferred tax liabilities. Analysis supporting the purchase price allocation included a valuation of assets and liabilities as of the closing date, an analysis of intangible assets and a detailed review of the opening balance sheet to determine other significant adjustments required to recognize assets and liabilities at fair value. The acquisition was an asset purchase for tax purposes.
As a result of the acquisition, the Company recorded approximately $8.2 million of inventory, $3.9 million of accounts receivable and other current assets, $0.7 million of identifiable intangible assets, $2.3 million of current liabilities, and a gain on bargain purchase of $0.8 million . The $0.7 million of identifiable intangible assets includes approximately $0.5 million of backlog and $0.2 million of developed technology. The acquired intangibles are amortized over their estimated useful lives, which ranged from one to three years.
In 2014, the Company also incurred approximately $1.5 million in acquisition related costs which are included in Selling, service and administration expenses in the Condensed Consolidated Statements of Operations.

9


The operating results of this purchase are included in the Company’s results of operations since the date of acquisition. Pro forma financial information has not been provided for the purchase as it was not material to the Company’s overall financial position.
6. Inventories
Inventories are principally valued at standard cost, which approximates the lower of cost (first-in, first-out) or market. Components of inventories were as follows:
(In thousands)
Dec 27, 2014
 
Mar 29, 2014
Raw materials and purchased parts
$
44,759

 
$
38,747

Work-in-process
10,716

 
12,914

Finished goods
3,949

 
7,241

 
$
59,424

 
$
58,902

7. Other Current Assets
Other current assets consisted of the following:
(In thousands)
Dec 27, 2014
 
Mar 29, 2014
Prepaid expenses
$
2,086

 
$
2,601

Value added tax receivable
880

 
779

Other
846

 
1,294

 
$
3,812

 
$
4,674

8. Other Assets
Other assets consisted of the following:
(In thousands)
Dec 27, 2014
 
Mar 29, 2014
Consignment and demo equipment, net
$
6,572

 
$
5,938

Minority equity investments
4,263

 
4,263

Other
2,365

 
2,146

 
$
13,200

 
$
12,347

Minority equity investments represent the Company's investment in OmniGuide, Inc., which is accounted for as a cost method investment. At the end of each reporting period, the Company determines whether events or circumstances have occurred that are likely to have a significant adverse effect on the fair value of investments. If there are no identified events or circumstances that may have a significant adverse effect on the fair value of investments and the fair value of those investments are not practicable to calculate, the fair value is not calculated.
The total carrying value of the Company's investment in OmniGuide, Inc., was $9.0 million at March 30, 2013 and an additional investment of $5.0 million was made in the second quarter of 2014 for a total investment of $14.0 million life-to-date, or a 15% interest. In the second quarter of 2014, OmniGuide, Inc., engaged in a Series F Preferred Stock round of equity financing priced below previous rounds, which was considered a triggering event and the Company recorded a $3.6 million impairment charge on its Series D and Series E investment at that time. In the fourth quarter of 2014, further triggering events were identified due to poor operating results through the end of the year combined with decreasing cash levels and we performed an updated valuation of our investments at that time and, as a result, recorded an additional $6.1 million impairment charge.
The Company's minority equity investment may be further impaired if OmniGuide, Inc. is unable to raise sufficient funding to continue operations in the near term, if the terms of any such funding are unfavorable to our position, if business results deteriorate, or if the company is sold for an amount that results in proceeds to us less than our carrying value. The total carrying value of $4.3 million at December 27, 2014 and March 29, 2014 is included in Other assets on the Condensed Consolidated Balance Sheets.



10


9. Accrued Liabilities
Accrued liabilities consisted of the following:
(In thousands)
Dec 27, 2014
 
Mar 29, 2014
Payroll-related liabilities
$
7,023

 
$
6,166

Product warranty accrual
3,493

 
4,215

Pension benefit liabilities
1,881

 
1,912

Purchase order commitments and receipts
1,809

 
2,569

Professional fees payable
1,454

 
1,933

Customer deposits
1,454

 
375

Freight accrual
170

 
503

Income taxes payable
106

 
162

Restructuring & cost management amounts payable
264

 
1,050

Value added taxes payable
427

 
332

Other
1,348

 
1,307

 
$
19,429

 
$
20,524

10. Product Warranty
The following is a reconciliation of the changes in the aggregate product warranty accrual:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands)
Dec 27, 2014
 
Dec 28, 2013
 
Dec 27, 2014
 
Dec 28, 2013
Product warranty accrual, beginning
$
3,152

 
$
5,563

 
$
4,215

 
$
5,411

Warranty charges incurred, net
(1,240
)
 
(1,755
)
 
(4,960
)
 
(5,298
)
Provision for warranty charges
1,581

 
815

 
4,238

 
4,510

Product warranty accrual, ending
$
3,493

 
$
4,623

 
$
3,493

 
$
4,623

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

Generally, revenue is recognized upon fulfillment of acceptance criteria at the Company's factory and title transfer which frequently occurs at the time of delivery to a common carrier. Revenue is deferred whenever title transfer is pending and/or acceptance criteria have not yet been fulfilled. Deferred revenue includes sales to Japanese customers, shipments of substantially new products and shipments with custom specifications or acceptance criteria. In sales involving multiple elements, the relative selling price of any undelivered elements, including installation services, is deferred until the elements are delivered and acceptance criteria are met. Revenue related to maintenance and service contracts is deferred and generally recognized ratably over the duration of the contracts.
The following is a reconciliation of the changes in deferred revenue:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands)
Dec 27, 2014
 
Dec 28, 2013
 
Dec 27, 2014
 
Dec 28, 2013
Deferred revenue, beginning
$
16,440

 
$
7,855

 
$
10,515

 
$
10,196

Revenue deferred
6,509

 
5,294

 
33,458

 
18,892

Revenue recognized
(15,126
)
 
(6,455
)
 
(36,150
)
 
(22,394
)
Deferred revenue, ending
$
7,823

 
$
6,694

 
$
7,823

 
$
6,694




11


12. Earnings (Loss) Per Share
The following is a reconciliation of weighted average shares outstanding used in the calculation of basic and diluted earnings per share:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands, except per share data)
Dec 27, 2014
 
Dec 28, 2013
 
Dec 27, 2014
 
Dec 28, 2013
Net loss
$
(6,376
)
 
$
(4,640
)
 
$
(20,870
)
 
$
(10,701
)
Weighted average shares used for basic earnings per share
30,617

 
30,054

 
30,507

 
29,922

Incremental diluted shares

 

 

 

Weighted average shares used for diluted earnings per share
30,617

 
30,054

 
30,507

 
29,922

Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.21
)
 
$
(0.15
)
 
$
(0.68
)
 
$
(0.36
)
Diluted
$
(0.21
)
 
$
(0.15
)
 
$
(0.68
)
 
$
(0.36
)
Awards of options, SARs and RSUs representing an additional 2.8 million and 3.8 million shares of stock for the third quarter of 2015 and 2014 , respectively, were not included in the calculation of diluted net earnings per share because their effect would have been antidilutive.
For the three quarters ended December 27, 2014 and December 28, 2013 , awards of options, SARs, and unvested RSUs representing an additional 2.8 million and 4.0 million shares, respectively, were not included in the calculation of diluted net earnings per share because their effect would have been antidilutive.
13. Product and Geographic Information
Net sales by product type were as follows:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands)
Dec 27, 2014
 
Dec 28, 2013
 
Dec 27, 2014
 
Dec 28, 2013
Interconnect & Microfabrication Group (IMG)
$
28,043

 
$
25,378

 
$
75,591

 
$
98,096

Semiconductor Group (SG)
11,453

 
8,535

 
31,969

 
25,083

Components Group (CG)
4,165

 
4,354

 
13,987

 
20,907

 
$
43,661

 
$
38,267

 
$
121,547

 
$
144,086

Net sales by geographic area, based on the location of the end user, were as follows:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands)
Dec 27, 2014
 
Dec 28, 2013
 
Dec 27, 2014
 
Dec 28, 2013
Asia
$
33,604

 
$
29,087

 
$
92,838

 
$
117,361

Americas
5,602

 
4,761

 
14,258

 
15,470

Europe
4,455

 
4,419

 
14,451

 
11,255

 
$
43,661

 
$
38,267

 
$
121,547

 
$
144,086

14. Restructuring and Cost Management Plans
    
In 2013, the Company 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 packaging, and proprietary laser technology. The plan is substantially complete, however restructuring and wind-down related activities will continue through 2015. See the Company's Form 10-K for the year ended March 29, 2014 for additional information related to restructuring and cost management plans.
In the first three quarters of 2015 , net restructuring costs of $37 thousand were recognized. At December 27, 2014 and March 29, 2014 , the amount of unpaid restructuring costs included in accrued liabilities was $0.3 million and $1.1 million , respectively.

12


The following table presents the amounts related to restructuring costs payable (in thousands):
Restructuring costs payable balance as of March 29, 2014
$
1,050

Employee severance and related benefits:
 
Cash payments
(823
)
Other adjustments
37

Restructuring costs payable balance as of December 27, 2014
$
264

15. Shareholders’ Equity
Share Repurchase Program
On December 9, 2011, the Board of Directors authorized a share repurchase program totaling $20 million to acquire shares of the Company’s outstanding common stock. The repurchases are to be made at management’s discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and other factors.
In the first quarter of 2015 the Company repurchased 207,738 shares for $1.5 million under this authorization at an average price of $7.01 per share, calculated inclusive of commissions and fees. Cash used to settle the repurchase as of December 27, 2014 totaled $1.5 million . The Company did not repurchase any shares during the second and third quarters of 2015 .
In 2014 the Company repurchased 19,832 shares for $0.2 million at an average price of $9.65 per share. The Company has repurchased a total of 227,570 shares life to date under this authorization as a part of its publicly announced plan.
There is no fixed completion date for the repurchase program.
Dividends
In December 2011, the Board of Directors adopted a dividend program. The following table summarizes the quarterly dividend declared and paid by the Company since the third quarter of 2014 :
Date Declared
 
Record Date
 
Payable Date
 
Amount per Share
November 18, 2014
 
December 1, 2014
 
December 15, 2014
 
$0.08
August 21, 2014
 
September 2, 2014
 
September 12, 2014
 
$0.08
May 15, 2014
 
May 27, 2014
 
June 10, 2014
 
$0.08
February 13, 2014
 
February 27, 2014
 
March 13, 2014
 
$0.08
November 7, 2013
 
November 19, 2013
 
December 4, 2013
 
$0.08
A special dividend of $2.00 per share was declared by the Board of Directors on December 3, 2012 after the successful settlement of a patent dispute. The special dividend should not be considered a recurring event.
The Company paid aggregate dividends of $7.3 million and $7.2 million in the first three quarters of 2015 and 2014 , respectively.
The declaration, timing and amount of any future cash dividends are at the discretion of the Board of Directors and will depend on the Company’s financial condition, results of operations, capital requirements and growth investment objectives, business conditions and other factors, as well as a determination that cash dividends are in the best interest of the shareholders.
16. Subsequent Events

On January 15, 2015, the Company completed the acquisition of Topwin Optoelectronics Technology Co., Ltd. ("Topwin") for $9.0 million in cash, subject to certain closing working capital adjustments, plus $4.5 million in stock to be paid out over the next three years. Upon achieving certain financial targets, up to an additional $4.5 million in stock will be issued, for total potential consideration of $18.0 million. The Company will record the fair value of the assets acquired and liabilities assumed on January 15, 2015, the date the Company obtained control of the operations, and include the results of their operations and cash flows in the Company's consolidated financial statements from that date forward.


13



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

The statements contained in this report that are not statements of historical fact, including without limitation, statements containing the words “believes,” “expects,” “anticipates” and similar words, constitute forward-looking statements that are subject to a number of risks and uncertainties. From time to time we may make other forward-looking statements. Investors are cautioned that such forward-looking statements are subject to an inherent risk that actual results may materially differ as a result of many factors, including the risks described in Part II, Item 1A “Risk Factors.”
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, enable functionality, alter physical characteristics or 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, 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.
Summary of Sequential Quarterly Results
The financial results of the third quarter of 2015 ended December 27, 2014 , reflected a slight increase in sales to $43.7 million compared to $42.9 million in the second quarter of 2015 . By product group, IMG increased $1.4 million primarily due to an increase in microfabrication equipment sales due to customer acceptance of new products, SG increased $1.7 million primarily due to increase in wafer mark and scribing system sales and CG revenues decreased $2.3 million primarily due to cyclically reduced demand for MLCC systems.
Total order volume for the third quarter of 2015 declined from $43.0 million to $40.6 million , primarily driven by timing of service contract bookings, partially offset by increased orders for flex via drilling and semiconductor wafer-scribing systems.
Gross profit was $15.8 million in both the third and second quarters of 2015 . Gross margin was 36.1% on net sales of $43.7 million in the third quarter of 2015 compared to a gross margin of 36.8% on net sales of $42.9 million in the second quarter of 2015 . The gross margin change was primarily driven by higher warranty costs in the IMG products, partially offset by improvements in product mix.
Net operating expenses of $21.8 million in the third quarter of 2015 increased $0.5 million from $21.3 million in the second quarter of 2015 . Selling, service and administration (SS&A) increased $0.5 million primarily due to costs related to the Topwin acquisition and higher commissions. Research, development and engineering (RD&E) expenses were fairly consistent with the previous quarter.
Operating loss was $6.0 million in the third quarter of 2015 compared to $5.6 million in the second quarter of 2015 , a change of $0.4 million .
Non-operating income was $0.1 million in the third quarter of 2015 compared to expense of $0.2 million in the second quarter of 2015 . The change was primarily due to market gains and interest income in our non-qualified deferred compensation plan, combined with decreases in foreign exchange losses.

14

Table of Contents

Provision for income taxes was $437 thousand in the third quarter of 2015 compared to $441 thousand in the second quarter of 2015 .
Net loss was $6.4 million in the third quarter of 2015 compared to a net loss of $6.2 million in the second quarter of 2015 .
Quarter Ended December 27, 2014 Compared to Quarter Ended December 28, 2013
Results of Operations
The following table presents results of operations data as a percentage of net sales:
 
Fiscal quarter ended
 
Dec 27, 2014
 
Dec 28, 2013
Net sales
100.0
 %
 
100.0
 %
Cost of sales
63.9

 
57.5

Gross profit
36.1

 
42.5

Selling, service and administration
30.6

 
32.4

Research, development and engineering
19.2

 
25.5

Gain on sale of property and equipment, net

 
(3.4
)
Operating loss
(13.7
)
 
(12.0
)
Interest and other income, net
0.1

 
0.2

Loss before income taxes
(13.6
)
 
(11.8
)
Provision for income taxes
1.0

 
0.3

Net loss
(14.6
)%
 
(12.1
)%
Net Sales
The following table presents net sales information by product group:
 
Fiscal quarter ended
   
Dec 27, 2014
 
Dec 28, 2013
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Interconnect & Microfabrication Group (IMG)
$
28,043

 
64.2
%
 
$
25,378

 
66.3
%
Semiconductor Group (SG)
11,453

 
26.2

 
8,535

 
22.3

Components Group (CG)
4,165

 
9.5

 
4,354

 
11.4

 
$
43,661

 
100.0
%
 
$
38,267

 
100.0
%
Net sales for the third quarter of 2015 increased $5.4 million or 14% from net sales for the third quarter of 2014 . Sales in IMG and SG increased by 11% and 34% , respectively, while CG decreased by 4% .
IMG sales for the third quarter of 2015 increased $2.7 million compared to the third quarter of 2014 . The increase in IMG sales was primarily driven by increase in microfabrication, flex via drilling and service sales.
SG sales for the third quarter of 2015 increased $2.9 million compared to the third quarter of 2014 . The increase was primarily driven by increase in service, wafer mark, scribing and circuit trim systems sales.
CG sales for the third quarter of 2015 decreased $0.2 million compared to the third quarter of 2014 , fairly consistent with the seasonally lower levels of the previous year.
         
The following table presents net sales information by geographic region:

15

Table of Contents

 
Fiscal quarter ended
   
Dec 27, 2014
 
Dec 28, 2013
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Asia
$
33,604

 
77.0
%
 
$
29,087

 
76.0
%
Americas
5,602

 
12.8

 
4,761

 
12.4

Europe
4,455

 
10.2

 
4,419

 
11.6

 
$
43,661

 
100.0
%
 
$
38,267

 
100.0
%
Gross Profit
 
Fiscal quarter ended
   
Dec 27, 2014
 
Dec 28, 2013
(In thousands, except percentages)
Gross Profit
 
% of Net Sales
 
Gross Profit
 
% of Net Sales
Gross Profit
$
15,777

 
36.1
%
 
$
16,281

 
42.5
%
Gross profit was $15.8 million for the third quarter of 2015 , a decrease of $0.5 million compared to the third quarter of 2014 . Gross margin was 36.1% and 42.5% for the third quarter s of 2015 and 2014 , respectively. These decreases were primarily driven by higher warranty and net laser repair costs, less favorable product mix in the SG group and less favorable absorption of fixed costs on lower systems production.
Operating Expenses
 
Fiscal quarter ended
   
Dec 27, 2014
 
Dec 28, 2013
(In thousands, except percentages)
Expense
 
% of Net Sales
 
Expense
 
% of Net Sales
Selling, service and administration
$
13,397

 
30.6
%
 
$
12,408

 
32.4
 %
Research, development and engineering
8,383

 
19.2

 
9,768

 
25.5

Gain on sale of property and equipment, net

 

 
(1,301
)
 
(3.4
)
 
$
21,780

 
49.8
%
 
$
20,875

 
54.5
 %
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 the third quarter of 2015 increased $1.0 million compared to the third quarter of 2014 . This increase was primarily attributable to higher variable expenses due to business volumes combined with increases in legal, audit and depreciation expenses, partially offset by decreases in travel, facilities and share-based compensation 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 the third quarter of 2015 decreased $1.4 million compared to the third quarter of 2014 . This decrease was primarily due to lower project materials and patent legal charges, and to a lesser degree by lower travel and share-based compensation expenses.
Gain on Sale of Property and Equipment, net
During the third quarter of 2014, we sold a facility in Portland, Oregon for $3.6 million, resulting in a pre-tax gain of $1.3 million .
Non-operating Income and Expense
Non-operating income and expense 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 non-operating income was $0.1 million in both of the third quarter s of 2015 and 2014 .

16

Table of Contents

Income Taxes
 
Fiscal quarter ended
 
Dec 27, 2014
 
Dec 28, 2013
(In thousands, except percentages)
Income Tax Provision
 
Effective
Tax Rate
 
Income Tax Provision
 
Effective
Tax Rate
Provision for income taxes
$
437

 
(7.4
)%
 
$
141

 
(3.1
)%
The income tax provision for the third quarter of 2015 was $437 thousand on pretax loss of $5.9 million , an effective tax rate of (7.4)% . For the third quarter of 2014 , the income tax provision was $141 thousand on pretax loss of $4.5 million , an effective rate of (3.1)% . The change in the effective tax rate was primarily due to the relative quarterly income or loss level, the mix of income between foreign and domestic jurisdictions and their relative tax rates.
Net Loss
 
Fiscal quarter ended
 
Dec 27, 2014
 
Dec 28, 2013
(In thousands, except percentages)
Net Loss
 
% of Net Sales
 
Net Loss
 
% of Net Sales
Net loss
$
(6,376
)
 
(14.6
)%
 
$
(4,640
)
 
(12.1
)%
Net loss for the third quarter of 2015 was $6.4 million , or $0.21 per basic and diluted share, compared to net loss of $4.6 million , or $0.15 per basic and diluted share, for the third quarter of 2014 .
Three Quarters Ended December 27, 2014 Compared to Three Quarters Ended December 28, 2013
Results of Operations
The following table presents results of operations data as a percentage of net sales:
 
Three fiscal quarters ended
 
Dec 27, 2014
 
Dec 28, 2013
Net sales
100.0
 %
 
100.0
 %
Cost of sales
63.1

 
58.2

Gross profit
36.9

 
41.8

Selling, service and administration
32.4

 
28.6

Research, development and engineering
21.4

 
19.4

Gain on sale of property and equipment, net

 
(0.9
)
Gain on acquisition of Semiconductor Systems business

 
(0.4
)
Operating loss
(16.9
)
 
(4.9
)
Other-than-temporary impairment of cost based investments

 
(2.5
)
Interest and other (expense) income, net
(0.1
)
 
0.1

Total non-operating expense
(0.1
)
 
(2.4
)
Loss before income taxes
(17.0
)
 
(7.3
)
Provision for income taxes
0.1

 
0.1

Net loss
(17.2
)%
 
(7.4
)%
Net Sales
The following table presents net sales information by product group:
 
Three fiscal quarters ended
   
Dec 27, 2014
 
Dec 28, 2013
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Interconnect & Microfabrication Group (IMG)
$
75,591

 
62.2
%
 
$
98,096

 
68.1
%
Semiconductor Group (SG)
31,969

 
26.3

 
25,083

 
17.4

Components Group (CG)
13,987

 
11.5

 
20,907

 
14.5

 
$
121,547

 
100.0
%
 
$
144,086

 
100.0
%

17

Table of Contents

Net sales for the first three quarters of 2015 decreased $22.5 million or 15.6% from net sales for the first three quarters of 2014 . Sales in IMG and CG decreased by 22.9% and 33.1% , respectively, while sales in SG increased by 27.5% .
IMG sales for the first three quarters of 2015 decreased $22.5 million compared to the first three quarters of 2014 . The decrease in IMG sales was primarily driven by the shipment of advanced microfabrication systems to Korea in 2014 which did not repeat at the same level in 2015.
SG sales for the first three quarters of 2015 increased $6.9 million compared to the first three quarters of 2014 . The increase in SG sales was primarily driven by increased sales of circuit trim, wafer trim and service from the Semiconductor Systems business which was acquired during the first quarter of 2014, and initial sales of scribing systems.
CG sales for the first three quarters of 2015 decreased $6.9 million compared to the first three quarters of 2014 . The decrease was primarily driven by reduced demand for MLCC systems in 2015 due to continued utilization of existing capacity, partially offset by increased tooling sales.
The following table presents net sales information by geographic region:
 
Three fiscal quarters ended
   
Dec 27, 2014
 
Dec 28, 2013
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Asia
$
92,838

 
76.4
%
 
$
117,361

 
81.5
%
Americas
14,258

 
11.7

 
15,470

 
10.7

Europe
14,451

 
11.9

 
11,255

 
7.8

 
$
121,547

 
100.0
%
 
$
144,086

 
100.0
%
Gross Profit
 
Three fiscal quarters ended
   
Dec 27, 2014
 
Dec 28, 2013
(In thousands, except percentages)
Gross Profit
 
% of Net Sales
 
Gross Profit
 
% of Net Sales
Gross Profit
$
44,793

 
36.9
%
 
$
60,299

 
41.8
%
Gross profit was $44.8 million for the first three quarters of 2015 , a decrease of $15.5 million compared to the first three quarters of 2014 . Gross margin was 36.9% and 41.8% for the first three quarters of 2015 and 2014 , respectively. These decreases were primarily due to lower IMG sales and production volumes, with less favorable absorption of fixed costs, along with higher warranty costs, continued pricing pressure and less favorable mix, partially offset by reductions in intangible asset amortization.
Operating Expenses
 
Three fiscal quarters ended
   
Dec 27, 2014
 
Dec 28, 2013
(In thousands, except percentages)
Expense
 
% of Net Sales
 
Expense
 
% of Net Sales
Selling, service and administration
$
39,412

 
32.4
%
 
$
41,206

 
28.6
 %
Research, development and engineering
25,952

 
21.4

 
27,912

 
19.4

Gain on sale of property and equipment, net

 

 
(1,301
)
 
(0.9
)
Gain on acquisition of Semiconductor Systems business

 

 
(499
)
 
(0.4
)
 
$
65,364

 
53.8
%
 
$
67,318

 
46.7
 %
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 the first three quarters of 2015 decreased $1.8 million compared to the first three quarters of 2014 . This decrease was primarily due to lower expenses for share-based compensation, travel, facilities and consulting, partially offset by higher audit and legal fees. Share-based compensation expenses were lower primarily due to lower attainment on

18

Table of Contents

performance based restricted stock awards and lower number of overall grants, combined with lower fair value for new awards granted in 2015.
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 the first three quarters of 2015 decreased $2.0 million compared to the first three quarters of 2014 . This decrease was primarily due to lower expenses for project materials, travel, patent legal fees and share-based compensation, partially offset by higher labor and consulting costs.
Gain on Sale of Property and Equipment, net
During the third quarter of 2014, we sold a facility in Portland, Oregon for $3.6 million, resulting in a pre-tax gain of $1.3 million .
Gain on acquisition of Semiconductor Systems Business
Gain on acquisition of Semiconductor Systems business was 0.5 million in 2014. This purchase resulted in an overall gain as the estimated fair value of the assets purchased was in excess of the total purchase consideration, primarily due to the recognition of certain intangible assets, comprised of developed technology and order backlog.
Non-operating Income and Expense
Non-operating income and 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, such as investment impairment.
Non-operating income and expense were as follows:
 
Three fiscal quarters ended
 
Dec 27, 2014
 
Dec 28, 2013
(In thousands, except percentages)
Non-Operating Income (Expense)
 
% of Net Sales
 
Non-Operating Income (Expense)
 
% of Net Sales
Other-than-temporary impairment of cost based investments
$

 
 %
 
$
(3,588
)
 
(2.5
)%
Interest and other (expense) income, net
$
(134
)
 
(0.1
)%
 
$
115

 
0.1
 %
Total non-operating expense
$
(134
)
 
(0.1
)%
 
$
(3,473
)
 
(2.4
)%
Other-than-temporary impairment of cost based investments
Other-than-temporary impairment of cost based investments was 3.6 million in first three quarters of 2014 and relates to our minority interest investment in OmniGuide, Inc. During the second quarter of 2014, OmniGuide, Inc. engaged in a Series F Preferred Stock round of equity financing at pricing below previous rounds which was considered a triggering event. As a result of that event we performed a valuation of the investment which resulted in a $3.6 million impairment charge of our Series D and Series E investments in that quarter.
Interest and other (expense) income, net
Net interest and other expense was $134 thousand in the first three quarters of 2015 compared to net interest and other income of $115 thousand in the first three quarters of 2014 . The decrease in income was primarily attributable to lower market gains on assets held in deferred compensation accounts and higher foreign exchange losses, and to a lesser extent, lower interest income.
Income Taxes
 
Three fiscal quarters ended
 
Dec 27, 2014
 
Dec 28, 2013
(In thousands, except percentages)
Income Tax Provision
 
Effective
Tax Rate
 
Income Tax Provision
 
Effective
Tax Rate
Provision for income taxes
$
165

 
(0.8
)%
 
$
209

 
(2.0
)%

19

Table of Contents

The income tax provision for the first three quarters of 2015 was $0.2 million on pretax loss of $20.7 million , an effective tax rate of (0.8)% . For the first three quarters of 2014 , the income tax provision was $0.2 million on pretax income of $10.5 million , an effective rate of (2.0)% . The change in the effective tax rate was primarily due to the relative income level, the mix of income between foreign and domestic jurisdictions and their relative tax rates, and a discrete benefit resulting from filing of the Company's tax returns.
Net Loss
 
Three fiscal quarters ended
 
Dec 27, 2014
 
Dec 28, 2013
(In thousands, except percentages)
Net Loss
 
% of Net Sales
 
Net Loss
 
% of Net Sales
Net loss
$
(20,870
)
 
(17.2
)%
 
$
(10,701
)
 
(7.4
)%
Net loss for the first three quarters of 2015 was $20.9 million , or $0.68 per basic and diluted share, compared to net loss of $10.7 million , or $0.36 per basic and diluted share for the first three quarters of 2014 .
Financial Condition and Liquidity
At December 27, 2014 , our principal sources of liquidity were cash and cash equivalents of $70.1 million , short-term investments of $9.6 million and accounts receivable of $40.5 million . At December 27, 2014 , we had a current ratio of 4.43 and held no long-term debt. Working capital of $142.9 million decreased $22.0 million compared to the March 29, 2014 balance of $164.8 million . Cash and cash equivalents were substantially impacted by operating losses, net working capital changes, the payment of quarterly dividends and share repurchases. Cash outflows also included payments totaling $2.7 million relating to an executive termination and distribution of his deferred compensation account.
In December 2011, the Board of Directors adopted a dividend program. The following table summarizes the quarterly dividend declared and paid by us since the third quarter of 2014:
Date Declared
 
Record Date
 
Payable Date
 
Amount per Share
November 18, 2014
 
December 1, 2014
 
December 15, 2014
 
$0.08
August 21, 2014
 
September 2, 2014
 
September 12, 2014
 
$0.08
May 15, 2014
 
May 27, 2014
 
June 10, 2014
 
$0.08
February 13, 2014
 
February 27, 2014
 
March 13, 2014
 
$0.08
November 7, 2013
 
November 19, 2013
 
December 4, 2013
 
$0.08
We paid aggregate dividends of $7.3 million and $7.2 million for the first third quarter s of 2015 and 2014 , respectively.
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 and growth investment objectives, business conditions and other factors, as well as a determination that cash dividends are in the best interest of our shareholders.
Sources and Uses of Cash
Net cash used in operating activities of $16.5 million for the three quarters ended Dec 27, 2014 , was due to $10.5 million of net loss adjusted for non-cash items and $6.0 million of cash outflows due to changes in working capital.
For the three quarters ended December 27, 2014 , net cash provided by investing activities of $28.4 million was the result of $32.9 million net proceeds from sales, maturities and purchases of investments, partially offset by $3.6 million of capital expenditures for purchases of property, plant and equipment (PP&E) and $1.0 million of expenditure for other assets. Accounts payable includes $0.9 million for amounts owed on PP&E purchases as of December 27, 2014 .
For the three quarters ended December 27, 2014 , net cash used in financing activities of $9.2 million primarily resulted from $7.3 million of cash dividends paid to shareholders and $1.5 million of share repurchase settlements.
We believe that our existing cash, cash equivalents and short-term investments are adequate to fund our operations, any dividends which may be declared, our share repurchase program and contractual obligations for at least the next twelve months.
Critical Accounting Policies and Estimates

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We reaffirm the “Critical Accounting Policies and Estimates” in Part II Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations reported in our Form 10-K for the year ended March 29, 2014 .
Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in the market risk disclosure contained in our Form 10-K for the year ended March 29, 2014 .
Item 4. Controls and Procedures
Attached to this quarterly report as exhibits 31.1 and 31.2 are the certifications of our President and Chief Executive Officer (CEO) and our Chief Financial Officer (CFO) required by Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This portion of our quarterly report on Form 10-Q is our disclosure of the conclusions of our management regarding the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report based on management’s evaluation of those disclosure controls and procedures. This disclosure should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

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

Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the third quarter of 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 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, 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 volatility in investment cycles in the market for microelectronics, and semiconductors used in electronic devices or in the market for consumer electronics reduce demand for

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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 these circumstances, our total order volume declined in 2013 compared to 2012 and continued to decline in 2014 and 2015. 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, 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 have also experienced new entrants to our markets offering aggressive price and payments terms in an attempt to gain market share. Some competitors, particularly in China, also develop low cost competitive products, in some cases employing processes or technology developed by us. 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.
We intend to enter into existing markets that are adjacent to our current markets. In these markets we will be competing against established competitors with recognized brands, customer relationships and proven products. If we fail to compete successfully against these competitors our ability to penetrate these markets will be limited, which could have an adverse effect on our financial results.
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 or lower cost products. In addition, we may agree to pricing concessions or extended payment terms with our customers in connection with volume orders or to improve cost of ownership in highly competitive applications. 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 2014, our top ten customers accounted for approximately 41% of total net sales, with one customer, Apple, Inc., and its affiliates, accounting for approximately 15% of total net sales. We anticipate that sales of our products to a relatively small number of customers will continue to account for a significant portion of our revenues. Consolidation between customers, changes in technologies or solutions used by customers, changes in products manufactured by customers or in end-user demand for those products, selection of suppliers other than us, customer bankruptcies or customer departures from their respective industries all may result in even fewer customers accounting for a high percentage of our revenue and reduced demand from any single major customer. Also, business levels with several of our top customers are dependent on our winning new designs and features each product cycle, and there is no guarantee of future business based on past design wins. 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. For example, revenues from Apple, Inc., decreased from $67 million or 31% of revenue in 2013 to $27 million or 15% of revenue in 2014. 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;

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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 our 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 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 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 2014, we recorded $12.8 million of charges in cost of sales for inventory written off in connection with discontinued products.

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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 requires a disclosure report to be filed annually with the SEC and this report 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 83% of net sales in 2014 , with 76% 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 a manufacturing facility in Singapore, research, development and pre-production facilities in Canada, France and China, 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, enforcing internal controls, collecting accounts receivable, and managing suppliers, distributors and representatives.
Our business and operating results could also be impacted, directly or indirectly, by natural disasters, outbreaks of infectious disease, military action, international conflicts, terrorist activities, civil unrest and associated political instability. Many of our facilities, including our Portland, Oregon headquarters, are in areas with known earthquake risk. Some of these events or circumstances may also result in heightened security concerns with respect to domestic and international travel and commerce, which may further affect our business and operating results. In particular, due to these uncertainties, we are subject to the following additional risks:
future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities;
more frequent instances of shipping delays;
demand for our products may not increase or may decrease; and
our customers or suppliers may experience financial difficulties or cease operations.
Implementation and Modification of Globalization Strategy
We are continuing to implement and expand 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 to reduce costs and to develop low cost follow-on solutions to our products. We believe this strategy will enhance customer relationships, improve our responsiveness, reduce our manufacturing costs for certain products and allow us to compete with low cost competitors who develop systems employing processes developed by us. We opened a manufacturing facility in Singapore in the fourth quarter of 2010, which manufactures certain IMG, SG, CG and laser ablation products and is now our primary system manufacturing facility. In January 2015 we acquired a Chinese laser systems manufacturer, Topwin Optoelectronics Technology to gain entry into the low cost Chinese laser systems market.

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Our globalization strategy is subject to a variety of complexities and risks, many of which may divert a substantial amount of management’s time. These risks include:
challenges in designing 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 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 elsewhere;
challenges resulting from implementing a sales representative model in certain regions rather than our historical direct sales model;
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 continuing development, expansion 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 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 2013 acquisition of Eolite Systems, our 2014 acquisition of the Semiconductor Systems business from GSI Group, Inc. and our January 2015 acquisition of Wuhan Topwin Optoelectronics Technology. Acquisitions involve numerous risks, many of which are unpredictable and beyond our control, including:
difficulties and increased costs in connection with integration of personnel, culture, operations, technologies and products of the acquired businesses;
language and cultural differences in the case of international acquisitions;
implementation of our enterprise resource planning (ERP) system into the acquired company’s operations;
diversion of management’s attention from other operational matters;
the potential loss of key employees of the acquired company;
lack of synergy or inability to realize expected synergies resulting from the acquisition;
acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance by the acquired company;
difficulties establishing satisfactory internal controls at the acquired company;
risks and uncertainties relating to the performance of the combined company following the transaction; and
acquiring unanticipated liabilities for which we will not be indemnified.
Furthermore, the accounting for an acquisition could result in significant charges resulting from amortization or write-off of intangible assets we acquire. Our inability to effectively manage these risks could result in our inability to realize the anticipated benefits of an acquisition on a timely basis, or at all, and materially and adversely affect our business, financial condition and results of operations. In addition, all acquisition transaction costs must be expensed as incurred rather than capitalized, which may have a material adverse effect on our results of operations.
The means by which we finance an acquisition may also significantly affect our business or the value of the shares of our common stock. If we issue common stock to pay for an acquisition, the ownership percentage of our existing shareholders will be diluted and the value of the shares held by our existing shareholders could be reduced. If we use cash on hand to pay for an acquisition, the payment could significantly reduce the cash that would be available to fund our operations or to use for other purposes. If we borrow funds in connection with an acquisition, we would be required to use cash to service the debt and to comply with financial and other covenants.
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

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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. On several occasions in recent years executives and other employees have received limited or no annual bonuses due to our financial performance relative to the performance parameters in our annual bonus plans. These events 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.
Our ability to retain key personnel and execute our strategy may also be adversely affected by the transition to a new CEO. In February 2014 Edward C. Grady became our President and Chief Executive Officer, replacing Nicholas Konidaris who held the position since 2004.
Need to Broaden our Marketing and Channel Capability
The laser microfabrication industry is comprised of a broad set of markets and applications and represents significant opportunities for growth. In order to access these opportunities, we need to broaden our approach from being customer-centric to being market-based. This will require the hiring, development, and application of new marketing capability and channel access. Our ability to successfully access and compete in these broader markets will be partially dependent on our development of these new skills and capabilities. Our inability to do so may harm our business and adversely affect our revenues and profitability.
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. Further, we cannot assure that our new products will gain timely 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 condition could be materially and adversely affected. We also will incur research and development expenses as we develop products for the adjacent markets we intend to enter. 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

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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. 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.
We also defend our patent and intellectual property portfolio. We initiated litigation in 2014 against each of Humo Laboratory, LTD. in Japan and Eo Technics Co., Ltd., in South Korea for infringement of key patents. There is no assurance that this litigation will be successful, and we may incur significant legal fees to prosecute these claims.
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.
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. The Company has failed to meet certain of the associated requirements in the past, and has obtained a waiver for certain periods. There is no assurance we will be able to satisfy these requirements and failure to meet such requirements may lead to reduction in future or past tax benefits. The Company believes that it is more likely than not the Company will continue to receive the associated tax incentives and there is no indication that past benefits received would be rescinded.
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 or by 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

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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 euros 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. In addition, we currently have a valuation allowance against domestic tax assets as a result of historic losses recorded in the United States. 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 $5.7 million in acquired intangible assets and $7.9 million in goodwill at December 27, 2014 . 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 2014, including a review for impairment based on certain triggering events and no significant impairments of intangible assets were detected.
We performed our annual goodwill impairment analysis during the fourth quarter of 2014 and determined that goodwill was not impaired. If at any time management determines that an impairment exists the Company may be required to record the impairment as part of operating income, which will result in a reduction in earnings and a corresponding reduction in our net asset value in the period such impairment is identified. The assessment of whether goodwill is impaired is sensitive to stock price and the assumed control premium. A significant deterioration in either may trigger impairment. Our stock price has recently traded around or below our book value of equity, thereby placing more emphasis on the determination of a reasonable control premium.
Stock Price Volatility

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The market price of our common stock has fluctuated widely. During the third quarter of 2015, our stock price fluctuated between a high of $7.92 per share and a low of $6.03 per share, and subsequent to the end of the fiscal quarter and prior to January 31, 2015 has been a low of $6.27. Consequently, the current market price of our common stock may not be indicative of future market prices, and we may be unable to sustain or increase the value of an investment in our common stock. Factors affecting our stock price, many of which are outside of our control, may include:
variations in operating results from quarter to quarter;
changes in earnings estimates by analysts or our failure to meet analysts’ expectations;
changes in the market price per share of our public company customers;
market conditions in the consumer electronics, semiconductor and other industries into which we sell products;
general economic conditions;
political changes, hostilities or natural disasters;
low trading volume of our common stock;
change in our dividend program;
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 experienced significant price and volume fluctuations in recent years. 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 declared a quarterly dividend in December 2011. The declaration, timing and amount of any future cash dividends are subject to capital availability and regular 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 overall levels of current or projected profitability; potential future capital requirements for investments in acquisitions; working capital requirements; 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.
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 or could be required to recognize an impairment charge with respect to our investment. For example, in 2014 we recognized a $9.7 million impairment with respect to our minority equity investment in OmniGuide, Inc. based upon a reduction in the investment's estimated fair value. The Company's investment may be further impaired if OmniGuide, Inc., is unable to raise sufficient funding to continue operations in the near term, if the terms of any such funding are unfavorable to our position, if business results deteriorate, or if the company is sold for an amount that results in proceeds to us less than our carrying value.

Item 4. Mine Safety Disclosures
Not Applicable.

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Item 6. Exhibits
This list is intended to constitute the exhibit index.

3.1
  
Third Restated Articles of Incorporation, as amended. Incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended April 3, 2010.
3.2
  
2009 Amended and Restated Bylaws, as amended. Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on November 9, 2012.
4.1
  
Rights Agreement, dated as of May 18, 2009, between Electro Scientific Industries, Inc. and Mellon Investor Services. Incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K filed on May 19, 2009.
10.1
 
Form of Change in Control Agreement between the Company and Edward Grady
10.2
 
Form of Stock Settled Stock Appreciation Rights Agreement between the Company and Edward Grady (November 18, 2014 awards)
10.3
 
Form of Performance-Based Restricted Stock Unit Award Agreement between the Company and Edward Grady (November 18, 2014)
10.4
 
Form of Performance-Based Restricted Stock Unit Award Agreement between the Company and executives other than Edward Grady (November 18, 2014)
31.1
  
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
  
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
  
XBRL Instance Document *
101.SCH
  
XBRL Taxonomy Extension Schema Document *
101.CAL
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