Electro Scientific Industries, Inc.
ELECTRO SCIENTIFIC INDUSTRIES INC (Form: 10-Q, Received: 08/06/2015 18:33:38)
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 June 27, 2015
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 August 3, 2015 was 30,909,649 shares.
 


Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC.
2016 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)
Jun 27, 2015
 
Mar 28, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
53,831

 
$
50,994

Short-term investments
4,661

 
6,612

Trade receivables, net of allowances of $842 and $712
49,234

 
42,295

Inventories
57,255

 
56,637

Shipped systems pending acceptance
2,127

 
2,516

Deferred income taxes, net
152

 
178

Other current assets
5,301

 
6,090

Total current assets
172,561

 
165,322

Non-current assets:
 
 
 
Property, plant and equipment, net of accumulated depreciation of $104,306 and $102,901
25,219

 
25,858

Non-current deferred income taxes, net
40

 
174

Goodwill
7,445

 
7,717

Acquired intangible assets, net of accumulated amortization of $20,235 and $19,880
8,601

 
8,958

Other assets
12,214

 
13,211

Total assets
$
226,080

 
$
221,240

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
16,390

 
$
9,514

Accrued liabilities
18,720

 
18,666

Deferred income tax liability, net
174

 
173

Deferred revenue
14,961

 
12,376

Total current liabilities
50,245

 
40,729

Non-current liabilities:
 
 
 
Income taxes payable
1,322

 
1,176

Deferred income tax liability, net
284

 
443

Other liabilities
1,918

 
1,571

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; 31,321 and 30,704 issued and outstanding
190,453

 
189,134

Accumulated deficit
(18,105
)
 
(11,741
)
Accumulated other comprehensive loss
(37
)
 
(72
)
Total shareholders’ equity
172,311

 
177,321

Total liabilities and shareholders’ equity
$
226,080

 
$
221,240

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
(In thousands, except per share amounts)
Jun 27, 2015
 
Jun 28, 2014
Net sales:


 


Systems
$
32,062

 
$
23,424

Service
11,029

 
11,606

Total net sales
43,091

 
35,030

Cost of sales:
 
 
 
Systems
21,285

 
16,934

Service
6,429

 
5,808

Total cost of sales
27,714

 
22,742

Gross profit
15,377

 
12,288

Operating expenses:
 
 
 
Selling, general and administrative
12,617

 
12,153

Research, development and engineering
8,645

 
9,145

Acquisition and integration costs
154

 

Restructuring costs
62

 

Net operating expenses
21,478

 
21,298

Operating loss
(6,101
)
 
(9,010
)
Non-operating (expense) income:
 
 
 
Interest and other (expense) income, net
(5
)
 
46

Total non-operating (expense) income
(5
)
 
46

Loss before income taxes
(6,106
)
 
(8,964
)
Provision for (benefit from) income taxes
258

 
(713
)
Net loss
$
(6,364
)
 
$
(8,251
)
Net loss per share—basic
$
(0.20
)
 
$
(0.27
)
Net loss per share—diluted
$
(0.20
)
 
$
(0.27
)
Weighted average number of shares—basic
31,177

 
30,353

Weighted average number of shares—diluted
31,177

 
30,353

Cash dividends paid per outstanding common share
$

 
$
0.08

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


















4

Table of Contents




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


 
Fiscal quarter ended
(In thousands)
Jun 27, 2015
 
Jun 28, 2014
Net loss
$
(6,364
)
 
$
(8,251
)
Other comprehensive loss:
 
 
 
Foreign currency translation adjustment, net of taxes of $17 and $0
31

 
534

Accumulated other comprehensive income related to benefit plan obligation, net of taxes of $2 and $2
4

 
3

Net unrealized loss on available-for-sale securities, net of taxes of $0

 
(1
)
Comprehensive loss
$
(6,329
)
 
$
(7,715
)

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

5

Table of Contents


ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Fiscal quarter ended
(In thousands)
Jun 27, 2015
 
Jun 28, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(6,364
)
 
$
(8,251
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,900

 
1,957

Amortization of acquired intangible assets
357

 
539

Share-based compensation expense
1,387

 
1,330

Loss (gain) on disposition of property and equipment, net
3

 
(19
)
Provision for doubtful accounts
127

 

Increase in deferred income taxes
(44
)
 
(103
)
Changes in operating accounts, net of acquisitions:
 
 
 
(Increase) decrease in trade receivables, net
(5,338
)
 
4,958

Increase in inventories
(552
)
 
(1,609
)
Decrease (increase) in shipped systems pending acceptance
389

 
(493
)
Decrease in other current assets
961

 
234

Increase in accounts payable, accrued & other liabilities
6,916

 
441

Increase in deferred revenue
2,585

 
1,753

Net cash provided by operating activities
2,327

 
737

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of investments
(162,395
)
 
(133,765
)
Proceeds from sales and maturities of investments
164,346

 
152,328

Purchase of property, plant and equipment
(1,344
)
 
(1,158
)
Proceeds from sale of property, plant and equipment

 
105

Decrease (increase) in other assets
(138
)
 
(276
)
Net cash provided by investing activities
469

 
17,234

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Cash dividends paid to shareholders

 
(2,417
)
Payment of withholding taxes on stock-based compensation
(531
)
 
(1,100
)
Proceeds from issuance of common stock
401

 
485

Share repurchase settlements

 
(1,330
)
Net cash used in financing activities
(130
)
 
(4,362
)
Effect of exchange rate changes on cash
171

 
389

NET CHANGE IN CASH AND CASH EQUIVALENTS
2,837

 
13,998

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
50,994

 
68,461

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
53,831

 
$
82,459

SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Cash paid for interest
(57
)
 
(2
)
Cash paid for income taxes
(299
)
 
(320
)
Income tax refunds received
83

 
2

Non-cash additions to property, plant and equipment
196

 
40

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

6

Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 28, 2015 . 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 28, 2015 . All references to years or quarters relate to fiscal years or fiscal quarters unless otherwise noted.

In the current period, certain prior period amounts have been revised, which conforms to current year presentation. Please see Note 7 Trade Accounts Receivable and Note 11 Accrued Current & Other Liabilities .
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 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 613,700 restricted stock unit (RSUs) awards and 467,000 SARs during the first quarter of 2016 . In the same period, the Company did not grant any stock options. The Company granted 451,400 RSUs and 230,000 SARs during the first quarter of 2015 .
Share-based compensation expense was included in the Company’s Condensed Consolidated Statements of Operations as follows:

7


 
Fiscal quarter ended
(In thousands)
Jun 27, 2015
 
Jun 28, 2014
Cost of sales
$
129

 
$
169

Selling, general and administrative
715

 
865

Research, development and engineering
219

 
296

Total share-based compensation expense
$
1,063

 
$
1,330

No share-based compensation costs were capitalized in the first quarter of 2016 . As of June 27, 2015 , the Company had $10.2 million of total unrecognized share-based compensation costs, net of estimated forfeitures, which are expected to be recognized over a weighted average period of 2.0 years. The amounts shown in the table above for the quarter ended June 27, 2015, do not include $324 thousand in expense related to acquisitions. Refer to Note 5 Business Acquisitions for discussion of stock amounts considered compensation related to acquisitions.
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 in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

8


The Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of June 27, 2015 and March 28, 2015 was as follows (in thousands):
June 27, 2015
Level 1
 
Level 2
 
Level 3
 
Total
Money market securities
$
2,997

 
$

 
$

 
$
2,997

Commercial paper

 
21,664

 

 
21,664

Municipal bonds

 
5,853

 

 
5,853

Forward purchase or (sale) contracts:
 
 
 
 
 
 
 
Japanese Yen

 
14

 

 
14

New Taiwan Dollar

 
(7
)
 

 
(7
)
Korean Won

 
(77
)
 

 
(77
)
Euro

 
(163
)
 

 
(163
)
British Pound

 
86

 

 
86

Chinese Renminbi

 
(6
)
 

 
(6
)
March 28, 2015
Level 1
 
Level 2
 
Level 3
 
Total
Money market securities
$
14,280

 
$

 
$

 
$
14,280

Corporate bonds

 
853

 

 
853

Municipal bonds

 
3,872

 

 
3,872

Government agencies

 
2,702

 

 
2,702

Commercial paper

 
15,537

 

 
15,537

Forward purchase or (sale) contracts:
 
 
 
 
 
 
 
Japanese Yen

 
(7
)
 

 
(7
)
New Taiwan Dollar

 
17

 

 
17

Korean Won

 
(44
)
 

 
(44
)
Euro

 
277

 

 
277

British Pound

 
(133
)
 

 
(133
)
Chinese Renminbi

 
(34
)
 

 
(34
)
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 June 27, 2015 and March 28, 2015 were utilized to calculate fair values.
During the first quarter of 2016 , there were no transfers between Level 1, Level 2 or Level 3 assets.

9



Investments
The Company’s investments at June 27, 2015 and March 28, 2015 were as follows (in thousands):  
 
 
 
Unrealized
 
 
June 27, 2015
Cost
 
Gain
 
Loss
 
Fair Value
Available-for-sale securities (current):
 
 
 
 
 
 
 
Commercial paper
$
21,664

 
$

 
$

 
$
21,664

Municipal Bonds
5,852

 
1

 

 
5,853

 
$
27,516

 
$
1

 
$

 
$
27,517

 
 
 
 
 
 
 
 
 
 
 
Unrealized
 
 
March 28, 2015
Cost
 
Gain
 
Loss
 
Fair Value
Available-for-sale securities (current):
 
 
 
 
 
 
 
Corporate Bonds
$
853

 
$

 
$

 
$
853

Municipal Bonds
3,870

 
2

 

 
3,872

Government agencies
2,702

 

 

 
2,702

Commercial paper
15,537

 

 

 
15,537

 
$
22,962

 
$
2

 
$

 
$
22,964

For purposes of determining gross realized gains and losses and reclassification out of accumulated other comprehensive 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 loss were insignificant as of June 27, 2015 and March 28, 2015 .
Investments with underlying maturities within one year at June 27, 2015 totaled $27.5 million .
5. Business Acquisitions
Fiscal 2015
On January 15, 2015, the Company acquired all of the outstanding shares of Wuhan Topwin Optoelectronics Technology Co., Ltd. (Topwin), a Chinese manufacturer of laser-based systems and as of March 28, 2015 the company performed a preliminary determination and allocation of purchase price to the identifiable acquired assets and liabilities. In the first quarter of 2016, the Company finalized the determination of purchase price, including the valuation of total consideration and the related contractual adjustments to working capital, and valuation of acquired assets and liabilities. Consideration was comprised of $7.6 million in cash and 748,944 of ESI common stock issuable over a three year period, valued at approximately $2.9 million as of the acquisition date. Out of the $2.9 million in equity, one-half, or 374,472 shares, is contingent-based consideration and one-half, or 374,472 shares, is non-contingent and will be issued over a three year period beginning June 30, 2015. The contingent consideration is based on future performance of Topwin, as evaluated against targets for net income for each year over a three year period. One-third of the contingent shares will be issued after each year if the target is met for that year; however failing to meet stated targets will result in none of the contingent shares being issued for that year. As of the acquisition date, the fair value of 374,472 shares of contingent consideration was estimated to be $0.4 million and of the 374,472 shares of non-contingent consideration was estimated to be $2.5 million . The fair value of the non-contingent and contingent shares to be issued over the three year period was determined based on the estimated share price as of the issuance date derived through Monte Carlo simulation, discounted back to the acquisition date. The value of the contingent shares included consideration of the estimated probability of attainment of the net income targets. 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. Additionally, the Company will issue, on the same terms described above, approximately 513,328 shares valued at $2.0 million , which, together with cash amounts of $0.2 million , is treated as compensation to a Principal in the Company who was also a former shareholder of Topwin. Compensation expense will be recognized over the Principal's term of employment or related service period required by the purchase agreement through December 31, 2017. In the first quarter of fiscal 2016, we have recognized $366 thousand in compensation expense related to this agreement, comprised of $324 thousand in share-related amounts and $42 thousand in earned cash compensation.
The total purchase price of approximately $10.5 million , net of cash acquired, was allocated to the underlying assets acquired and liabilities assumed based on their fair values, as shown in the following table:

10



(In thousands)
 
Accounts receivable
$
454

Inventory
544

Prepaid expense and other current assets
295

Property, plant and equipment
23

Acquired intangibles
3,618

Goodwill
7,445

Accounts payable and other accrued liabilities
(1,859
)
Total purchase price, net of cash acquired
$
10,520


The acquisition is expected to enable the Company to gain entry into the low total-cost-of-ownership solutions market in China and the goodwill of approximately $7.4 million recognized as a result of the acquisition was assigned to the Topwin reporting unit. The premium paid over the fair value of the individual assets acquired and liabilities assumed reflects the Company’s view that this acquisition was the result of a competitive bid process and has provided the Company with innovative design and manufacturing capabilities for laser-based manufacturing solutions across a variety of complementary applications, together with direct access to local China market, supply chain and opto-electronics knowledge center. None of the goodwill is expected to be deductible for tax purposes.
As a result of the acquisition, the Company recorded approximately $4.9 million of identifiable assets, including $3.6 million of identifiable intangible assets, and $ 1.9 million of identifiable liabilities. The acquired intangible assets consist primarily of $3.5 million of developed technology and will be amortized over their useful lives, which range from one to ten years.
In the first quarter of 2016, the Company incurred approximately $154 thousand in acquisition-related costs. In 2015, the Company incurred approximately $0.8 million in acquisition-related costs which were included in Selling, general and administrative expenses in the Consolidated Statements of Operations. The operating results of this acquisition are included in the Company’s results of operations since the date of acquisition. Pro forma financial information has not been provided for the acquisition of Topwin as it was not material to the Company’s operations and overall financial position.
6. Inventories
Inventories are principally valued at standard costs, which approximate the lower of cost (first-in, first-out) or market. Components of inventories were as follows:
(In thousands)
Jun 27, 2015
 
Mar 28, 2015
Raw materials and purchased parts
$
37,836

 
$
37,991

Work-in-process
14,525

 
14,834

Finished goods
4,894

 
3,812

 
$
57,255

 
$
56,637

7. Trade Accounts Receivable
Trade accounts receivable consisted of the following:
(In thousands)
Jun 27, 2015
 
Mar 28, 2015
Current trade accounts receivable, net
$
49,234

 
$
42,295

Non-current trade accounts receivable
2,054

 
3,656

 
$
51,288

 
$
45,951

As noted above, $2.1 million and $3.7 million of trade accounts receivable were non-current as of June 27, 2015 and March 28, 2015 , respectively, and were included in Other assets in the Condensed Consolidated Balance Sheets. Presentation of $3.7 million of non-current trade accounts receivable previously shown as current at March 28, 2015 was revised to reflect these amounts as non-current, which conforms to current period presentation.
8. Other Current Assets

11


Other current assets consisted of the following:
(In thousands)
Jun 27, 2015
 
Mar 28, 2015
Prepaid expenses
$
1,892

 
$
2,595

Acquisition related receivable
1,118

 
1,180

Value added tax receivable
1,129

 
802

Other
1,162

 
1,513

 
$
5,301

 
$
6,090

9. Goodwill
In the fourth quarter of 2015, the Company realigned its products into two segments as a result of changes in the go-to-market strategies, common customer characteristics, and information utilized to manage our business. This reorganization required the Company to reassign goodwill to the new reporting units based on the relative fair value of the respective reporting units. The Company performed its annual review of goodwill for impairment in the fourth quarter of fiscal 2015 and as a result of that analysis recorded an estimated non-cash goodwill impairment charge of $7.9 million to write down the goodwill to its implied fair value as of March 28, 2015 , subject to finalization of a step two impairment analysis. The step two impairment analysis has now been completed and the impairment charge is unchanged.
10. Other Assets
Other assets consisted of the following:
(In thousands)
Jun 27, 2015
 
Mar 28, 2015
Consignment and demo equipment, net
$
7,441

 
$
7,164

Non-current trade accounts receivable
2,054

 
3,656

Long term deposits and other
2,719

 
2,391

 
$
12,214

 
$
13,211

11. Accrued Current & Other Liabilities
Accrued current liabilities consisted of the following:
(In thousands)
Jun 27, 2015
 
Mar 28, 2015
Payroll-related liabilities
$
7,016

 
$
6,723

Product warranty accrual
3,493

 
3,342

Restructuring costs payable
1,853

 
1,997

Purchase order commitments and receipts
1,825

 
1,815

Professional fees payable
1,624

 
1,237

Customer deposits
692

 
1,057

Value added taxes payable
306

 
474

Freight accrual
210

 
171

Income taxes payable
11

 
83

Other
1,690

 
1,767

 
$
18,720

 
$
18,666


Other liabilities consisted of the following:
(In thousands)
Jun 27, 2015
 
Mar 28, 2015
Product warranty accrual
$
528

 
$

Other non-current liabilities
1,390

 
1,571

 
$
1,918

 
$
1,571

Presentation of $1.6 million of Other non-current liabilities previously shown as current at March 28, 2015 was revised to reflect these amounts as non-current, which conforms to current period presentation.


12


12. Product Warranty
The following is a reconciliation of the changes in the product warranty accrual:
 
Fiscal quarter ended
(In thousands)
Jun 27, 2015
 
Jun 28, 2014
Product warranty accrual, beginning
$
3,342

 
$
4,215

Warranty charges incurred, net
(1,484
)
 
(1,940
)
Provision for warranty charges
2,163

 
1,212

Product warranty accrual, ending
$
4,021

 
$
3,487

Net warranty charges incurred include labor charges and costs of replacement parts for system repairs under warranty. These costs are recorded net of any estimated cost recoveries resulting from either successful repair of damaged parts or from warranties offered by the Company’s suppliers for defective components. The provision for warranty charges reflects the estimate of future anticipated net warranty costs to be incurred for all products under warranty at quarter end and is recorded to cost of sales. Of the total of $4.0 million in product warranty accrual at June 27, 2015 , $0.5 million is non-current and is included in Other liabilities on the Condensed Consolidated Balance Sheets.
13. Deferred Revenue

Generally, revenue is recognized upon fulfillment of acceptance criteria at the Company's factory and title transfer which frequently occurs at the time of delivery to a common carrier. Revenue is deferred whenever title transfer is pending and/or acceptance criteria have not yet been fulfilled. Deferred revenue occurrences include sales to Japanese customers, shipments of substantially new products and shipments with custom specifications and acceptance criteria. In sales involving multiple element arrangements, the relative selling price of any undelivered elements, including installation services, is deferred until the elements are delivered and acceptance criteria are met. Revenue related to maintenance and service contracts is deferred and recognized ratably over the duration of the contracts.
The following is a reconciliation of the changes in deferred revenue:
 
Fiscal quarter ended
(In thousands)
Jun 27, 2015
 
Jun 28, 2014
Deferred revenue, beginning
$
12,376

 
$
10,515

Revenue deferred
15,720

 
11,808

Revenue recognized
(13,135
)
 
(10,055
)
Deferred revenue, ending
$
14,961

 
$
12,268

14. 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
(In thousands, except per share data)
Jun 27, 2015
 
Jun 28, 2014
Net loss
$
(6,364
)
 
$
(8,251
)
Weighted average shares used for basic earnings per share
31,177

 
30,353

Incremental diluted shares

 

Weighted average shares used for diluted earnings per share
31,177

 
30,353

Net loss per share:
 
 
 
Net loss — basic
$
(0.20
)
 
$
(0.27
)
Net loss — diluted
$
(0.20
)
 
$
(0.27
)
Awards of options, SARs and unvested RSUs representing an additional 3.6 million and 3.3 million shares of stock for the first quarters of 2016 and 2015 , respectively, were not included in the calculation of diluted net earnings per share because their effect would have been antidilutive.

13


15. Segment and Geographic Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer. Prior to the fourth quarter of 2015, we operated in one segment, high-technology manufacturing equipment, which was comprised of products that were classified in three groups: interconnect and micromachining, semiconductor and component. As a result of changes in our go-to-market strategies, common customer characteristics, and information utilized to manage our business, we realigned our products into two segments. Since the fourth quarter 2015 ESI has operated in two segments, Component Processing and Micromachining.
Net sales by segment were as follows:
 
Fiscal quarter ended
(In thousands)
Jun 27, 2015
 
Jun 28, 2014
Component Processing
$
38,284

 
$
30,298

Micromachining
4,807

 
4,732

 
$
43,091

 
$
35,030


Gross profit by segment was as follows:
 
Fiscal quarter ended
(In thousands)
Jun 27, 2015
 
Jun 28, 2014
Component Processing
$
14,110

 
$
12,567

Micromachining
1,662

 
337

Corporate and other
(395
)
 
(616
)
 
$
15,377

 
$
12,288


Net sales by geographic area, based on the location of the end user, were as follows:
 
Fiscal quarter ended
(In thousands)
Jun 27, 2015
 
Jun 28, 2014
Asia
$
33,536

 
$
24,718

Americas
6,356

 
6,174

Europe
3,199

 
4,138

 
$
43,091

 
$
35,030

16. Restructuring and Cost Management Plans
In March 2015, as a part of the plan to streamline its manufacturing and development activities, the Company initiated a restructuring plan to close the assembly plant and development center located in Chelmsford, Massachusetts. The estimated completion date of the plan is the end of fiscal 2016. See the Company's Form 10-K for the year ended March 28, 2015 for additional information related to restructuring and cost management plans.
Net restructuring costs of $0.1 million in the first quarter of 2016 included severance and wind-up costs. These costs relate to the restructuring plan described above and our previously disclosed action to close our Beijing facility. At June 27, 2015 and March 28, 2015 , the amount of unpaid restructuring costs included in accrued liabilities was $1.9 million and $2.0 million , respectively.
The following table presents the amounts related to restructuring costs payable (in thousands):

14


Restructuring & cost management amounts payable as of March 28, 2015
$
1,997

Employee severance and related benefits:
 
Cash payments
(206
)
Costs incurred and other adjustments
62

Restructuring & cost management amounts payable as of June 27, 2015
$
1,853

17. Shareholders’ Equity
Share Repurchase Program
In December 2011, the Board of Directors authorized a share repurchase program totaling $20.0 million to acquire shares of our outstanding common stock. The repurchases are to be made at management’s discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and other factors.
The Company did not repurchase any shares during the first quarter of 2016. 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.
There is no fixed completion date for the repurchase program.
Dividends
In February 2015, the Board of Directors suspended the quarterly dividend which was adopted by the Company in December 2011. The Company paid dividends in the first three quarters of 2015 under the 2011 dividend policy in the aggregate amount of $0.24 per share. The Company did not pay any dividends in the first quarter of 2016.
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. ESI's integrated solutions allow industrial designers and process engineers to control the power of laser light to transform materials in ways that differentiate their consumer electronics, wearable devices, semiconductor circuits and high-precision components for market advantage. ESI’s laser-based manufacturing solutions feature the micro-machining industry’s highest precision and speed, and target the lowest total cost of ownership. Founded in 1944, ESI is headquartered in Portland, Oregon, with global operations from the Pacific Northwest to the Pacific Rim.
Laser microfabrication is comprised of a set of precise micron-level processes, including drilling, scribing, dicing, singulation, cutting, ablating, trimming, and precision marking on multiple types of materials. These processes require application-specific laser systems that are able to meet our customers’ exacting performance and productivity requirements. Our laser-based systems are utilized in the production of consumer electronics, flexible and rigid printed circuit boards, semiconductor devices, advanced semiconductor packaging, electronic sensors, touch-panel glass, flat panel liquid crystal displays (LCDs) and other high value components and devices to enable functionality, increase performance and improve production yields.
Additionally, we produce high-capacity test and inspection equipment that is critical to the quality control process during the production of multilayer ceramic capacitors (MLCCs). Our equipment ensures that each component meets the electrical and physical tolerances required to perform properly.
Historically and during much of fiscal 2015 we operated in one segment, high technology manufacturing equipment, which was comprised of products classified into three groups: interconnect and micromachining, semiconductor, and component test. As a result of changes in our go-to-market strategies, common customer characteristics, and information utilized to manage our business, during the fourth quarter of 2015 we realigned our products into two segments: Component Processing (CP) and Micromachining (MM). Included within Component Processing are Interconnect Products (IP),

15


Semiconductor Products (SP), and Component Test Products (CTP), which are sold primarily to manufacturers of electronic components to drill, cut, trim, ablate, test and mark features that improve the yield or functionality of the component. Micromachining Products (MP) are sold primarily to manufacturers of end devices across multiple industries and are used to drill, cut, or mark features on a variety of materials, generally on the casing or external surfaces of the end device. ESI does not maintain or monitor operating expenses or assets at the segment level.
Summary of Sequential Quarterly Results
The financial results for the first quarter of 2016 reflected a sequential increase in revenues to $43.1 million from $37.6 million in the fourth quarter of 2015 , largely a result of the higher orders during the quarter and a $4.2 million decrease in backlog. Total orders increased to $41.9 million in the first quarter of 2016 compared to $40.0 million in the prior quarter, primarily driven by growth in the MM segment from a new design win secured during the quarter.
CP segment sales increased to $38.3 million in first quarter of 2016 from $30.1 million in the prior quarter from higher sales of Semiconductor Products, specifically higher sales of wafer trim and wafer processing systems. Sales also increased modestly in the Interconnect and the Component Test Product groups. Sales in the MM segment fell due to low orders levels during the fourth quarter of 2015 , which caused backlog to be very low entering the first quarter of 2016 .
Gross profit was $15.4 million in the first quarter of 2016 compared to a gross profit of $12.9 million in the fourth quarter of 2015 . Gross margin was 35.7% on net sales of $43.1 million in the first quarter of 2016 compared to a gross margin of 34.4% on net sales of $37.6 million in the fourth quarter of 2015 . The gross margin rate improved sequentially, primarily due to a decrease of inventory write-offs from $1.0 million in the fourth quarter of 2015 to zero in the first quarter of 2016 . Excluding the impact of inventory write-offs, gross margins declined modestly on unfavorable mix and ramp costs associated with new products.
Net operating expenses of $21.5 million in the first quarter of 2016 decreased $10.6 million from $32.1 million in the fourth quarter of 2015 , primarily due to several large non-recurring expenses incurred during the fourth quarter of 2015 . These non-recurring expenses included $2.1 million for restructuring and $7.9 million of goodwill impairment, which did not repeat in the first quarter of 2016 .
Operating loss was $6.1 million in the first quarter of 2016 compared to an operating loss of $19.2 million in the fourth quarter of 2015 , a change of $13.1 million . The decrease in operating loss was primarily due to higher sales and gross profit, and lower operating expenses as noted above.
Non-operating expense was $0.01 million in the first quarter of 2016 compared to expense of $3.7 million in the fourth quarter of 2015 . The improvement was primarily due to the non-recurring nature of a $4.3 million impairment against our minority equity investment in OmniGuide, Inc., recorded in the fourth quarter of 2015 .
Provision for income taxes was $0.3 million in the first quarter of 2016 compared to a provision of $0.1 million in the fourth quarter of 2015 , primarily due to the amount and timing of foreign income.
Net loss was $6.4 million in the first quarter of 2016 compared to a net loss of $22.9 million in the fourth quarter of 2015 .
Quarter Ended June 27, 2015 Compared to Quarter Ended June 28, 2014
Results of Operations
The following table presents results of operations data as a percentage of net sales:

16


 
Fiscal quarter ended
 
Jun 27, 2015
 
Jun 28, 2014
Net sales:
100.0
 %
 
100.0
 %
Cost of sales:
64.3

 
64.9

Gross profit
35.7

 
35.1

Selling, general and administrative
29.3

 
34.7

Research, development and engineering
20.1

 
26.1

Restructuring costs
0.1

 

Operating loss
(14.2
)
 
(25.7
)
Interest and other income, net

 
0.1

Loss before income taxes
(14.2
)
 
(25.6
)
Provision for (benefit from) income taxes
0.6

 
(2.0
)
Net loss
(14.8
)%
 
(23.6
)%

Net Sales
The following table presents net sales information by operating segment:
 
Fiscal quarter ended
 
Jun 27, 2015
 
Jun 28, 2014
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Component Processing
 
 
 
 
 
 
 
Interconnect Products (IP)
$
20,645

 
47.9
%
 
$
16,216

 
46.3
%
Component Test Products (CTP)
6,498

 
15.0

 
3,333

 
9.5

Semiconductor Products (SP)
11,141

 
25.9

 
10,749

 
30.7

 
$
38,284

 
88.8
%
 
$
30,298

 
86.5
%
Micromachining
 
 
 
 
 
 
 
Micromachining Products (MP)
$
4,807

 
11.2

 
$
4,732

 
13.5

Net Sales
$
43,091

 
100
%
 
$
35,030

 
100
%

Net sales for the first quarter of 2016 increased $8.1 million or 23.0% from net sales for the first quarter of 2015 . Sales in the CP and MP segments increased by 26.4% and 1.6% respectively.
CP segment sales for the first quarter of 2016 increased $8.0 million compared to the first quarter of 2015 . The increase in CP segment sales was driven by increased demand for our flex via drilling products, including the new GemStone product, and our component test systems.
MM segment sales for the first quarter of 2016 increased $0.1 million compared to the first quarter of 2015 . The increase was driven by a design win for our new Lumen series platform, the addition of Topwin and slightly higher service revenues, offset by lower sales of laser ablation systems.
The following table presents net sales information by geographic region:
 
Fiscal quarter ended
   
Jun 27, 2015
 
Jun 28, 2014
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Asia
$
33,536

 
77.8
%
 
$
24,718

 
70.6
%
Americas
6,356

 
14.8

 
6,174

 
17.6

Europe
3,199

 
7.4

 
4,138

 
11.8

 
$
43,091

 
100.0
%
 
$
35,030

 
100.0
%

17


Gross Profit
 
Fiscal quarter ended
   
Jun 27, 2015
 
Jun 28, 2014
(In thousands, except percentages)
Gross Profit
 
% of Net Sales
 
Gross Profit
 
% of Net Sales
Component Processing
$
14,110

 
36.9
 %
 
$
12,567

 
41.5
 %
Micromachining
1,662

 
34.6

 
337

 
7.1

Corporate and other
(395
)
 
(0.9
)
 
(616
)
 
(1.8
)
Gross Profit
$
15,377

 
35.7
 %
 
$
12,288

 
35.1
 %
Gross profit was $15.4 million for the first quarter of 2016 , an increase of $3.1 million compared to the first quarter of 2015 . The gross profit increase was principally due to higher sales volume. Gross margins were 35.7% and 35.1% for the first quarter s of 2016 and 2015 , respectively. The higher gross margin is due primarily to lower purchase accounting and equity compensation charges in Cost of Sales.
Gross margin for the CP segment decreased from 41.5% to 36.9% on unfavorable mix and higher costs due to ramp of new products. MM segment gross margins increased from 7.1% to 34.6% due to improved margins on system sales and increased gross profit on higher utilization of internally-developed lasers. Additionally, fixed costs are allocated between segments based on business levels and this resulted in lower costs allocated to the MM segment in the first quarter 2016 compared to the fourth quarter of 2015.
Operating Expenses
 
Fiscal quarter ended
   
Jun 27, 2015
 
Jun 28, 2014
(In thousands, except percentages)
Expense
 
% of Net Sales
 
Expense
 
% of Net Sales
Selling, general and administrative
$
12,617

 
29.3
%
 
$
12,153

 
34.7
%
Research, development and engineering
8,645

 
20.1

 
9,145

 
26.1

Acquisition and integration costs
154

 
0.4

 

 

Restructuring costs
62

 
0.1

 

 

 
$
21,478

 
49.8
%
 
$
21,298

 
60.8
%
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses primarily consist of labor and other employee-related expenses including share-based compensation expense, travel expenses, professional fees, sales commissions and facilities costs.
SG&A expenses for the first quarter of 2016 increased $0.5 million compared to the first quarter of 2015 . This increase was primarily attributable to higher purchase accounting charges associated with the Topwin acquisition and integration.
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 quarter of 2016 decreased $0.5 million compared to the first quarter of 2015 , reflecting decreases in labor expense, project materials, and external IP-related charges.
Acquisition and Integration Costs
Acquisition and integration costs consisted mainly of travel, consulting, and legal expenses associated with the acquisition and integration of Topwin Optoelectronics, which was acquired in January 2015.
Restructuring Costs
Restructuring costs consisted primarily of expenses associated with the closure of the facility in Chelmsford, Massachusetts, which was announced in March 2015.
Non-operating Income and Expense, net

18


 
Fiscal quarter ended
 
Jun 27, 2015
 
Jun 28, 2014
(In thousands, except percentages)
Non-operating Income and Expense, net

 
% of Net Sales
 
Non-operating Income and Expense, net

 
% of Net Sales
Interest and other income (expense), net
$
(5
)
 
%
 
$
46

 
0.1
%
Interest and other income (expense), net, consists of net 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. The decrease in other income was primarily attributable to lower foreign exchange gains.
Income Taxes
 
Fiscal quarter ended
 
Jun 27, 2015
 
Jun 28, 2014
(In thousands, except percentages)
Income Tax Provision
 
Effective
Tax Rate
 
Income Tax Benefit
 
Effective
Tax Rate
Provision for (benefit from) income taxes
$
258

 
(4.2
)%
 
$
(713
)
 
8.0
%
The income tax provision for the first quarter of 2016 was $0.3 million on pretax loss of $6.1 million , an effective tax rate of (4.2)% . For the first quarter of 2015 , the income tax benefit was $0.7 million on pretax loss of $9.0 million , an effective rate of 8.0% . The change in the effective tax rate was driven by a favorable tax assessment related to the legal settlement with All Ring in the first quarter of 2015 .
Net Loss
 
Fiscal quarter ended
 
Jun 27, 2015
 
Jun 28, 2014
(In thousands, except percentages)
Net Loss
 
% of Net Sales
 
Net Loss
 
% of Net Sales
Net loss
$
(6,364
)
 
(14.8
)%
 
$
(8,251
)
 
(23.6
)%
As a result of the factors discussed above, net loss for the first quarter of 2016 was $6.4 million , or $0.20 per basic and diluted share, compared to a net loss of $8.3 million , or $0.27 per basic and diluted share, for the first quarter of 2015 .
Financial Condition and Liquidity
At June 27, 2015 , our principal sources of liquidity were cash and cash equivalents of $53.8 million , short-term investments of $4.7 million and current accounts receivable of $49.2 million . At June 27, 2015 , we had a current ratio of 3.43 and had no long-term debt. Working capital of $122.3 million decreased $2.3 million compared to the March 28, 2015 balance of $124.6 million .
In February 2015, the Board of Directors suspended the quarterly dividend which was adopted by the Company in December 2011. The Company paid dividends in the first three quarters of 2015 under the 2011 dividend policy in the aggregate amount of $0.24 per share. The Company did not pay any dividends in the first quarter of 2016.
Sources and Uses of Cash
Net cash provided by operating activities of $2.3 million for the first quarter of 2016 was the result of $2.6 million in net loss adjusted for non-cash items offset by decreases in working capital. The change in working capital was primarily driven by a $6.9 million increase in accounts payable, due to normalization of amounts and timing related to inventory receipts and associated payments, a $3.0 million increase in deferred margin and a $1.0 million decrease in other current assets, partially offset by a $5.3 million increase in accounts receivable, driven by shipments skewed to the latter part of the first quarter .
Net cash provided by investing activities of $0.5 million was primarily the result of net proceeds from maturities of investments of $2.0 million , offset by $1.3 million of capital expenditures from purchases of property, plant and equipment (PP&E). Accounts payable balance includes $0.2 million for amounts owed on PP&E purchases as of June 27, 2015 .
For the first quarter of 2016 , net cash used in financing activities of $0.1 million primarily resulted from $0.5 million of cash paid for withholding taxes for stock-based compensation, offset by $0.4 million of proceeds from the issuance of common stock.

19


We believe that our existing cash, cash equivalents and short-term investments are adequate to fund our operations and contractual obligations for at least the next twelve months.
Critical Accounting Policies and Estimates
We reaffirm the “Critical Accounting Policies and Estimates” in Part II Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations reported in our Form 10-K for the year ended March 28, 2015 .
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 28, 2015 .

20


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 the evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were not effective as of June 27, 2015, because of the material weaknesses described in Management’s Report on Internal Control over Financial Reporting in our annual Form 10-K dated March 28, 2015. Management is still in process of evaluating and remediating the related deficiencies.

Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the first quarter of 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

21

Table of Contents

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, PCB's and semiconductors used in electronic devices or in the market for consumer electronics reduce demand for our products and may materially and adversely affect our business, financial condition and results of operations. 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.
Expansion into New Markets
Our future success depends in large part on our successful penetration of new markets adjacent to our existing markets and of the Chinese market for lower cost systems. These markets are new to us and our success is dependent on our displacing entrenched competitors who are familiar with these markets and are known to customers. There is no assurance that we will be successful in penetrating these new markets significantly or at all. If we fail to successfully penetrate these markets our business, financial condition and results of operations could be materially and adversely affected.
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 products 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.
Revenues are Largely Dependent on Few Customers
We depend on a few significant customers for a large portion of our revenues. In 2015 , our top ten customers accounted for approximately 40% 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

22

Table of Contents

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 $27 million in 2014 to $15 million in 2015. 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.
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 Based on the Sale of a Small Number of Product Units
We derive a substantial portion of our revenue from the sale of a relatively small number of products. Accordingly, our revenues, margins and other operating results could fluctuate significantly from quarter to quarter depending upon a variety of factors in addition to those described above, including:
changes in the timing of orders and terms or acceptance of product shipments by our customers;
changes in the mix of products and services that we sell;
timing and market acceptance of our new product introductions; and
delays or problems in the planned introduction of new products, or in the performance of any such products following delivery to customers.
As a result of these risks, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be meaningful, and that these comparisons may not be an accurate indicator of our future performance.
Risks Related to Our Supply Chain and Production
Variability of Production Capacity
To meet rapidly changing demand in the industries we serve, we must effectively manage our resources and production capacity. During periods of decreasing demand for our products, we must be able to appropriately align our cost structure with prevailing market conditions and effectively manage our supply chain. Our ability to rapidly and effectively reduce our cost structure in response to such downturns is limited by the fixed nature of many of our expenses in the near term and by our need to continue our investment in next-generation product technology and to support and service our products. Conversely, when upturns occur in the markets we serve, we may have difficulty rapidly and effectively increasing our manufacturing capacity or procuring sufficient materials to meet sudden increases in customer demand that could result in the loss of business to our competitors and harm to our relationships with our customers. If we are not able to timely and appropriately adapt to changes in our business environment, our business, financial condition or results of operations may be materially and adversely affected.
Reliance on Critical Suppliers
We use a wide range of components from numerous suppliers in the manufacture of our products, including custom electronic, laser, optical and mechanical components. We generally do not have guaranteed supply arrangements with our suppliers. We seek to reduce the risk of production and service interruptions and shortages of key parts by selecting and qualifying alternative suppliers for key parts, monitoring the financial stability of key suppliers and maintaining appropriate inventories of key parts. Although we make reasonable efforts to ensure that parts are available from multiple suppliers, some key parts are available only from a single supplier or a limited group of suppliers in the short term. In addition, some of the lasers we use in our products are difficult to manufacture, and as a result we may not receive an adequate supply of lasers in a timely fashion to fill orders. Operations at our suppliers’ facilities are subject to disruption or discontinuation for a variety of reasons, including changes in business relationships, competitive factors, financial difficulties, work stoppages, fire, natural disasters or other causes. Any such disruption or discontinuation to our suppliers’ operations could interrupt or reduce our manufacturing activities and delay delivery of our products, any or all of which could materially and adversely affect our results of operations. In addition, when markets recover from economic downturns, there is a heightened risk that one or more

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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 accounting charges for excess and obsolete inventory if inventory cannot be used, which would negatively affect our financial results. Also, if we alter our technology or product development strategy, we may have inventory that may not be usable under the new strategy, which may also result in material accounting charges. For example, during 2015, we recorded approximately $1.0 million of charges in cost of sales for inventory written-off associated with discontinued products.
Uncertainties Resulting from Conflict Minerals Regulation
On August 22, 2012, the SEC adopted a new rule requiring disclosures of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured by companies filing public reports. The 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 86% of net shipments in 2015, 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 manufacturing facilities in Singapore and China, research and development facilities in Canada, France and Taiwan, and sales and service offices in various countries. Under our globalization strategy, we intend to increase our foreign operations in the future. Our non-U.S. sales, purchases and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including the following:
periodic local or geographic economic downturns and unstable political conditions;
price and currency exchange controls;
fluctuation in the relative values of currencies;
difficulty in repatriating money, whether as a result of tax laws or otherwise;
difficulties protecting intellectual property;
compliance with labor laws and other laws governing employees;
local labor disputes;
shipping delays and disruptions;
unexpected changes in trading policies, regulatory requirements, tariffs and other barriers; and

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difficulties in managing a global enterprise, including staffing, collecting accounts receivable, and managing suppliers, distributors and representatives.
Our business and operating results could also be impacted, directly or indirectly, by natural disasters, outbreaks of infectious disease, military action, international conflicts, terrorist activities, civil unrest and associated political instability. Many of our facilities, including our Portland, Oregon headquarters, are in areas with known earthquake risk. Some of these events or circumstances may also result in heightened security concerns with respect to domestic and international travel and commerce, which may further affect our business and operating results. In particular, due to these uncertainties, we are subject to the following additional risks:
future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities;
more frequent instances of shipping delays;
demand for our products may not increase or may decrease; and
our customers or suppliers may experience financial difficulties or cease operations.
Implementation and Modification of Globalization Strategy
We are 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. As part of this strategy we acquired Topwin, a Chinese manufacturer of laser-based systems, in January 2015 to gain entry into the low-cost solutions market in China. 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 IP, MP, SP and CTP products and is now our primary system manufacturing facility.
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;
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 June 2012 acquisition of Eolite Systems, our May 2013 acquisition of the Semiconductor Systems business from GSI Group, Inc. and our January 2015 acquisition of Topwin. Acquisitions involve numerous risks, many of which are unpredictable and beyond our control, including:
difficulties and increased costs in connection with integration of personnel, operations, technologies and products of the acquired businesses;
difficulties in 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;
the inability to successfully enter new markets expected to result from the acquisition;

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acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance by the acquired company;
difficulties establishing satisfactory internal controls and accounting practices at the acquired company;
risks related to the culture, language, and local practices of 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 and goodwill we acquire. Our inability to effectively manage these risks could result in our inability to realize the anticipated benefits of an acquisition on a timely basis, or at all, and materially and adversely affect our business, financial condition and results of operations. In addition, all acquisition transaction costs must be expensed as incurred rather than capitalized, which may have a material adverse effect on our results of operations.
The means by which we finance an acquisition may also significantly affect our business or the value of the shares of our common stock. If we issue common stock to pay for an acquisition, the ownership percentage of our existing shareholders will be diluted and the value of the shares held by our existing shareholders could be reduced. If we use cash on hand to pay for an acquisition, the payment could significantly reduce the cash that would be available to fund our operations or to use for other purposes. If we borrow funds in connection with an acquisition, we would be required to use cash to service the debt and to comply with financial and other covenants.
We may from time to time also make strategic investments in development stage companies. Investments in development stage companies are subject to a high degree of risk. We could lose all or a portion of our investment in any such company or could be required to recognize an impairment charge with respect to our investment. For example, in 2014 and 2015 we recognized a loss totaling $14 million on our investment in OmniGuide, Inc., due to a lender of OmniGuide exercising its right to convert the obligations owed to it into 100% of OmniGuide's outstanding equity.
Hiring and Retention of Personnel
Our continued success depends in part upon the services of our key managerial, financial and technical personnel. The loss of key personnel, or our inability to attract, assimilate and retain qualified personnel, could result in the loss of customers, inhibit our ability to operate and grow our business and otherwise have a material adverse effect on our business and results of operations. We have previously had to, and may in the future have to, impose salary reductions on employees during economic downturns in an effort to maintain our financial position. 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 and locations in which we compete for talent 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 2014 Edward C. Grady became our President and Chief Executive Officer, replacing Nicholas Konidaris who held the position since 2004.
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.

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Need to Invest in Research and Development
Our industry is characterized by the need for continued investment in research and development. Because of intense competition in the industries in which we compete, if we were to fail to invest sufficiently in research and development, our products could become less attractive to our current and potential customers or obsolete, and our business and financial condition could be materially and adversely affected. As a result of our need to maintain our spending levels in this area, our operating results could be materially harmed if our net sales decline. In addition, as a result of our emphasis on research and development and technological innovation, our operating costs may increase in the future, and research and development expenses may increase as a percentage of total operating expenses and as a percentage of net sales.
Need to Broaden our Marketing and Channel Capability
The laser microfabrication industry is comprised of 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 customer centric to 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 would harm our business and adversely affect our revenues and profitability.
Products are Highly Complex
Our products are highly complex, and our extensive product development, manufacturing and testing processes may not be adequate to detect all defects, errors, failures and quality issues that could impact customer satisfaction or result in claims against us. As a result, we may have to replace certain components or provide remediation in response to the discovery of defects in products after they are shipped. The occurrence of any defects, errors, failures or quality issues could result in cancellation of orders, product returns, diversion of our resources, legal actions by our customers and other losses to us or to our customers. These occurrences could also result in the loss of, or delay in, market acceptance of our products, loss of sales and increased expenses and warranty costs, which would harm our business and adversely affect our revenues and profitability.
Risks Related to Legal Matters
Protection of Proprietary Rights – Generally
Our success depends significantly upon the protection of our proprietary rights. We attempt to protect our proprietary rights through patents, copyrights, trademarks, maintenance of trade secrets and other measures, including entering into confidentiality agreements. We incur substantial costs to obtain and maintain patents and to defend our intellectual property rights. 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.

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We also defend our patent and intellectual property portfolio. We initiated litigation in 2014 against Humo Laboratory, LTD. in Japan and against Eo Technics Co., Ltd., in South Korea in May 2014 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, however 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 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. 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
Liquidity
We may require greater working capital to operate than similar size businesses in many other industries. At June 27, 2015 , we had working capital of $122.3 million , including $58.5 million in cash and short-term investments. Our operating cash flows were negative for most quarters from September 2013 through March 2015. In the quarter ended June 27, 2015 we had positive operating cash flows of $2.3 million . If revenues were to grow, we would expect increased working capital needs for receivables and inventory. While we have a credit facility in place, the level of availability and cost are based on maintaining certain levels of qualified receivables and domestic cash. As a result, if either of these balances decreases sufficiently, our ability to access the facility may be limited or costs may be higher. In addition, if we fail to meet the covenants in our credit facility, including the tangible net worth covenant, the facility may not be available to us. If we were to require additional financing, there is no assurance it would be available on terms that are acceptable to us or at all. In addition, if we were to obtain financing by selling stock or convertible securities, the ownership of existing shareholders would be diluted. If we were to require additional financing and were unable to do so on acceptable terms or at all, our business and our ability to continue operations could be materially and adversely affected.
Unfavorable Currency Exchange Rate Fluctuations

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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; (e) the ability to maintain our Pioneer Status in Singapore; and (f) 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 Goodwill, Intangible and Long-Lived Assets
We held a net total of $8.6 million in acquired intangible assets and $7.4 million in goodwill at June 27, 2015 . We review our acquired intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. In the fourth quarter of 2015 we realigned our products into two segments as a result of changes in our go-to-market strategies, common customer characteristics, and information utilized to manage our business. This reorganization required the Company to reassign its reported goodwill to the new reporting units based on the relative fair value of the respective reporting units.
We performed a review of our acquired definite-lived intangible assets in the fourth quarter of 2015, including a review for impairment based on certain triggering events and no significant impairments of intangible assets were identified.
The carrying value of goodwill by reporting unit prior to March 28, 2015 was approximately $7.4 million for Topwin, $6.3 million for Component Processing and $1.6 million for Micromachining. We performed our annual goodwill impairment analysis based on the carrying value of the reorganized reporting units. Carrying value was determined based on the Company's allocation of assets and liabilities to the reporting units using reasonable assumptions. We impaired $7.9 million of goodwill as of March 28, 2015, based on our analysis at the reporting unit level, which represented the goodwill associated with Component Processing and Micromachining. We will test for impairment of goodwill at the reporting unit level 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 of the reporting unit. Should the performance of our Topwin reporting unit not meet our expectations, further impairment to goodwill may be triggered.
In addition, certain of our long-lived assets such as machinery and equipment may experience impairment in their value as a result of such events as the introduction of new products, changes in technology or changes in customer demand patterns. We depreciate our machinery and equipment at levels we believe are adequate; however, there can be no assurance that there will not be a future impairment that may have a material impact on our business, financial condition and results of operations.
Stock Price Volatility
The market price of our common stock has fluctuated widely. During the first quarter of 2016 , our stock price fluctuated between a high of $6.30 per share and a low of $5.26 per share, and subsequent to the end of the fiscal quarter and prior to August 3, 2015 has been as low as $4.15. 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;

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general economic conditions;
political changes, hostilities or natural disasters;
low trading volume of our common stock;
change in our dividend policy;
the number of analysts covering our common stock;
being added or removed from market indices;
policies of institutional investors restricting or prohibiting investments in stock with a market price below certain thresholds;
stock price volatility based on one or a few investors buying or selling a large number of shares over days or weeks, due to relatively low volumes of trading in our 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.
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.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud and our stock price may be adversely affected.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed.
In connection with our 2015 audit we identified material weaknesses in our internal control over financial reporting related to the accounting and disclosure of complex, judgmental accounting matters and non-routine transactions. The matters involving internal controls and procedures that our management considered to be material weaknesses included the risk assessment and certain process and review level controls associated with complex and non-routine transactions affecting goodwill, disclosures related to the Topwin acquisition, disclosures related to operating segments, presentation of service revenue and associated cost of sales on the statements of operations.
The Company is in the process of identifying and implementing certain changes in our internal controls to address the material weaknesses. Specifically, the Company is documenting, implementing, and assessing necessary changes in the risk assessment process and in the design of the controls and identifying additional procedures and expertise required to ensure effective management and technical review of significant, complex, and non-routine transactions.
Management believes that it will identify and implement additional controls that will remediate the material weaknesses discussed above. However, no assurance can be given that these changes will remediate the material weaknesses until such time that the controls have operated for a sufficient period of time and their operating effectiveness has been tested.
The requirements of Section 404 of the Sarbanes-Oxley Act are ongoing and also apply to future years. We expect that our internal control over financial reporting will continue to evolve as our business develops. Although we are committed to continue to improve our internal control processes and we will continue to diligently and vigorously review our internal control over financial reporting in order to ensure compliance with the Section 404 requirements, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. Therefore, we cannot be certain that in the future additional material weaknesses or significant deficiencies will not exist or otherwise be discovered. If our efforts to remediate the weaknesses identified are not successful or if other deficiencies occur, these weaknesses or deficiencies could result in misstatements of our results of operations, additional restatements of our consolidated financial statements, a decline in our stock price and investor confidence, or other material effects on our business, reputation, results of operations, financial condition or liquidity.

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 March 26, 2015.
31.1
  
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
  
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
  
XBRL Instance Document *
101.SCH
  
XBRL Taxonomy Extension Schema Document *
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document *
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document *
 
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.





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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date:
August 6, 2015
ELECTRO SCIENTIFIC INDUSTRIES, INC.
 
 
By:
/s/    Edward C. Grady         
 
 
 
Edward C. Grady
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
By:
/s/    Paul Oldham         
 
 
 
Paul Oldham
 
 
 
Vice President of Administration, Chief Financial Officer and Corporate Secretary
 
 
 
(Principal Financial Officer)
 
 
 
 
 
 
By:
/s/    Kerry Mustoe       
 
 
 
Kerry Mustoe
 
 
 
Vice President, Corporate Controller and Chief Accounting Officer
 
 
 
(Principal Accounting Officer)




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EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Edward C. Grady, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Electro Scientific Industries, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 6, 2015

 
/s/ Edward C. Grady
Edward C.Grady
President and Chief Executive Officer






EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Paul Oldham, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Electro Scientific Industries, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 6, 2015

 
/s/ Paul Oldham
Paul Oldham
Vice President of Administration,
Chief Financial Officer and Corporate Secretary





EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report on Form 10-Q of Electro Scientific Industries, Inc. (the Company) for the quarterly period ended June 27, 2015 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Edward C. Grady, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/ Edward C. Grady
Edward C.Grady
President and Chief Executive Officer
August 6, 2015
This certification is made solely for the purpose of 18 U.S.C. Section 1350, and not for any other purpose. A signed original of this written statement required by Section 906 has been provided to Electro Scientific Industries, Inc. and will be retained by Electro Scientific Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.





EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report on Form 10-Q of Electro Scientific Industries, Inc. (the Company) for the quarterly period ended June 27, 2015 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Paul Oldham, Vice President of Administration, Chief Financial Officer, and Corporate Secretary of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/ Paul Oldham
Paul Oldham
Vice President of Administration,
Chief Financial Officer and Corporate Secretary

August 6, 2015
This certification is made solely for the purpose of 18 U.S.C. Section 1350, and not for any other purpose. A signed original of this written statement required by Section 906 has been provided to Electro Scientific Industries, Inc. and will be retained by Electro Scientific Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.