Electro Scientific Industries, Inc.
ELECTRO SCIENTIFIC INDUSTRIES INC (Form: 10-Q, Received: 02/09/2016 16:28:10)
Table of Contents

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

For the quarterly period ended January 2, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-12853
 
 
 
ELECTRO SCIENTIFIC INDUSTRIES, INC.
 
 
 

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨     
 
Accelerated  filer 
ý
Non-accelerated filer
¨     
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý
The number of shares outstanding of the Registrant’s Common Stock as of February 5, 2016 was 31,127,287 shares.
 


Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
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)
Jan 2, 2016
 
Mar 28, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
42,071

 
$
50,994

Short-term investments
20,771

 
6,612

Trade receivables, net of allowances of $827 and $712
37,012

 
42,295

Inventories, net
60,881

 
56,637

Shipped systems pending acceptance
1,470

 
2,516

Deferred income taxes, net
134

 
178

Other current assets
4,371

 
6,090

Total current assets
166,710

 
165,322

Non-current assets:
 
 
 
Property, plant and equipment, net of accumulated depreciation of $106,352 and $102,901
23,507

 
25,858

Non-current deferred income taxes, net
98

 
174

Goodwill
7,445

 
7,717

Acquired intangible assets, net of accumulated amortization of $20,927 and $19,880
7,909

 
8,958

Other assets
11,064

 
13,211

Total assets
$
216,733

 
$
221,240

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
16,344

 
$
9,514

Accrued liabilities
20,980

 
18,666

Deferred income tax liability, net
174

 
173

Deferred revenue
7,708

 
12,376

Total current liabilities
45,206

 
40,729

Non-current liabilities:
 
 
 
Income taxes payable
1,384

 
1,176

Deferred income tax liability, net
232

 
443

Other liabilities
3,166

 
1,571

Total liabilities
$
49,988

 
$
43,919

Commitments and contingencies (See Note 13 "Commitments & Contingencies" )


 


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

 

Common stock, without par value; 100,000 shares authorized; 31,537 and 30,704 issued and outstanding
193,547

 
189,134

Accumulated deficit
(25,950
)
 
(11,741
)
Accumulated other comprehensive loss
(852
)
 
(72
)
Total shareholders’ equity
166,745

 
177,321

Total liabilities and shareholders’ equity
$
216,733

 
$
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
 
Three fiscal quarters ended
(In thousands, except per share amounts)
Jan 2, 2016
 
Dec 27, 2014
 
Jan 2, 2016
 
Dec 27, 2014
Net sales:
 
 
 
 
 
 
 
Systems
$
31,282

 
$
31,750

 
$
98,914

 
$
85,447

Services
12,060

 
11,911

 
33,991

 
36,100

Total net sales
43,342

 
43,661

 
132,905

 
121,547

Cost of sales:
 
 
 
 
 
 
 
Systems
20,292

 
22,031

 
63,922

 
59,707

Services
5,329

 
6,917

 
17,464

 
20,074

Total cost of sales
25,621

 
28,948

 
81,386

 
79,781

Gross profit
17,721

 
14,713

 
51,519

 
41,766

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
12,468

 
12,332

 
37,619

 
36,384

Research, development and engineering
7,778

 
8,384

 
24,706

 
25,953

Acquisition and integration costs

 

 
194

 

Restructuring costs
1,944

 

 
2,597

 

Net operating expenses
22,190

 
20,716

 
65,116

 
62,337

Operating loss
(4,469
)
 
(6,003
)
 
(13,597
)
 
(20,571
)
Non-operating income (expense):
 
 
 
 
 
 
 
Interest and other income (expense), net
67

 
64

 
68

 
(134
)
Total non-operating income (expense)
67

 
64

 
68

 
(134
)
Loss before income taxes
(4,402
)
 
(5,939
)
 
(13,529
)
 
(20,705
)
Provision for income taxes
184

 
437

 
681

 
165

Net loss
$
(4,586
)
 
$
(6,376
)
 
$
(14,210
)
 
$
(20,870
)
Net loss per share—basic
$
(0.15
)
 
$
(0.21
)
 
$
(0.45
)
 
$
(0.68
)
Net loss per share—diluted
$
(0.15
)
 
$
(0.21
)
 
$
(0.45
)
 
$
(0.68
)
Weighted average number of shares—basic
31,495

 
30,617

 
31,355

 
30,507

Weighted average number of shares—diluted
31,495

 
30,617

 
31,355

 
30,507

Cash dividends paid per outstanding common share
$

 
$
0.08

 
$

 
$
0.24


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
 
Three fiscal quarters ended
(In thousands)
Jan 2, 2016
 
Dec 27, 2014
 
Jan 2, 2016
 
Dec 27, 2014
Net loss
$
(4,586
)
 
$
(6,376
)
 
$
(14,210
)
 
$
(20,870
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of taxes of $0, $179, $0 and $0
(68
)
 
(359
)
 
(793
)
 
(41
)
Accumulated other comprehensive income related to benefit plan obligation, net of taxes of $(2), $(2), $(7) and $(6)
4

 
3

 
12

 
10

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

 
(5
)
 
1

 
(12
)
Comprehensive loss
$
(4,648
)
 
$
(6,737
)
 
$
(14,990
)
 
$
(20,913
)

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)
 
Three fiscal quarters ended
(In thousands)
Jan 2, 2016
 
Dec 27, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(14,210
)
 
$
(20,870
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
5,659

 
5,880

Amortization of acquired intangible assets
1,047

 
1,112

Share-based compensation expense
3,939

 
3,402

Loss (gain) on disposition of property and equipment, net
788

 
(8
)
Provision for doubtful accounts
127

 

(Increase) decrease in deferred income taxes
(71
)
 
2

Changes in operating accounts, net of acquisitions:

 

Decrease (increase) in trade receivables, net
8,593

 
(3,284
)
Increase in inventories
(7,046
)
 
(2,169
)
Decrease in shipped systems pending acceptance
1,342

 
1,106

Decrease in other current assets
1,967

 
783

Increase in accounts payable and accrued liabilities
10,531

 
217

Decrease in deferred revenue
(4,668
)
 
(2,692
)
Net cash provided by (used in) operating activities
7,998

 
(16,521
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of investments
(320,581
)
 
(357,046
)
Proceeds from sales and maturities of investments
306,423

 
389,900

Purchase of property, plant and equipment
(2,740
)
 
(3,608
)
Proceeds from sale of property, plant and equipment
2

 
154

Increase in other assets
(133
)
 
(980
)
Net cash (used in) provided by investing activities
(17,029
)
 
28,420

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Cash dividends paid to shareholders

 
(7,266
)
Payment of withholding taxes on stock-based compensation
(645
)
 
(1,850
)
Proceeds from issuance of common stock
1,056

 
1,407

Share repurchases

 
(1,456
)
Net cash provided by (used in) financing activities
411

 
(9,165
)
Effect of exchange rate changes on cash
(303
)
 
(1,129
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(8,923
)
 
1,605

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
50,994

 
68,461

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
42,071

 
$
70,066

SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Cash paid for interest
$
(57
)
 
$
(2
)
Cash paid for income taxes
(799
)
 
(863
)
Income tax refunds received
140

 
564

Net increase in property, plant and equip. & other assets related to transfers from inventory
2,988

 
1,474

Non-cash additions to property, plant and equipment
160

 
945

 
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. The three quarters ended January 2, 2016 consisted of a 40-week period as compared to a 39-week period for the three quarters ended December 27, 2014. Similarly, the third quarter of 2016 ended January 2, 2016 was a 14-week period as compared to a 13-week period for the second quarter of 2016 ended September 26, 2015 and the third quarter of 2015 ended December 27, 2014.

In the first quarter of 2016, certain prior period amounts were revised to conform to current year presentation. Please see Note 7 "Trade Accounts Receivable" and Note 10 "Accrued Current Liabilities & Other Liabilities" .
2. Recent Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, "Financial Instruments - Overall (Subtopic 825-10)." ASU 2016-01 enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information by addressing certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments simplify certain requirements and also reduce diversity in current practice for other requirements. ASU 2016-01 is effective for public companies' fiscal years beginning after December 15, 2017, which would be the Company's fiscal year ending March 30, 2019, including interim periods within those fiscal years. Except for the early application guidance specifically allowed in ASU 2016-01, early adoption is not permitted. We do not expect the adoption of ASU 2016-01 to have a material effect on our financial position, results of operations or cash flows.

In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes." ASU 2015-17 simplifies the presentation of deferred income taxes, and requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments apply to all entities that present a classified statement of financial position, and aligns the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards ("IFRS") IAS 1. ASU 2015-17 is effective for public companies' financial statements issued for annual periods beginning after December 15, 2016, which would be the Company's fiscal year ending March 31, 2018, and interim periods within those annual periods. Early application is permitted and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company is currently

7


evaluating the impact of adopting this guidance on its Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.

In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09 "Revenue from Contracts with Customers" one year to interim and annual reporting periods beginning after December 15, 2017, which would be the Company's fiscal year ending March 30, 2019. This guidance may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. The Company is currently evaluating the impact of adopting this guidance on its Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, “Simplifying the Measurement of Inventory (Topic 330).” ASU 2015-11 simplifies the accounting for the valuation of all inventory not accounted for using the last-in, first-out (“LIFO”) method by prescribing inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2016, which would be the Company's fiscal year ending March 31, 2018, on a prospective basis. Early adoption is permitted. We do not expect the adoption of ASU 2015-11 to have a material effect on our financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40).” ASU 2015-05 provides guidance regarding the accounting for a customer's fees paid in a cloud computing arrangement, specifically about whether a cloud computing arrangement includes a software license, and if so, how to account for the software license. ASU 2015-05 is effective for public companies' annual periods, including interim periods, beginning after December 15, 2015, which would be the Company's fiscal year ending April 1, 2017. Early adoption is permitted. We do not expect the adoption of ASU 2015-05 to have a material effect on our financial position, results of operations or cash flows.

In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation (Topic 718)." ASU No. 2014-12 addresses accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. ASU 2014-12 indicates that, in such situations, the performance target should be treated as a performance condition and, accordingly, the performance target should not be reflected in estimating the grant-date fair value of the award. Instead, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, which would be the Company's fiscal year ending April 1, 2017. We do not expect the adoption of ASU 2014-12 to have a material effect on our financial position, results of operations or cash flows.
3. Share-Based Compensation

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

Stock-settled stock appreciation rights (SARs) grant the right to receive shares of the Company's stock equivalent to the increase in stock value of a specified number of shares over a specified period of time, divided by the stock price at the time of exercise. The Company uses the Black-Scholes model to estimate the fair value of SARs. Similar to options, SARs are measured at the fair value of the award on the 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 705,700 RSUs and 467,000 SARs during the first three quarters of 2016 , but did not grant any stock options. The Company granted 827,700 RSUs and 634,523 SARs, and zero stock options during the first three quarters of 2015 .
Share-based compensation expense was included in the Company’s Condensed Consolidated Statements of Operations as follows:

8


 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands)
Jan 2, 2016
 
Dec 27, 2014
 
Jan 2, 2016
 
Dec 27, 2014
Cost of sales
$
103

 
$
154

 
$
347

 
$
474

Selling, general and administrative
832

 
629

 
2,291

 
2,096

Research, development and engineering
188

 
256

 
613

 
832

Total share-based compensation expense
$
1,123

 
$
1,039

 
$
3,251

 
$
3,402

The Company does not capitalize share-based compensation costs. As of January 2, 2016 , the Company had $8.1 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 fiscal quarter ended January 2, 2016 and three fiscal quarters ended January 2, 2016, do not include $191 thousand and $688 thousand, respectively, in share-based compensation expense related to acquisitions. Refer to Note 5 "Business Acquisition" for discussion of stock amounts considered compensation related to acquisitions.
4. Fair Value Measurements
Financial Assets and Liabilities Measured at Fair Value
ASC Topic 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include the following:
Level 1 , defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2 , defined as inputs that are observable either directly or indirectly such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and other inputs that can be corroborated by observable market data; and
Level 3 , defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of January 2, 2016 and March 28, 2015 was as follows (in thousands):
January 2, 2016
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market securities
$
3,004

 
$

 
$

 
$
3,004

Commercial paper

 
8,948

 

 
8,948

Government agencies

 
1,604

 

 
1,604

Total cash equivalents
$
3,004

 
$
10,552

 
$

 
$
13,556

Short term investments - available for sale:
 
 
 
 
 
 
 
Government agencies
$

 
$
18,836

 
$

 
$
18,836

Total short-term investments - available for sale
$

 
$
18,836

 
$

 
$
18,836

 
 
 
 
 
 
 
 
Forward purchase or (sale) contracts:
 
 
 
 
 
 
 
Japanese Yen
$

 
$
(58
)
 
$

 
$
(58
)
New Taiwan Dollar

 
(10
)
 

 
(10
)
Korean Won

 
(68
)
 

 
(68
)
Euro

 
(261
)
 

 
(261
)
British Pound

 
(60
)
 

 
(60
)
Chinese Renminbi

 
(17
)
 

 
(17
)
Total forward contracts
$

 
$
(474
)
 
$

 
$
(474
)
 
 
 
 
 
 
 
 
Deferred compensation plan assets:*
 
 
 
 
 
 
 
Mutual funds and exchange traded funds
$
1,906

 
$

 
$

 
$
1,906

Money market securities
543

 

 

 
543

Total deferred compensation plan assets
$
2,449

 
$

 
$

 
$
2,449


9


March 28, 2015
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market securities
$
14,280

 
$

 
$

 
$
14,280

Commercial paper

 
15,537

 

 
15,537

Government agencies

 
2,702

 

 
2,702

Total cash equivalents
$
14,280

 
$
18,239

 
$

 
$
32,519

Short term investments - available for sale:
 
 
 
 
 
 
 
Corporate bonds
$

 
$
853

 
$

 
$
853

Municipal bonds

 
3,872

 

 
3,872

Total short-term investments - available for sale
$

 
$
4,725

 
$

 
$
4,725

 
 
 
 
 
 
 
 
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
)
Total forward contracts
$

 
$
76

 
$

 
$
76

 
 
 
 
 
 
 
 
Deferred compensation plan assets:*
:
 
 
 
 
 
 
 
Mutual funds and exchange traded funds
$
1,885

 
$

 
$

 
$
1,885

Money market securities
190

 

 

 
190

Total deferred compensation plan assets
$
2,075

 
$

 
$

 
$
2,075

*These investments represent assets held in trust for our deferred compensation plan
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 January 2, 2016 and March 28, 2015 were utilized to calculate fair values.
During the first three quarters of 2016 and 2015, there were no transfers between Level 1, 2 or 3 assets.

10



Investments
The Company’s investments at January 2, 2016 and March 28, 2015 were as follows (in thousands):  
 
 
 
Unrealized
 
 
January 2, 2016
Cost
 
Gain
 
Loss
 
Fair Value
Available-for-sale securities (current):
 
 
 
 
 
 
 
Government agencies
20,437

 
3

 

 
20,440

Commercial paper
8,948

 

 

 
8,948

Mutual funds and exchange traded funds*
2,454

 

 
(5
)
 
2,449

Total Investments
$
31,839

 
$
3

 
$
(5
)
 
$
31,837

 
 
 
 
 
 
 
 
 
 
 
Unrealized
 
 
March 28, 2015
Cost
 
Gain
 
Loss
 
Fair Value
Available-for-sale securities (current):
 
 
 
 
 
 
 
Commercial paper
$
15,537

 
$

 
$

 
$
15,537

Municipal bonds
3,870

 
2

 

 
3,872

Government agencies
2,702

 

 

 
2,702

Corporate bonds
853

 

 

 
853

Mutual funds and exchange traded funds*
1,950

 
125

 

 
2,075

Total Investments
$
24,912

 
$
127

 
$

 
$
25,039

*These investments represent assets held in trust for our deferred compensation plan
For purposes of determining gross realized gains and losses and reclassification out of accumulated other comprehensive income (loss), the cost of securities sold is based on specific identification. Net unrealized holding gains and losses on current available-for-sale securities included in accumulated other comprehensive income (loss) were insignificant as of January 2, 2016 and March 28, 2015 .
Investments with underlying maturities within one year at January 2, 2016 , including cash equivalents, totaled $31.8 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 assumed liabilities. Analysis supporting the purchase price allocation included a valuation of assets and liabilities as of the closing date, an analysis of intangible assets and a detailed review of the opening balance sheet to determine other significant adjustments required to recognize assets and liabilities at fair value. Consideration was comprised of $7.6 million in cash and 748,944 shares of ESI common stock issuable over a three year period, valued at approximately $2.9 million as of the acquisition date. 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 the contingent consideration was estimated to be $0.4 million and the fair value 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 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. Additionally, the Company will issue, on the same terms described above, approximately 513,328 shares valued at $2.0 million , which, together with cash 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 three quarters of fiscal 2016, we have

11


recognized approximately $0.7 million in compensation expense related to this agreement, comprised primarily of share-based 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:
(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 subject to competitive bidding and that it 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 three quarters of 2016, the Company incurred approximately $0.2 million in acquisition-related costs, which were included in Selling, general and administrative expenses in the Consolidated Statements of Operations. 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 or market on a first-in, first-out basis. Components of inventories were as follows:
(In thousands)
Jan 2, 2016
 
Mar 28, 2015
Raw materials and purchased parts
$
39,688

 
$
37,991

Work-in-process
14,874

 
14,834

Finished goods
6,319

 
3,812

 
$
60,881

 
$
56,637

In the third quarter of 2016 and 2015, the Company recorded a charge against inventory for write-offs associated with discontinued products of $1.4 million and zero, respectively.
7. Trade Accounts Receivable
Trade accounts receivable consisted of the following:
(In thousands)
Jan 2, 2016
 
Mar 28, 2015
Current trade accounts receivable, net
$
37,012

 
$
42,295

Non-current trade accounts receivable
288

 
3,656

 
$
37,300

 
$
45,951


12


Non-current trade accounts receivable are 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
Other current assets consisted of the following:
(In thousands)
Jan 2, 2016
 
Mar 28, 2015
Prepaid expenses
$
2,542

 
$
2,595

Acquisition related receivable

 
1,180

Value added tax receivable
747

 
802

Other
1,082

 
1,513

 
$
4,371

 
$
6,090

9. Other Assets
Other assets consisted of the following:
(In thousands)
Jan 2, 2016
 
Mar 28, 2015
Consignment and demo equipment, net
$
8,070

 
$
7,164

Non-current trade accounts receivable
288

 
3,656

Long term deposits and other
2,706

 
2,391

 
$
11,064

 
$
13,211

10. Accrued Current Liabilities & Other Liabilities
Accrued liabilities consisted of the following:
(In thousands)
Jan 2, 2016
 
Mar 28, 2015
Payroll-related liabilities
$
7,654

 
$
6,723

Purchase order commitments and receipts
3,079

 
1,815

Product warranty accrual
3,046

 
3,342

Customer deposits
2,291

 
1,057

Professional fees payable
1,345

 
1,237

Restructuring costs payable
982

 
1,997

Other current liabilities
2,583

 
2,495

 
$
20,980

 
$
18,666

Included in other current liabilities above are accrued amounts for customer deposits, value-added taxes, freight, income taxes, and other similar items.
Other liabilities (non-current) consisted of the following:
(In thousands)
Jan 2, 2016
 
Mar 28, 2015
Product warranty accrual
$
1,640

 
$

Other non-current liabilities
1,526

 
1,571

 
$
3,166

 
$
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.




13



11. Product Warranty
The following is a reconciliation of the changes in the aggregate product warranty accrual:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands)
Jan 2, 2016
 
Dec 27, 2014
 
Jan 2, 2016
 
Dec 27, 2014
Product warranty accrual, beginning
$
4,451

 
$
3,152

 
$
3,342

 
$
4,215

Warranty charges incurred, net
(2,057
)
 
(1,240
)
 
(5,604
)
 
(4,960
)
Provision for warranty charges
2,292

 
1,581

 
6,948

 
4,238

Product warranty accrual, ending
$
4,686

 
$
3,493

 
$
4,686

 
$
3,493

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 $4.7 million in product warranty accrual at January 2, 2016 , $1.6 million is non-current and is included in Other liabilities on the Condensed Consolidated Balance Sheets.
12. Deferred Revenue

Generally, revenue is recognized upon fulfillment of acceptance criteria at the Company's factory and transfer of risk and title. Revenue is deferred whenever title transfer is pending, risk has not transferred, 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
 
Three fiscal quarters ended
(In thousands)
Jan 2, 2016
 
Dec 27, 2014
 
Jan 2, 2016
 
Dec 27, 2014
Deferred revenue, beginning
$
12,662

 
$
16,440

 
$
12,376

 
$
10,515

Revenue deferred
13,868

 
6,509

 
47,459

 
33,458

Revenue recognized
(18,822
)
 
(15,126
)
 
(52,127
)
 
(36,150
)
Deferred revenue, ending
$
7,708

 
$
7,823

 
$
7,708

 
$
7,823

13. Commitments & Contingencies
On March 20, 2015, the Company entered into a loan and security agreement ("Loan Agreement") with Silicon Valley Bank, as lender. The Loan Agreement provides for a senior secured asset-based revolving credit facility (the “Credit Facility”) with up to $30 million available on a revolving basis, including a $15 million sublimit for letters of credit. The credit agreement expires March 20, 2018. At January 2, 2016 , we had no revolving loans or letters of credit outstanding under our Credit Facility, we were in compliance with all covenants, and were not in default under the Loan Agreement. The commitment fee on the amount of unused credit was 0.3 percent.
We mitigate credit risk by transacting with highly rated counterparties for foreign exchange contracts, letters of credit and other transactions where counterparty risk is a factor. We have evaluated the non-performance risks associated with our lenders and other parties and believe them to be insignificant. From time to time we may be party to litigation arising in the normal course of business. Currently we are not party to any litigation we believe would have a material adverse effect on our financial position, results of operations, or cash flows.




14



14. Earnings (Loss) Per Share
The following is a reconciliation of weighted average shares outstanding used in the calculation of basic and diluted earnings per share:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands, except per share data)
Jan 2, 2016
 
Dec 27, 2014
 
Jan 2, 2016
 
Dec 27, 2014
Net loss
$
(4,586
)
 
$
(6,376
)
 
$
(14,210
)
 
$
(20,870
)
Weighted average shares used for basic earnings per share
31,495

 
30,617

 
31,355

 
30,507

Incremental diluted shares

 

 

 

Weighted average shares used for diluted earnings per share
31,495

 
30,617

 
31,355

 
30,507

Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.15
)
 
$
(0.21
)
 
$
(0.45
)
 
$
(0.68
)
Diluted
$
(0.15
)
 
$
(0.21
)
 
$
(0.45
)
 
$
(0.68
)
Awards of options, SARs and RSUs representing an additional 2.9 million and 2.8 million shares of stock for the third quarter of 2016 and 2015 , respectively, and 2.6 million and 2.8 million shares of stock for the three quarters ended January 2, 2016 and December 27, 2014 , respectively, were not included in the calculation of diluted net earnings per share because their effect would have been antidilutive.
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 the Company has operated in two segments, Component Processing and Micromachining.
Net sales by segment were as follows:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands)
Jan 2, 2016
 
Dec 27, 2014
 
Jan 2, 2016
 
Dec 27, 2014
Component Processing
$
37,511

 
$
31,830

 
$
108,549

 
$
94,486

Micromachining
5,831

 
11,831

 
24,356

 
27,061

 
$
43,342

 
$
43,661

 
$
132,905

 
$
121,547

Gross profits by segment were as follows:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands)
Jan 2, 2016
 
Dec 27, 2014
 
Jan 2, 2016
 
Dec 27, 2014
Component Processing
$
17,969

 
$
10,993

 
$
45,466

 
$
36,666

Micromachining
1,482

 
4,038

 
8,617

 
6,411

Corporate and other
(1,730
)
 
(318
)
 
(2,564
)
 
(1,311
)
 
$
17,721

 
$
14,713

 
$
51,519

 
$
41,766



15


Net sales by geographic area, based on the location of the end user, were as follows:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(In thousands)
Jan 2, 2016
 
Dec 27, 2014
 
Jan 2, 2016
 
Dec 27, 2014
Asia
$
33,278

 
$
33,604

 
$
103,843

 
$
92,838

Americas
7,589

 
5,602

 
20,750

 
14,258

Europe
2,475

 
4,455

 
8,312

 
14,451

 
$
43,342

 
$
43,661

 
$
132,905

 
$
121,547

16. Restructuring and Cost Management Plans
    
In March 2015, as a part of the plan to streamline manufacturing and development activities, the Company initiated a restructuring plan that included the closure of the assembly plant and development center located in Chelmsford, Massachusetts, which was part of our Component Processing segment. The original estimated completion date of the plan was the end of fiscal 2016 at a total estimated pre-tax cost of $5.5 million. 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 related to the above mentioned restructuring plan were $2.6 million in the first three quarters of 2016 and $5.6 million from the inception of the plan. Included in these costs were write-offs of leasehold improvements associated with the abandoned manufacturing facility, employee severance and related payments, and other wind-down costs. As of January 2, 2016 , most of the restructuring activities have been completed, and we expect to pay the remaining costs and accrued expenses primarily related to severance and employee benefits by the end of 2016.
At January 2, 2016 and March 28, 2015 , the amount of unpaid restructuring costs included in accrued liabilities was $1.0 million and $2.0 million , respectively.
The following table presents the amounts related to restructuring costs payable (in thousands):
Restructuring & cost management amounts payable as of March 28, 2015
$
1,997

Employee severance and related benefits:
 
Cash payments
(3,612
)
Costs incurred and other adjustments
2,597

Restructuring & cost management amounts payable as of January 2, 2016
$
982

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 three quarters of 2016 . In the first three quarters 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.

16



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”, “projects”, "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), 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-user 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-user device. ESI does not maintain or monitor operating expenses or assets at the segment level.
The three quarters ended January 2, 2016 consisted of a 40-week period as compared to a 39-week period for the three quarters ended December 27, 2014. Similarly, the third quarter of 2016 ended January 2, 2016 was a 14-week period as compared to a 13-week period for the second quarter of 2016 ended September 26, 2015 and the third quarter of 2015 ended December 27, 2014.
Summary of Sequential Quarterly Results
Third Quarter 2016 Ended January 2, 2016 Compared to Second Quarter 2016 Ended September 26, 2015.
The third quarter reflected sequential improvement in orders and gross margins from the second quarter of 2016 . Total order volume for the third quarter of 2016 increased to $52.6 million from $51.6 million , with an increase in CP orders partially offset by a sequential decline in MM orders. CP orders grew approximately 6%, primarily due to a sequential increase in Interconnect Products as a result of increased sales of our Gemstone flex via drilling product, higher service activity, and the first order of our new Cornerstone Series 2 laser drilling system. Orders for Semiconductor Products were roughly flat with increased demand for wafer trim products and a follow-on order for memory repair systems. Component Test Product orders were up slightly on stronger system demand. Orders declined slightly in our MM segment and included a follow-on order for our Lumen series micromachining system.

17

Table of Contents

Total sales declined from $46.5 million in the second quarter of 2016 to $43.3 million . By segment, CP sales increased by $4.8 million from $32.8 million in the second quarter of 2016 to $37.5 million in third quarter of 2016 . This was primarily driven by an increase in semiconductor sales on higher memory repair system sales and increased service revenue, partially offset by lower MLCC system sales due to cyclical demand. MM sales decreased to $5.8 million in the third quarter of 2016 from $13.7 million in the second quarter of 2016 , primarily due to lower orders in the third quarter and the timing of shipments between quarters.
Total shipments were $38.8 million in the third quarter of 2016 compared to $44.0 million in the second quarter of 2016 with the decline primarily relating to the shipment timing referenced above.
Gross profit was $17.7 million in the third quarter of 2016 compared to $18.4 million in the second quarter of 2016 . Gross margin was 40.9% on net sales of $43.3 million in the third quarter of 2016 compared to a gross margin of 39.6% on net sales of $46.5 million in the second quarter of 2016 . The improvement in gross margin was primarily due to favorable product mix, higher service margins and lower manufacturing expenses due to restructuring activity in 2016. Total margin improvements were partially offset by a $1.4 million write-off of inventory associated with a discontinued large-format glass cutting product.
Net operating expenses of $22.2 million in the third quarter of 2016 represent an increase of $0.8 million from $21.4 million in the second quarter of 2016 , primarily due to restructuring costs of $1.9 million and an additional week of operating expenses in the third quarter of 2016 as compared to the second quarter of 2016, mostly offset by substantial savings from efficiency and cost reduction initiatives. Selling, general and administrative (SG&A) expenses decreased $0.1 million due to lower commissions on reduced sales volume and lower consulting charges, partially offset by higher travel expenses related to marketing and sales activities. Research, development and engineering (RD&E) expenses decreased $0.5 million due to lower project materials and consulting costs. Restructuring costs increased $1.4 million from the previous quarter primarily due to the closure of the Chelmsford manufacturing facility in the third quarter of 2016.
Operating loss was $4.5 million in the third quarter of 2016 compared to $3.0 million in the second quarter of 2016 .
Non-operating income was $67 thousand in the third quarter of 2016 compared to $6 thousand in the second quarter of 2016 . The change was primarily due to interest income and market gains on our non-qualified deferred compensation plan, partially offset by higher bank charges related to the unused credit facility and foreign exchange losses.
Provision for income taxes was $0.2 million in both the third and second quarters of 2016 .
Net loss was $4.6 million in the third quarter of 2016 compared to a net loss of $3.3 million in the second quarter of 2016 .
Third Quarter 2016 Ended January 2, 2016 Compared to Third Quarter 2015 Ended December 27, 2014
Results of Operations
The following table presents results of operations data as a percentage of net sales:
 
Fiscal quarter ended
 
Jan 2, 2016
 
Dec 27, 2014
Net sales
100.0
 %
 
100.0
 %
Cost of sales
59.1

 
66.3

Gross profit
40.9

 
33.7

Selling, general and administrative
28.8

 
28.2

Research, development and engineering
17.9

 
19.2

Restructuring costs
4.5

 

Operating loss
(10.3
)
 
(13.7
)
Interest and other income (expense), net
0.1

 
0.1

Total non-operating income (expense)
0.1

 
0.1

Loss before income taxes
(10.2
)
 
(13.6
)
Provision for income taxes
0.4

 
1.0

Net loss
(10.6
)%
 
(14.6
)%



18

Table of Contents

Net Sales
The following table presents net sales information by product group:
 
Fiscal quarter ended
   
Jan 2, 2016
 
Dec 27, 2014
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Component Processing
 
 
 
 
 
 
 
Interconnect Products (IP)
$
22,824

 
52.6
%
 
$
16,213

 
37.1
%
Component Test Products (CTP)
3,303

 
7.6

 
4,164

 
9.5

Semiconductor Products (SP)
11,384

 
26.3

 
11,453

 
26.3

 
$
37,511

 
86.5

 
$
31,830

 
72.9

Micromachining
 
 
 
 
 
 
 
Micromachining Products (MP)
$
5,831

 
13.5

 
$
11,831

 
27.1

Net Sales
$
43,342

 
100.0
%
 
$
43,661

 
100.0
%
Net sales for the third quarter of 2016 decreased $0.3 million or 0.7% from net sales for the third quarter of 2015 . By segment, sales in the CP increased by 17.8% and MM decreased by 50.7% .
CP segment sales for the third quarter of 2016 increased $5.7 million compared to the third quarter of 2015 . The increase in CP segment sales was driven by demand for our flex via drilling products, including the new GemStone product, and increased sales of the legacy memory repair systems. This increase was partially offset by lower sales for circuit trim, wafer trim and MLCC systems due to the cyclical nature of demand for these products.
MM segment sales for the third quarter of 2016 decreased $6.0 million compared to the third quarter of 2015 . The decrease was primarily the result of timing of shipments of our Lumen series micromachining systems in the third quarter of 2016 .
The following table presents net sales information by geographic region:
 
Fiscal quarter ended
   
Jan 2, 2016
 
Dec 27, 2014
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Asia
$
33,278

 
76.8
%
 
$
33,604

 
77.0
%
Americas
7,589

 
17.5

 
5,602

 
12.8

Europe
2,475

 
5.7

 
4,455

 
10.2

Net Sales
$
43,342

 
100.0
%
 
$
43,661

 
100.0
%
Gross Profit
 
Fiscal quarter ended
   
Jan 2, 2016
 
Dec 27, 2014
(In thousands, except percentages)
Gross Profit
 
% of Net Sales
 
Gross Profit
 
% of Net Sales
Component Processing
$
17,969

 
47.9
 %
 
$
10,993

 
34.5
 %
Micromachining
1,482

 
25.4

 
4,038

 
34.1

Corporate and other
(1,730
)
 
(4.0
)
 
(318
)
 
(0.7
)
Gross Profit
$
17,721

 
40.9
 %
 
$
14,713

 
33.7
 %
Gross profit was $17.7 million for the third quarter of 2016 , an increase of $3.0 million compared to the third quarter of 2015 , on relatively flat sales. Gross margin was 40.9% and 33.7% for the third quarter s of 2016 and 2015 , respectively. The gross margin increase was primarily driven by favorable product mix in the memory repair and flex via drilling products, a reduction in inventory reserves related to the sale of memory repair systems, higher service margins and decreased manufacturing expenses due to restructuring activities, compared to unfavorable mix in the third quarter of 2015 , driven by lower margin sales to our largest customer. These improvements in gross profit and margins were partially offset by inventory write-offs in the third quarter of 2016 related to the discontinuation of our large-format glass cutting product.

19

Table of Contents

Gross margin for the CP segment increased from 34.5% to 47.9% or an increase of $7.0 million , primarily due to increased sales volume and associated favorable absorption of fixed costs and improved product mix. MM segment gross margins decreased from 34.1% to 25.4% due principally to lower production and sales volumes.
Operating Expenses
 
Fiscal quarter ended
   
Jan 2, 2016
 
Dec 27, 2014
(In thousands, except percentages)
Expense
 
% of Net Sales
 
Expense
 
% of Net Sales
Selling, general and administrative
$
12,468

 
28.8
%
 
$
12,332

 
28.2
%
Research, development and engineering
7,778

 
17.9

 
8,384

 
19.2

Restructuring costs
1,944

 
4.5

 

 

Operating Expenses
$
22,190

 
51.2
%
 
$
20,716

 
47.4
%
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 third quarter of 2016 increased $0.1 million compared to the third quarter of 2015 . This increase was primarily attributable to an additional week of expenses in the third quarter of 2016, and to a lesser extent increases in variable pay and travel expenses related to product marketing and sales activities. Offsetting these items were decreases in expenses due to savings from efficiency and cost reduction initiatives.
Research, Development and Engineering
Research, development and engineering (RD&E) expenses are primarily comprised of labor and other employee-related expenses including share-based compensation expense, professional fees, project materials costs, equipment costs and facilities costs. RD&E expenses for the third quarter of 2016 decreased $0.6 million compared to the third quarter of 2015 . This decrease was primarily due to lower project materials, patent legal, travel and share-based compensation expenses, partially offset by the additional week of expense in the third quarter of 2016.
Restructuring Costs
During the fourth quarter of 2015, we initiated restructuring plans to consolidate and shift our manufacturing activities to Asia and other cost reduction actions. The $1.9 million of restructuring costs in 2016 relate primarily to the facilities charges for the closure of the Chelmsford, Massachusetts manufacturing plant, as we ceased our use of that facility in the third quarter of 2016, and to a lesser extent employee severance and related benefits of other cost reduction actions.

Non-operating Income and Expense
 
Fiscal quarter ended
   
Jan 2, 2016
 
Dec 27, 2014
(In thousands, except percentages)
Interest and Other (Expense) Income, net
 
% of Net Sales
 
Interest and Other (Expense) Income, net
 
% of Net Sales
Interest and other income (expense), net
$
67

 
0.1
%
 
$
64

 
0.1
%
Total non-operating income (expense)
$
67

 
0.1
%
 
$
64

 
0.1
%
Non-operating income and expense consists of interest income and expense, market gains and losses on assets held in employees’ deferred compensation accounts, realized and unrealized foreign exchange gains and losses, bank charges, investment management fees, and other miscellaneous non-operating items. Net non-operating income was $0.1 million in the third quarter s of 2016 and 2015 .




20

Table of Contents

Income Taxes
 
Fiscal quarter ended
 
Jan 2, 2016
 
Dec 27, 2014
(In thousands, except percentages)
Income Tax Provision
 
Effective
Tax Rate
 
Income Tax Provision
 
Effective
Tax Rate
Provision for income taxes
$
184

 
(4.2
)%
 
$
437

 
(7.4
)%
The income tax provision for the third quarter of 2016 was $184 thousand on pretax loss of $4.4 million , an effective tax rate of (4.2)% . For the third quarter of 2015 , the income tax provision was $437 thousand on pretax loss of $5.9 million , an effective rate of (7.4)% . The effective tax rate fluctuation was due to the overall decrease in income subject to tax in foreign jurisdictions and the extension of expired tax incentives resulting in benefits recorded in the third quarter of 2016 as compared to the third quarter of 2015.
Net Loss
 
Fiscal quarter ended
 
Jan 2, 2016
 
Dec 27, 2014
(In thousands, except percentages)
Net Loss
 
% of Net Sales
 
Net Loss
 
% of Net Sales
Net loss
$
(4,586
)
 
(10.6
)%
 
$
(6,376
)
 
(14.6
)%
Net loss for the third quarter of 2016 was $4.6 million , or $0.15 per basic and diluted share, compared to net loss of $6.4 million , or $0.21 per basic and diluted share, for the third quarter of 2015 .
Three Quarters Ended January 2, 2016 Compared to Three Quarters Ended December 27, 2014
Results of Operations
The following table presents results of operations data as a percentage of net sales:
 
Three fiscal quarters ended
 
Jan 2, 2016
 
Dec 27, 2014
Net sales
100.0
 %
 
100.0
 %
Cost of sales
61.2

 
65.6

Gross profit
38.8

 
34.4

Selling, general and administrative
28.3

 
29.9

Research, development and engineering
18.6

 
21.4

Acquisition and integration costs
0.1

 

Restructuring costs
2.0

 

Operating loss
(10.2
)
 
(16.9
)
Interest and other income (expense), net
0.1

 
(0.1
)
Total non-operating income (expense)
0.1

 
(0.1
)
Loss before income taxes
(10.2
)
 
(17.0
)
Provision for income taxes
0.5

 
0.1

Net loss
(10.7
)%
 
(17.2
)%








21

Table of Contents

Net Sales
The following table presents net sales information by product group:
 
Three fiscal quarters ended
   
Jan 2, 2016
 
Dec 27, 2014
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Component Processing
 
 
 
 
 
 
 
Interconnect Products (IP)
$
64,969

 
48.9
%
 
$
48,531

 
39.9
%
Component Test Products (CTP)
14,292

 
10.8

 
13,986

 
11.5

Semiconductor Products (SP)
29,288

 
22.0

 
31,969

 
26.3

 
$
108,549

 
81.7

 
$
94,486

 
77.7

Micromachining
 
 
 
 
 
 
 
Micromachining Products (MP)
$
24,356

 
18.3

 
$
27,061

 
22.3

Net Sales
$
132,905

 
100.0
%
 
$
121,547

 
100.0
%
Net sales for the first three quarters of 2016 increased $11.4 million or 9.3% from net sales for the first three quarters of 2015 . Sales in CP increased by $14.1 million or 14.9% and MM decreased by $2.7 million or 10.0% .
The increase in CP sales for the first three quarters of 2016 compared to the first three quarters of 2015 was primarily due to higher demand for our flex via drilling products, in particular our new Gemstone system, and increased sales of the legacy memory repair systems. These increases were partially offset by lower sales of the circuit and wafer trim systems.
The decrease in MP sales for the first three quarters of 2016 compared to the first three quarters of 2015 was primarily driven by reduced demand for laser ablation systems as well as lower service sales, partially offset by increased sales of Lumen series micromachining systems.
The following table presents net sales information by geographic region:
 
Three fiscal quarters ended
   
Jan 2, 2016
 
Dec 27, 2014
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Asia
$
103,843

 
78.1
%
 
$
92,838

 
76.4
%
Americas
20,750

 
15.6

 
14,258

 
11.7

Europe
8,312

 
6.3

 
14,451

 
11.9

Net Sales
$
132,905

 
100.0
%
 
$
121,547

 
100.0
%
Gross Profit
 
Three fiscal quarters ended
   
Jan 2, 2016
 
Dec 27, 2014
(In thousands, except percentages)
Gross Profit
 
% of Net Sales
 
Gross Profit
 
% of Net Sales
Component Processing
$
45,466

 
41.9
 %
 
$
36,666

 
38.8
 %
Micromachining
8,617

 
35.4

 
6,411

 
23.7

Corporate and other
(2,564
)
 
(1.9
)
 
(1,311
)
 
(1.1
)
Gross Profit
$
51,519

 
38.8
 %
 
$
41,766

 
34.4
 %
Gross profit was $51.5 million for the first three quarters of 2016 , an increase of $9.8 million compared to the first three quarters of 2015 . Gross profit increased primarily due to increased sales volume and lower manufacturing expenses as a result of restructuring activities. Gross margin was 38.8% and 34.4% for the first three quarters of 2016 and 2015 , respectively. The improvement in gross margin was driven by higher absorption of fixed costs due to increased production volumes, decreased manufacturing expenses, favorable product mix, and a reduction in inventory reserves related to the sale of memory repair systems, all partially offset by an inventory write-off related to a discontinued large-format glass cutting product and intangible asset amortization.


22

Table of Contents

Operating Expenses
 
Three fiscal quarters ended
   
Jan 2, 2016
 
Dec 27, 2014
(In thousands, except percentages)
Expense
 
% of Net Sales
 
Expense
 
% of Net Sales
Selling, general and administrative
$
37,619

 
28.3
%
 
$
36,384

 
29.9
%
Research, development and engineering
24,706

 
18.6

 
25,953

 
21.4

Acquisition and integration costs
194

 
0.1

 

 

Restructuring costs
2,597

 
2.0

 

 

Operating Expenses
$
65,116

 
49.0
%
 
$
62,337

 
51.3
%
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 three quarters of 2016 increased $1.2 million compared to the first three quarters of 2015 . This increase was primarily attributable to an additional week of expense in the third quarter of 2016, increases in variable pay, share-based compensation and commission expense due to higher sales volume. These were partially offset by reductions in other areas due to savings from efficiency and cost reduction initiatives.
Research, Development and Engineering
RD&E expenses are primarily comprised of labor and other employee-related expenses including share-based compensation expense, professional fees, project materials costs, equipment costs and facilities costs. RD&E expenses for the first three quarters of 2016 decreased $1.2 million compared to the first three quarters of 2015 . This decrease was driven by lower patent legal fees, labor cost reductions, decreased stock compensation and depreciation expenses. These were partially offset by increased project material expenses.
Acquisition and Integration Costs
Acquisition and integration costs consisted mainly of consulting, legal and travel expenses associated with the acquisition and integration of Topwin Optoelectronics, which was acquired in January 2015.
Restructuring Costs
During the fourth quarter of 2015, we initiated restructuring plans to consolidate and shift our manufacturing activities to Asia and other cost reduction actions. The $2.6 million of restructuring costs in 2016 relate primarily to the charges for the closure of the Chelmsford, Massachusetts manufacturing plant in the third quarter of 2016, and, to a lesser extent employee severance and related benefits of other cost reduction actions.
Non-operating Income and Expense
Non-operating income and expense, net, consists of interest income and expense, market gains and losses on assets held in employees’ deferred compensation accounts, realized and unrealized foreign exchange gains and losses, bank charges, investment management fees, and other miscellaneous non-operating items, such as investment impairment.
Non-operating income and expense were as follows:
 
Three fiscal quarters ended
 
Jan 2, 2016
 
Dec 27, 2014
(In thousands, except percentages)
Non-Operating Income (Expense)
 
% of Net Sales
 
Non-Operating Income (Expense)
 
% of Net Sales
Interest and other income (expense), net
$
68

 
0.1
%
 
$
(134
)
 
(0.1
)%
Total non-operating income (expense)
$
68

 
0.1