Electro Scientific Industries, Inc.
ELECTRO SCIENTIFIC INDUSTRIES INC (Form: 10-K, Received: 06/15/2016 06:02:24)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K  
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 2, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-12853
ELECTRO SCIENTIFIC INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oregon
 
93-0370304
(State or other jurisdiction of incorporation
or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
13900 N.W. Science Park Drive, Portland, Oregon
 
97229
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: 503-641-4141
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value

 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No   ý
Indicate by check mark if the Registrant is not required to file reports pursuant Section 13 or Section 15(d) of the Act.    Yes   ¨     No   ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.   ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   ¨     Accelerated  filer   ý         Non-accelerated filer   ¨     Smaller reporting company   ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨     No   ý


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The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the last sales price $4.59 as reported by the NASDAQ Stock Market, as of the last business day of the Registrant’s most recently completed second fiscal quarter September 26, 2015 was $126,411,014 .
The number of shares outstanding of the Registrant’s Common Stock as of June 10, 2016 was 31,471,682 shares.
Documents Incorporated by Reference
The Registrant has incorporated into Part III of this Form 10-K, by reference, portions of its Proxy Statement for its 2016 Annual Meeting of Shareholders.


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ELECTRO SCIENTIFIC INDUSTRIES, INC.
2016 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
 
Part I
Part II
Part III
Part IV
 
 
 


Table of Contents

PART I
Item 1. Business
This annual report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below in Item 1A Risk Factors.
Where You Can Find More Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 as amended (Exchange Act). You can inspect and copy our reports, proxy statements and other information filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC maintains an Internet site at www.sec.gov where you can obtain most of our SEC filings. We also make available, free of charge on our website at www.esi.com , our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC. The information found on our website is not part of this Form 10-K. You can also obtain copies of these reports by contacting Investor Relations at (503) 641-4141.
Fiscal Year
Our fiscal year consists of 52 or 53 weeks ending on the Saturday nearest March 31. Accordingly, our fiscal 2016 reporting period consisted of a 53 -week period ending on April 2, 2016 , our fiscal 2015 consisted of a 52 -week period ending on March 28, 2015 and our fiscal 2014 reporting period consisted of a 52 -week period ending on March 29, 2014 . All references to years or quarters relate to fiscal years or fiscal quarters unless otherwise noted.
Business Overview
Electro Scientific Industries, Inc. and its subsidiaries (ESI) is a leading supplier of innovative laser-based micro-manufacturing solutions for industries reliant on microtechnologies. 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. Founded in 1944, ESI is headquartered in Portland, Oregon, with global operations and subsidiaries in Asia, Europe and North America.
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.
Industry Overview
The microelectronics, printed circuit board (PCB) and semiconductor industries continue to be driven by demand for advanced features and improved functionality in increasingly smaller and smarter consumer devices. The technologies for consumer electronic devices such as smart phones, tablets, wearable technologies, personal computers, mobile computing devices, video game systems and high-definition televisions have developed rapidly as increasingly affordable products have been introduced that offer more functionality in smaller packages. In addition, semiconductor and other advanced technologies are being used in a broadening set of markets and applications, including automotive, aerospace, medical, security and display.
These dynamics in turn are driving the need for faster, smaller, more complex, less expensive and higher-quality electronic devices and components. To achieve these improvements, component and other device manufacturers are increasing the circuit and feature densities in these devices and investing in new technologies.
For example, smaller and lighter semiconductor devices are driving the need to shrink the physical dimensions of the semiconductor packaging and the high density interconnect (HDI) circuit board on which they are mounted. In addition,

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integrated circuit (IC) designers are moving high level interconnect from silicon to the package (ICP) to reduce overall cost in consumer devices. Higher operating speeds of computers and communication products require more input and output channels within packages and between the packages and the HDI circuit board. These trends require smaller, more accurate, and precisely tapered or shaped holes, known as vias, to create connections between layers and interconnecting devices. The continual trend toward smaller and smarter devices also requires the use of an increasing amount of flexible interconnect material between PCBs and other components. These flexible circuits require the smallest and most accurate vias to create the connections between these devices.
In addition, the ability to shrink the actual dimensions of a device is becoming increasingly more difficult, and producers are investing in new technologies, such as stacking thin silicon wafers to create advanced three dimensional (3D) chip packages. We believe this trend may drive additional applications for laser processing, including scribing and dicing of ultra-thin wafers, drilling of through silicon vias (TSV) and scribing of next generation thin films.
Smaller and more complex devices also require more capacitance to be designed into circuits. This has resulted in an increase in the use of smaller, higher-capacitance passive components such as MLCCs. In calendar year 2014, estimated production of MLCCs was approximately 3 trillion units. These MLCCs must be tested electrically and optically to characterize performance and ensure reliability. Automated equipment to test these MLCCs in the manufacturing environment, like our high capacitance tester, can test and sort up to one million parts per hour on parts with dimensions as small as 0.4 by 0.2 millimeters.
Our business is also comprised of specialized microfabrication applications. Any material that can be cut, drilled, marked or joined using a mechanical process can be microfabricated with greater precision and accuracy using a laser-based solution. As consumer electronics and other products or devices become more compact, mechanical processes will not be able to meet the stringent specifications demanded by producers. We believe the capabilities of laser-based solutions for microfabrication will enable our customers to continue to move beyond the limitations of mechanical processes and generate growth for us in the future.
Our Solutions
We believe our products address the needs of microelectronics, PCB and semiconductor manufacturers by providing them with a high return on their investment due to measurable production benefits such as lower cost of ownership, higher performance, continued miniaturization, greater reliability, and improved production yield.
Our core competencies enable us to design, manufacture, and market a variety of integrated laser-based solutions for microfabrication applications in high-volume manufacturing environments. These core competencies include a deep understanding of:

laser/material interaction;
laser beam positioning;
optics and illumination including image processing and optical character recognition;
high-speed motion control;
small parts handling;
proprietary laser technology including laser power control; and
systems engineering.

We combine this technology expertise with a thorough understanding of our customers’ processes, and our manufacturing agility to respond rapidly to customer demand to develop and deliver integrated solutions and products that address multiple markets and applications.

Our customers manufacture components, interconnect/packaging devices, semiconductors, displays or other parts that serve a wide range of electronic applications. Our systems enable the manufacturing of these components and devices. The primary end-market applications for our customers are consumer electronics, including smart mobile devices such as smart phones and tablets, computers and semiconductors. These devices and applications are also utilized in a variety of other industries including automotive, aerospace, medical, security and general lighting.
Our Strategy
Our strategy is to leverage our core competencies to be a cost of ownership leader in laser-based microfabrication for microtechnology industries, including microelectronics, PCB, and semiconductor. These core competencies, combined with an understanding of our customers’ processes and the use of common platforms, enable us to address a broad range of laser-based applications and end markets within these industries. We intend to focus our efforts on businesses and applications where our differentiated capability enables us to be a market leader. The elements of our strategy are to (1) expand our addressable market

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by focusing on large, existing, near-adjacent applications in the growing laser microfabrication market, (2) invest in localized demonstration capability, application development and design, particularly in China, (3) leverage proprietary laser technology to create competitive advantage, (4) strengthen marketing capability and broaden customer focus, and (5) develop and leverage flexible platforms and technology for cost of ownership and time to market advantage in new applications.
Expand our addressable market by focusing on large, existing, near-adjacent applications in the growing laser microfabrication market
Growth in consumer electronics, smart phones, tablets, notebook computers and other smart devices is driving increased miniaturization and complexity of the underlying components and materials, which in turn is creating additional opportunities for laser-based microfabrication. In addition, these materials and components are being adopted in electronic devices, sensors, displays, and other technologies ubiquitously across many markets and applications including automotive, aerospace, medical, communications, appliances, security, general lighting, energy, and entertainment. As a result, we believe there are many large, existing, near-adjacent opportunities for laser micromachining for both the devices themselves and components within them. Our strategy is to expand our addressable market in these near-adjacent applications where we can utilize our technology for a cost of ownership advantage for our customers. Our primary areas of focus are to defend and grow our presence in PCB and interconnect value-added laser processes, expand our consumer electronics device micromachining product and customer base, and extend the reach of our existing product portfolio. For example, during 2015 and 2016 we grew our position in flexible circuit manufacturing and introduced new capabilities in IC packaging and high density interconnect. In addition, we expanded our portfolio of mid-range micromachining products with the acquisition of Wuhan Topwin Optoelectronics Technology Co., Ltd. (Topwin) based in Wuhan, China, and subsequent introduction of the Jade and Garnet micromachining platforms to address a variety of materials at a lower price point. Finally, we leveraged our previous investment in semiconductor to introduce and receive qualification for semiconductor wafer scribing. We believe our growth will be driven by overall growth in the market for these devices, expanding the applications and customers we address, and growing our share in these adjacent markets.
Invest in localized demonstration capability, application development and design, particularly in China
A significant portion of our customers are located in Asia, particularly China. In addition, purchase decisions, product evaluation and qualification are increasingly made locally. As a result, we believe we need to have a stronger local presence in order to respond rapidly to customer requirements and timelines. Our strategy is to invest additional resources for local demonstration, application development, and design capability. In addition, we expect to develop local manufacturing capability or delivery capability through third party and/or local sources of supply. For example, this year we introduced several new products that were designed and manufactured in China, partnering our applications and design center in Shanghai, China with the recently acquired Topwin organization. These new products demonstrate our local design and supply chain capabilities and allow us to be more responsive to customer requirements and timelines in the region. In addition, we opened a center for advanced applications development in Korea. We believe this investment will improve our response to local requirements and enable greater access to the Korean market.
Leverage proprietary laser technology to create competitive advantage
ESI has been a pioneer in laser-material interaction and has developed deep expertise in the use of multiple types of laser technology to develop customer solutions. Over the last five years we have invested in proprietary laser technology through the acquisitions of PyroPhotonics Lasers, Inc., Eolite Systems and the Semiconductor Systems business of GSI Group, Inc. The acquisition of Eolite provided us access to high power UV nanosecond and low-cost picosecond fiber lasers with a unique, scalable architecture. Combined with capability from our Pyrophotonics laser business, these lasers address multiple micromachining applications including thin film processing, glass processing, material trimming, precision drilling, and organic and metal cutting. We intend to utilize these lasers internally to provide differentiated capability and lower cost of ownership as well as provide potential additional commercial revenue for the Company with the ability to customize lasers to specific customer applications in markets or applications that are not core to our internally developed systems. In 2016, we successfully ramped our Boreas laser which provided key differentiation for our latest generation flexible drilling product, Gemstone, and is our largest deployment of internally developed lasers for our own systems to date. Our strategy is to expand the utilization of these technologies to enable differentiated capability within our systems, lower cost, and generate incremental revenue and gross profit for the Company.
Strengthen marketing capability and broaden customer focus
The Company’s close collaboration with key customers who are leaders in their respective industries has enabled ESI to develop world-class technologies that meet the emerging needs of these demanding customers. Our strategy is to modify our approach to product development so we can meet needs across broader markets as opposed to a few key customers. We believe

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this new approach will enable our products to serve the needs of a far larger portion of the laser microfabrication market. We have strengthened our marketing capability and channel reach through external hiring, employee training and development, increased localization, and use of channel partners.
Leverage flexible platforms and technology for cost of ownership and time to market advantage
Our key technological capabilities include laser-material interaction, laser beam positioning, optics and illumination, high-speed motion control systems, small parts handling systems and systems integration. Our strategy is to incorporate these capabilities into a series of flexible platforms that have multiple common elements but are tailored to specific applications and to leverage our investment in these platforms to address multiple new applications and market opportunities. In addition, we believe that leveraging common platforms will increase efficiency in the Company through greater use of common parts, lower inventory requirements, shorter cycle times, and leveraged engineering investment across the Company. During 2016 we introduced several new platforms that with minimal modification can address a variety for laser micromachining applications.
Our Products
During 2016, we operated in two segments, Component Processing and Micromachining. Included within Component Processing are interconnect products, semiconductor products and component test products. The interconnect, semiconductor and component test products are sold primarily to manufacturers of electronic components and are used to drill, cut, trim, ablate, test and mark features that improve the yield or functionality of the component. Micromachining products are sold primarily to manufacturers of end devices across multiple industries and are used primarily to drill, cut or mark features on a variety of materials, generally on the casing or external surface of the end device. In addition, micromachining products tend to serve markets that require fewer features, less stringent design requirements, and lower cost.
Component Processing
Interconnect Products (IP)
Our laser systems for interconnect products address multiple applications and materials on a broad set of substrates, panels, and continuous-feed reels primarily for the PCB and packaging industries. Our laser via drilling systems target electrical interconnect applications that require high accuracy and small via (hole) dimensions to create electrical connections between layers in flexible circuits, high-density circuit boards and IC packages. Our micro via drilling technology addresses the rapidly changing applications in IC packages, multichip modules and HDI circuit boards. Our ultraviolet (UV) laser processing systems employ state-of-the-art technology in lasers, optics and motion control. These products include single-beam and multi-beam systems that produce high-quality vias with the best-in-class placement accuracy for improved yield of packages and substrates.
These same technologies can be used to singulate individual PCB’s (depaneling), rout copper openings on PCB material, precisely cut flexible circuit material, and mark individual packages or circuit boards.
Semiconductor Products (SP)
Our semiconductor manufacturing products address multiple applications that utilize laser energy to process materials on wafer-based substrates and semiconductor devices and packages. Applications include processing of silicon wafers, memory devices, mixed signal devices, hybrid circuits, sensors, and resistors.
Semiconductor Systems
In May 2013, we acquired the assets of the Semiconductor Systems business from GSI Group Inc. These products include industry leading wafer marking equipment, wafer and circuit trim tools, and LCD repair tools. Wafer marking equipment is used for serialization and wafer identification by both manufacturers of semiconductor wafers and within semiconductor fabs. Wafer and circuit trim tools are laser systems that adjust the electrical performance of semiconductor devices or hybrid circuits by removing a precise amount of material from one or more circuit components. In addition, the company continues to sell a limited number of memory yield improvement systems and related laser upgrades.
3D Semiconductor Wafer Processing
The advent of 3D chip packaging technologies is driving the need for silicon wafers to become thinner in order to allow for stacking of wafers within the same packaging geometry. As wafers become thinner, they become more challenging to cut into discrete chips using traditional mechanical saws. Our model 9900 uses a laser to dice ultra-thin silicon wafers, those with a thickness of 50 microns or below, and to singulate interposers. During 2016 we introduced Ultrus TM , based on the 9900 platform that can scribe next-generation thin film materials that lend themselves to laser processing. As 3D technologies are

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developed, we believe the use of advanced laser technology will become increasingly important to productivity and performance.
Display Repair
Our laser display repair systems are utilized to improve yields in the manufacture of flat panel displays. During production, individual pixels of a display may develop electrical defects that result in no light emission or the emission of only a steady white light. To correct these defects, flat panel display producers employ a laser repair process to isolate the electrical defects during production by cutting the inputs to the pixel. Our laser systems are primarily sold to the manufacturers of LCD and OLED repair tools as a key component of their products.
Component Test Products (CTP)
Our component test products combine high-speed small parts handling technology with real-time control systems to provide highly automated, cost-effective inspection solutions for manufacturers of MLCCs and other passive components such as capacitor arrays, inductors, resistors, varistors and hybrid circuits. These components, produced in quantities of trillions of units per year, process analog, digital and high-frequency signals and are used extensively in nearly all electronic products. Our MLCC test systems employ high-speed handling and positioning techniques to precisely load, test and sort MLCCs based on their electrical energy storage capacity, or capacitance, and their electrical energy leakage, or dissipation factor. Our 35XX series is the most productive tester in the market today. Our latest 3510 model enables high-speed testing of the industry’s smallest metric 0402 capacitors used primarily in advanced cell phone and tablet designs. We also produce consumable products such as carrier plates and termination belts, both of which are used to hold MLCCs during the manufacturing and testing process.
Micromachining
Micromachining Products (MP)

Micromachining products are comprised of laser systems that are used primarily by manufacturers of end devices across multiple industries to drill, cut or mark features on a variety of materials, generally on the casing or external surface of the end device. In addition, micromachining products tend to serve markets that require fewer features, less stringent design requirements, and lower cost.
Micromachining Systems
As technologies enable consumer electronics and other devices to become more compact, mechanical processes are not able to meet the stringent specifications demanded by manufacturers. We offer several platforms that enable customers to perform precision drilling, scribing, cutting, etching, routing or marking on many different types of materials and devices including glass, metal, plastic, paint and ceramics. We also offer laser products for integration into customers' tools or process that are useful for applications such as thin film processing, glass processing, material trimming, precision drilling, and organic and metal cutting.
In 2015, we acquired Topwin, a laser system design and manufacturing company located in China. During 2016, we introduced the Jade and Garnet platforms, which incorporate ESI laser technology and software controls on top of base platforms originally designed by Topwin, to address multiple applications requiring mid-range performance, particularly in China. In addition, Topwin offers a portfolio of low-cost laser products that address a variety of marking, cutting and welding applications.
In addition, we offer laser ablation systems that ablate material for identification and analysis applications, including forensics, mineral analysis and research.
Customers
Our top ten customers for 2016 , 2015 and 2014 accounted for approximately 51% , 40% and 41% of total net sales, respectively. One customer, Apple Inc., and its affiliates, accounted for approximately 15% , 9% and 15% of total net sales in 2016 , 2015 and 2014 , respectively.
Sales, Marketing and Service
We sell our products worldwide through direct sales and service offices, value-added resellers and independent representatives located around the world. ESI has direct sales and service personnel in Oregon, California and several other states; China, Japan, Korea, Singapore and Taiwan in Asia; and France, Germany and the United Kingdom in Europe. We serve select customers in Asia, the Americas, Europe and additional countries through manufacturers’ representatives.

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We have a substantial base of installed products in use by leading microelectronics and semiconductor manufacturers. We emphasize strong working relationships with these customers to meet their needs for additional systems and to facilitate the successful development and sale of new products to these customers.
We generally employ service personnel wherever we have a significant installed base. We offer a variety of warranty, maintenance and parts replacement programs to support the requirements of our customers’ high-volume manufacturing environments.
Backlog
Backlog consists of purchase orders for products and spare parts that we expect to ship within 12 months and service contracts for performance generally within 24 months. Backlog does not include deferred system revenue. Backlog was $55.2 million at April 2, 2016 compared to $36.5 million at March 28, 2015 , representing an increase of 51% primarily as a result of increased orders in the fourth quarter of 2016 compared to the fourth quarter of 2015. Our stated backlog is not necessarily indicative of sales for any specific future period, because of possible order cancellations or deferrals, shipping or acceptance delays, and backlog does not represent any assurance that we will realize a profit from filling the orders.
Research, Development and Technology
We believe that our ability to compete effectively and deliver customer solutions depends, in part, on our ability to maintain and expand our expertise in core technologies and product applications. Our primary core competencies and capabilities include:
laser-material interaction;
high-speed, micron-level motion control systems;
precision optics;
proprietary laser technology;
laser power control;
image processing and optical character recognition;
high-speed, small parts handling;
real-time production-line electronic measurement;
real-time operating systems; and
systems design and integration.
Our research and development expenditures for 2016 , 2015 and 2014 were $32.4 million ( 18% of net sales), $35.2 million ( 22% of net sales) and $37.8 million ( 21% of net sales), respectively.
Competition
Our markets are dynamic, cyclical and highly competitive. The principal competitive factors in our markets are total cost of ownership, product performance, ease of use, reliability, service, technical support, product roadmap, price, proprietary technology, manufacturing responsiveness and relationships with customers. We believe that our products compete favorably with respect to these factors. Some of our competitors have greater financial, engineering and manufacturing resources and larger distribution networks than we do. Some of our customers or potential customers develop, or have the ability to develop, manufacturing equipment similar to our products. Competition in our markets may intensify and our technological advantages may be reduced or lost as a result of technological advances by competitors or customers or changes in electronic device processing technology.
Our component processing products compete with laser systems provided by Via Mechanics, Ltd., EO Technics Co. Ltd., LPKF Laser & Electronics AG, Mitsubishi Electric Corporation, Orbotech Ltd., InnoLas Systems GmbH, DISCO Corporation, Laser Solutions, Inc., Quantel USA, Inc., HOYA Corporation, Humo Laboratory Ltd. as well as component manufacturers that develop systems for internal use. Our Micromachining Products compete with laser and laser systems provided by Hans Laser, HG Laser and several Chinese and Korean companies who compete within their local markets.
Manufacturing and Supply
Our primary production facilities are located in Singapore; Portland, Oregon; Klamath Falls, Oregon; and Wuhan, China. Our Singapore facility is our primary systems manufacturing facility and manufactures certain IP, SP, CTP and MP products. The Portland facility primarily provides advanced manufacturing and prototype capability. The Klamath Falls facility manufactures CTP consumable products. The Wuhan facility is primarily used to manufacture our Topwin micromachining products. Our Singapore and Wuhan operations are located in leased facilities. As we continue our efforts to streamline the organization and improve efficiencies, we expect a growing percentage of final systems will be shipped from Singapore and China.

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We use qualified manufacturers to supply many components and sub-system modules for our products. Our systems use high-performance computers, peripherals, lasers and other components from various suppliers. Some of the components we use are obtained from a single source or a limited group of suppliers. An interruption in the supply of a particular component would have a temporary adverse impact on us. We believe our relationships with our suppliers are good.
Patents and Other Intellectual Property
We have a policy of seeking patents, when appropriate, on inventions relating to products and methods that are discovered or developed as part of our ongoing research, development and manufacturing activities. We owned 370 United States patents and 642 patents issued outside of the United States as of April 2, 2016 . Additionally, as of April 2, 2016 , we had 33 patent applications pending in the United States and 340 patent applications pending outside of the United States. Although our patents are important, we believe that the competitiveness of our products also depends on the technical competence and innovation of our employees.
We rely on copyright protection for our proprietary software. We also rely upon trade secret protection for our confidential and proprietary information. Others may independently develop substantially equivalent proprietary information and techniques, and we may be unable to meaningfully protect our trade secrets.
Employees
As of April 2, 2016 , we employed 698 people of whom 651 were permanent and 47 were temporary. Many of our employees are highly skilled, and our success will depend in part upon our ability to attract and retain such employees, who are in great demand. We have never had a work stoppage or strike, and no employees are represented by a labor union or covered by a collective bargaining agreement. We consider our employee relations to be good.
Environmental Compliance
During fiscal 2016, we retained ISO 14001 certification via Surveillance Assessment for our environmental management system for our Portland, Oregon operations. We do not expect compliance with international, federal, state and local provisions that have been enacted or adopted related to the discharge of materials into the environment or otherwise relating to protection of the environment to have a material effect on our capital expenditures, earnings or competitive.
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”, “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 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, PCB's, 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 economies, particularly those of Asia and the United States; 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.



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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. In many cases we are attempting to penetrate these new markets with newly introduced products which are not yet proven in the industry. In addition, in some cases we will need to develop or expand our sales channels and customer relationships in order to execute on this strategy. 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 payment 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. In addition, because we price our products in U.S. dollars, a strong U.S. dollar can make our products less price competitive outside of the United States to products priced in other currencies. 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 2016 , our top ten customers accounted for approximately 51% of total net sales. We anticipate that sales of our products to a relatively small number of customers will continue to account for a significant portion of our revenues. Consolidation between customers, changes in technologies or solutions used by customers, changes in products manufactured by customers or in end-user demand for those products, selection of suppliers other than us, customer bankruptcies or customer departures from their respective industries all may result in even fewer customers accounting for a high percentage of our revenue and reduced demand from any single major customer. Also, business levels with several of our top customers are dependent on the Company 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. 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 penetrating new markets, 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 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.

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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 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. In addition, our new manufacturing capability with the acquisition of Topwin in China has not been proven at the high volumes we anticipate for that facility. If we are not able to timely and appropriately adapt to changes in our business environment, our business, financial condition or results of operations may be materially and adversely affected.
Reliance on Critical Suppliers
We use a wide range of components from numerous suppliers in the manufacture of our products, including custom electronic, laser, optical and mechanical components. We generally do not have guaranteed supply arrangements with our suppliers. We seek to reduce the risk of production and service interruptions and shortages of key parts by selecting and qualifying alternative suppliers for key parts, monitoring the financial stability of key suppliers and maintaining appropriate inventories of key parts. Although we make reasonable efforts to ensure that parts are available from multiple suppliers, some key parts are available only from a single supplier or a limited group of suppliers in the short term. In addition, some of the lasers we use in our products are difficult to manufacture, and as a result we may not receive an adequate supply of lasers in a timely fashion to fill orders. Operations at our suppliers’ facilities are subject to disruption or discontinuation for a variety of reasons, including changes in business relationships, competitive factors, financial difficulties, work stoppages, fire, natural disasters or other causes. Any such disruption or discontinuation to our suppliers’ operations could interrupt or reduce our manufacturing activities and delay delivery of our products, any or all of which could materially and adversely affect our results of operations. In addition, when markets recover from economic downturns, there is a heightened risk that one or more of our suppliers may not be able to meet our increased demand requirements, adversely impacting our ability to fulfill orders and win business with our customers.
Utilization of Contract Manufacturers
We have arrangements with contract manufacturers to complete the manufacturing of certain of our 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 2016 , we recorded approximately $1.4 million of charges in cost of sales for inventory written off associated with discontinued products.
Uncertainties Resulting from Conflict Minerals Regulation
Many countries, including the United States and those in the European Union and China, have implemented directives that restrict the sale of new electrical and electronic equipment containing certain hazardous substances, and require a disclosure if certain metals used in products are not from a conflict free source.


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Risks Related to Our Organization
Operating a Global Business
International shipments accounted for 90% of net shipments in 2016 , with 83% 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 application development facilities in Canada, France, China and Korea, and sales and service offices in various countries. Under our globalization strategy, we intend to increase our foreign operations in the future. Our non-U.S. sales, purchases and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including the following:
periodic local or geographic economic downturns and unstable political conditions;
price and currency exchange controls;
fluctuation in the relative values of currencies;
difficulty in repatriating money, whether as a result of tax laws or otherwise;
difficulties protecting intellectual property;
compliance with labor laws and other laws governing employees;
local labor disputes;
shipping delays and disruptions;
unexpected changes in trading policies, regulatory requirements, tariffs and other barriers; and
difficulties in managing a global enterprise, including staffing, collecting accounts receivable, and managing suppliers, distributors and representatives.
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 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. We also acquired Topwin, a Chinese manufacturer of laser-based systems, in January 2015 to gain entry into the low-cost solutions market in China. In 2016, we opened an applications development center in Korea in order to increase responsiveness and increase access to local customers.
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, including those who develop systems employing processes developed by us.
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

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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. For example, the Company announced a restructuring plan in 2015 which led to the impairment of associated leasehold improvements and other assets for our Chelmsford facility. The estimated future liability associated with the lease commitments was accrued net of estimated sublease rental income. However, to the extent the property is vacated or payments are not made by the sub-lessee, the Company will incur the full amounts of the ongoing lease obligation.
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;
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;
difficulties implementing internal manufacturing processes 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 or lower levels of revenue, profitability or cash flows for acquired businesses and assets 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.
Security Breaches
 We store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees, on our networks. The secure maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other actions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, disrupt our operations and damage our reputation, which could adversely affect our business, revenues and competitive position.
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

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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.
Risks Related to Technology
Markets Characterized by Rapid Technological Change
The markets for our products are characterized by rapid technological change and innovation, frequent new product introductions, changes in customer requirements and evolving industry standards. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address technological changes and the requirements of current and potential customers. The development of new, technologically advanced products is a complex and uncertain process, requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. The introduction by us or by our competitors of new or enhanced products, or alternative technologies, may cause our customers to defer, change or cancel orders for our existing products or cease purchasing our products altogether. Further, we cannot assure that our new products will gain timely market acceptance or that we will be able to respond effectively to product announcements by competitors, technology changes or emerging industry standards. If we are unable to develop new or enhanced products to address product or technology changes or new industry standards on a timely basis or at all, or if our new or enhanced products are not accepted by the market, or if our customers adopt alternative technologies, our business, financial condition and results of operations may be adversely affected.
Need to Invest in Research and Development
Our industry is characterized by the need for continued investment in research and development. Because of intense competition in the industries in which we compete, if we were to fail to invest sufficiently in research and development, our products could become less attractive to our current and potential customers or obsolete, and our business and financial condition could be materially and adversely affected. 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 are broadening 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.

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Protection of Proprietary Rights – Foreign Jurisdictions
Our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as in the United States. Many United States companies have encountered substantial problems in protecting their proprietary rights against infringement in foreign countries. If we fail to adequately protect our intellectual property in these countries, it could be easier for our competitors to sell competing products in foreign countries, which could result in reduced sales and gross margins.
Intellectual Property Infringement Claims
Several of our competitors hold patents covering a variety of technologies, applications and methods of use similar to some of those used in our products. While we attempt in our designs to avoid patent infringement, from time to time we and our customers have received correspondence from our competitors claiming that some of our products, as used by our customers, may be infringing one or more of these patents. Competitors or others have in the past and may in the future assert infringement claims against our customers or us with respect to current or future products or uses, and these assertions may result in costly litigation or require us to obtain a license to use intellectual property rights of others. If claims of infringement are asserted against our customers, those customers may seek indemnification from us for damages or expenses they incur.
If we become subject to infringement claims, we will evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question or defending our position. These licenses, however, may not be available on satisfactory terms or at all. If we are not able to negotiate the necessary licenses on commercially reasonable terms or successfully defend our position, our financial condition and results of operations could be materially and adversely affected.
We also defend our patent and intellectual property portfolio. For example, we initiated litigation in 2014 against Humo Laboratory, LTD. in Japan and against Eo Technics Co., Ltd., in South Korea in 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 period ends on June 30, 2016. While the Company has failed to meet certain of the associated requirements for the incentive in the past, it has obtained a waiver for certain periods and believes that it is more likely than not the Company will continue to receive the associated tax incentives for balance of the incentive period. Although the Company has applied for an extension of benefits beyond the incentive period, there is no assurance that these benefits will be extended.
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.

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Risks Related to Financial Matters
Liquidity
We may require greater working capital to operate than similar size businesses in many other industries. At April 2, 2016 , we had working capital of $127 million , including $58 million in cash and short-term investments. Our operating cash flows were negative for most quarters since September 2013 through March 2015. In 2016 we had positive operating cash flows with revenue growth driving operating cash flows of $4.7 million . If revenues were to grow, we would expect increased working capital needs for receivables and inventory.
As of April 2, 2016 , we have permanently reinvested $37.0 million of foreign earnings primarily related to manufacturing operations in Singapore and China (Topwin). The Company’s net investment exposure in foreign subsidiaries translated into U.S. dollars using the period-end exchange rates at April 2, 2016 and March 28, 2015 was approximately $56.9 million and $64.3 million, respectively. The potential loss in fair value resulting from a hypothetical 10% adverse change in foreign exchange rates would be approximately $5.7 million and $6.4 million at April 2, 2016 and March 28, 2015 , respectively. Foreign exchange rate gains or losses on foreign investments as of April 2, 2016 were reflected as a cumulative translation adjustment, net of tax, and do not affect the Company’s results of operations.
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 significantly, 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.
In addition, most of our contracts to acquire inventory represent purchase commitments. As a result, if we experience lower than anticipated demand for our products, in many cases we would not be able to avoid the cost of purchasing the associated inventory, which could negatively impact our results of operations and liquidity.
Unfavorable Currency Exchange Rate Fluctuations
Currency exchange rate fluctuations could have an adverse effect on our sales and results of operations and we could experience losses with respect to forward exchange contracts into which we may enter. Unfavorable currency fluctuations could require us to increase prices to foreign customers, which could result in lower net sales by us to those customers. Alternatively, if we do not adjust the prices for our products in response to unfavorable currency fluctuations, our results of operations could be materially and adversely affected. In addition, some of our foreign sales are denominated in the currency of the country in which these products are sold and the currency we receive in payment for such sales could be less valuable at the time of receipt as a result of exchange rate fluctuations. From time to time, we enter into forward exchange contracts to hedge the value of accounts receivable primarily denominated in euros and other currencies. However, we cannot be certain that our efforts will be adequate to protect us against significant currency fluctuations or that such efforts will not expose us to additional exchange rate risks, which could adversely affect our results of operations.
Fluctuations in Effective Tax Rate
As a global company, we are subject to taxation in the United States and numerous foreign jurisdictions. Our effective tax rate is subject to fluctuation from one period to the next because the income tax rates for each year are a function of many factors, including: (a) taxable income levels and the effects of a mix of profits (losses) earned by ESI and our subsidiaries in numerous tax jurisdictions with a broad range of income tax rates; (b) our ability to utilize deferred tax assets; (c) taxes, refunds, interest or penalties resulting from tax audits; (d) the magnitude of various credits and deductions as a percentage of total taxable income; (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 total of $7.1 million in acquired intangible assets, net of accumulated amortization, and $7.4 million in goodwill at April 2, 2016 . Events may occur or circumstances change such that the carrying value is not recoverable or it becomes more likely than not that the fair value of long-lived assets is reduced below the carrying value of the reporting unit.
For example, 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

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required the Company to reassign goodwill to the new reporting units based on the relative fair value of the respective reporting units, and as a result we concluded that $7.9 million of goodwill was impaired as of March 28, 2015.
We performed a review of our acquired definite-lived intangible assets in the fourth quarter of 2016 , including a review for impairment based on certain triggering events and no significant impairments of intangible assets were identified, other than a $0.4 million intangible associated with developed technology for our Topwin reporting unit. We performed our annual goodwill impairment analysis of the associated reporting unit and determined that the goodwill was not impaired. The estimated fair value of the Topwin reporting unit exceeded the carrying value of the reporting unit by approximately $1.7 million or over 18%. The assessment of whether goodwill is impaired is sensitive to many financial and valuation assumptions, including projections of future performance, the determination of weighted average cost of capital, and estimates of terminal value. Our projections include assumptions regarding the adoption of new products, expected margins, and other factors, and a significant deterioration or deviation between expectations and actual performance may trigger impairment.   For example, should the performance of our Topwin reporting unit not meet our expectations, impairment of goodwill associated with that reporting unit may be triggered, which could have a material impact on our business, financial condition and results of operations.
In addition, certain of our long-lived assets such as machinery and equipment may experience impairment 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 could 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 fiscal 2016 , our stock price fluctuated between a high of $7.36 per share and a low of $4.21 per share. Consequently, the current market price of our common stock may not be indicative of future market prices, and we may be unable to sustain or increase the value of an investment in our common stock. Factors affecting our stock price, many of which are outside of our control, may include:
variations in operating results from quarter to quarter;
changes in earnings estimates by analysts or our failure to meet analysts’ expectations;
changes in the market price per share of our public company customers;
market conditions in the consumer electronics, semiconductor and other industries into which we sell products;
general economic conditions;
political changes, hostilities or natural disasters;
low trading volume of our common stock;
the number of analysts covering our common stock;
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

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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, and presentation of service revenue and associated cost of sales on the statements of operations.
Management believes that it has identified and implemented additional controls, which have remediated these material weaknesses.
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 such weaknesses or deficiencies occur, they 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 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our executive and administrative headquarters, which houses our primary engineering and marketing functions, advanced manufacturing capability for new products, and manufacturing of select legacy products are located in a three-building complex with 197,838 square feet of space on 10.15 acres in Portland, Oregon. Additionally, our component test products consumables are manufactured at a 53,000 square foot plant on 31 acres in Klamath Falls, Oregon. We own all of these buildings. We believe the productive capacity of these facilities to be adequate and suitable for the requirements of our business for the foreseeable future.
Our primary system manufacturing facilities are located in leased facilities in Singapore. We lease approximately 26,000 square feet of facilities in Singapore where we manufacture certain Micromachining and Component Processing products. We also lease an approximately 23,000 square foot facility in Sunnyvale, California that is used primarily for engineering, marketing and as a demonstration center for our microfabrication systems. We lease approximately 25,000 square feet of facilities in Wuhan, China that is used primarily for manufacturing of our Topwin micromachining products. Additionally, we lease other office and facility space in various locations throughout the United States and various foreign countries.
We lease approximately 32,500 square feet of facilities in Chelmsford, Massachusetts that have been used primarily for engineering and manufacture of our Semiconductor Systems products. However, as a part of the Company’s plan to streamline its manufacturing and development activities, the Company transitioned the manufacturing and development activities to other U.S. facilities during 2016. In the third quarter of 2016, we entered into a sublease for this property and the associated rental income partially offsets the Company's ongoing lease obligation.
Item 3. Legal Proceedings
In the ordinary course of business, we are involved in various legal matters, either asserted or unasserted, and investigations. In the opinion of management, ultimate resolution of these matters will not have a material effect on our consolidated financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not Applicable.

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Table of Contents

PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Common Stock Prices
Our common stock trades on the NASDAQ Stock Market under the symbol ESIO. There were approximately 401 shareholders of record as of June 10, 2016 , and on that date there were 31,471,682 common shares outstanding. The closing price on June 10, 2016 was $6.63 per share.
The following table shows the high and low closing prices for our common stock as reported on the NASDAQ Stock Market for the fiscal quarters indicated:
Fiscal 2016
High
 
Low
Quarter 1
7.36
 
5.05
Quarter 2
5.40
 
4.53
Quarter 3
5.28
 
4.21
Quarter 4
6.20
 
5.40
 
Fiscal 2015
High
 
Low
Quarter 1
$10.01
 
$6.68
Quarter 2
7.70
 
5.98
Quarter 3
7.77
 
6.13
Quarter 4
7.88
 
6.16
Equity Compensation Plan Information
Disclosures related to securities authorized for issuance under our Equity Compensation Plans are incorporated by reference into Item 12 of this annual report on Form 10-K, Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters, from our Proxy Statement for our fiscal 2016 annual meeting.
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 with aggregate dividends of $7.3 million . The following table summarizes the quarterly dividends declared and paid by us in 2015 :
Date Declared
 
Record Date
 
Payable Date
 
Amount per Share
November 18, 2014
 
December 1, 2014
 
December 15, 2014
 
$0.08
August 21, 2014
 
September 2, 2014
 
September 12, 2014
 
$0.08
May 15, 2014
 
May 27, 2014
 
June 10, 2014
 
$0.08

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Table of Contents

Stock Performance Graph
The graph below compares the cumulative 60-month total return to holders of Electro Scientific Industries, Inc. common stock with the cumulative total returns of the S&P 500 Index and the S&P Information Technology Index for the same period. The graph assumes that the value of the investment in Electro Scientific Industries, Inc. common stock and in each of the indices (including reinvestment of dividends) was $100.00 on April 2, 2011 and tracks it through April 2, 2016 .
Historical stock price performance should not be relied upon as indicative of future stock price performance.
*$100 invested on 4/2/2011 in stock or 3/31/ 2011 in index, including reinvestment of dividends.
Indexes calculated on month-end basis.


   
Cumulative Total Return 1
   
April 2, 2011
 
March 31, 2012
 
March 30, 2013
 
March 29, 2014
 
March 28, 2015
 
April 2, 2016
Electro Scientific Industries, Inc.
100.00

 
88.51

 
80.07

 
73.94

 
47.61

 
55.88

S&P 500
100.00

 
108.54

 
123.69

 
150.73

 
169.92

 
172.95

S&P Information Technology Index
100.00

 
120.21

 
118.86

 
149.28

 
176.32

 
190.53

 
1. Copyright © 2016 S&P, a division of McGraw Hill Financial. All rights reserved.


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  Item 6. Selected Financial Data
(In thousands, except per share data)
2016
 
2015
 
2014
 
2013
 
2012
Statement of Operations Data
 
 
 
 
 
 
 
 
 
Net sales
$
184,391

 
$
159,118

 
$
181,167

 
$
216,625

 
$
254,229

Provision for (benefit from) income taxes
(16
)
 
234

 
(92
)
 
39,851

 
(1,417
)
Net (loss) income
(12,257
)
 
(43,811
)
 
(38,334
)
 
(54,716
)
 
4,904

Net (loss) income per share—basic
(0.39
)
 
(1.43
)
 
(1.28
)
 
(1.86
)
 
0.17

Net (loss) income per share—diluted
(0.39
)
 
(1.43
)
 
(1.28
)
 
(1.86
)
 
0.17

Cash dividends paid per outstanding common share

 
0.24

 
0.32

 
2.32

 
0.08

Balance Sheet Data
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, restricted cash, short-term investments and auction rate securities
$
57,665

 
$
57,606

 
$
106,905

 
$
145,057

 
$
198,723

Working capital
126,658

 
124,593

 
164,835

 
194,406

 
269,532

Net property, plant and equipment
24,543

 
25,858

 
27,930

 
27,894

 
32,103

Total assets
220,100

 
221,240

 
270,209

 
322,208

 
433,210

Shareholders’ equity
170,031

 
177,321

 
222,881

 
264,142

 
378,670


1.
Fiscal 2016 operating expenses included $2.8 million for restructuring costs, which primarily consisted $1.4 million each of employee severance costs and charges for asset write-off and related items. Fiscal 2016 cost of sales included $ 1.4 million for inventory write-offs and $0.4 million of intangible write-offs related to discontinued products. Fiscal 2016 also included $4.2 million of charges for share-based compensation expense, $2.4 million of charges for purchase accounting amortization which included $1.4 million for amortization of acquired intangible assets and $1.0 million of compensation expense related to the purchase of Topwin (Refer to Note 6 "Business Acquisition" for discussion of compensation consideration related to acquisitions).
2.
Fiscal 2015 included non-cash goodwill impairment charge of $7.9 million to write down the goodwill to its implied fair value as of March 28, 2015, $3.0 million for restructuring costs for the Chelmsford facility closure, which primarily consisted of $2.0 million for employee severance and related costs and $1.0 million for inventory write-offs. Fiscal 2015 also included $4.5 million of charges for share-based compensation expense, $4.3 million for impairment of a minority investment, $1.5 million for amortization of acquired intangible assets and a $0.6 million gain on liquidation of a foreign subsidiary. The Company also paid $9.0 million in cash for the Topwin acquisition during fiscal 2015.
3.
Fiscal 2014 included $1.1 million for restructuring costs, which primarily consisted of $0.8 million charge towards obligations for our outgoing Chief Executive Officer and $0.2 million of charges related to asset write-offs. Fiscal 2014 also included $12.8 million of charges in cost of sales for inventory write-offs, $9.7 million for impairment of a minority equity investment, $6.1 million for share-based compensation expense, $2.9 million for amortization of acquired intangible assets, including $0.3 million of accelerated amortization, $1.3 million for net gain on sale of property and equipment, $0.6 million of accelerated depreciation on assets that will no longer be utilized and a $0.5 million of gain on acquisition of Semiconductor Systems business.
4.
Fiscal 2013 included $2.6 million for restructuring costs, which primarily consisted of $1.5 million of employee severance costs and $1.1 million of charges related to asset write-offs. Fiscal 2013 also included $21.0 million of charges in cost of sales for inventory write-offs, $8.1 million for share-based compensation expense, $4.8 million for amortization of acquired intangible assets, including $2.3 million of accelerated amortization, $1.2 million for net gain on sale of property and equipment, and a $15.3 million benefit for net legal settlement proceeds.
5.
Fiscal 2013 included a charge of $46.9 million to increase the valuation allowance on deferred tax assets.
6.
Fiscal 2012 included $3.8 million for restructuring costs, which primarily consisted of $1.9 million of employee severance costs and $1.7 million of accelerated depreciation for certain assets. Fiscal 2012 also included $2.0 million of charges in cost of sales for an inventory write-off, $11.5 million for share-based compensation expense, $1.7 million for amortization of acquired intangible assets, $1.2 million for loss on disposal of assets and the write-off of engineering materials, $0.6 million for legal settlement costs, and a gain of $2.7 million from sale of previously impaired auction rate securities.
7.
The Company paid cash dividends of $7.3 million, $9.6 million, $68.1 million and $2.3 million during fiscal 2015, fiscal 2014, fiscal 2013 and fiscal 2012, respectively. No cash dividends were paid during fiscal 2016.

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Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview of Business
Electro Scientific Industries, Inc. and its subsidiaries (ESI) is a leading supplier of innovative laser-based micro-manufacturing solutions for industries reliant on microtechnologies. 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. Founded in 1944, ESI is headquartered in Portland, Oregon, with global operations and subsidiaries in Asia, Europe and North America.
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.
Overview of Financial Results
Our fiscal year consists of 52 or 53 weeks ending on the Saturday nearest March 31. Accordingly, our fiscal 2016 reporting period consisted of a 53 -week period ending on April 2, 2016 , our fiscal 2015 reporting period consisted of a 52 -week period ending on March 28, 2015 and our fiscal 2014 reporting period consisted of a 52 -week period ending on March 29, 2014 . All references to years or quarters relate to fiscal years or fiscal quarters unless otherwise noted.
Total order volume in 2016 was $201.7 million , compared to orders of $170.9 million in 2015 . Orders within our Component Processing segment increased approximately 20%, with increases in IP orders partially offset by declines in CTP and SP. Orders for IP increased by approximately 40%, primarily for flex via drilling tools driven by the addition of our new Gemstone via drilling system to our flex product portfolio and the increasing content and complexity of flex circuits primarily in consumer electronics. Orders for SP decreased by approximately 10% with increases in legacy memory repair orders more than offset by decreased trim system sales and decreased service activity. Orders for CTP decreased by 8% primarily as a result of reduced MLCC system demand due to fewer technology sales compared to the prior year and continued over capacity. Orders for Micromachining segment products increased by approximately 10% primarily due to application wins for the Lumen series micromachining platform.
Total revenue in 2016 was $184.4 million , an increase of 16% , compared to revenue of $159.1 million in 2015 . Component Processing revenue increased by 22.2% . Within our Component Processing segment, IP revenue increased by 40.7% primarily due to $24.5 million increase in flex sales with the introduction of our new Gemstone flex via drilling product, and a $4.7 million increase in service sales. SP revenue was relatively flat as the increase in legacy memory repair system sales and initial sale of our Ultrus advanced scribing system was offset by decreases in the circuit trim and wafer trim systems. CTP revenue increased by 4.2% due to reduction in backlog of our component test systems. In our Micromachining segment, MP sales decreased by 7.0% primarily driven by reduced demand for laser ablation systems as well as lower service sales, partially offset by increased sales of $5.7 million for micromachining systems, primarily due to the Lumen series system sales. Backlog was $55.2 million as of April 2, 2016 compared to $36.5 million as of March 28, 2015 , primarily due to increased orders for flex via drilling systems in the fourth quarter of 2016.
Gross profit was $72.7 million in 2016 compared to $54.7 million in 2015 . Overall gross profit increased due to the increase in production and sales volumes, and lower manufacturing costs as we consolidated facilities and made lean improvements. These were partially offset by higher warranty costs and higher inventory and intangible write-offs of $0.8 million associated with discontinued products. Gross margin increased to 39.4% in 2016 compared to 34.4% in 2015 . This increase in gross margin was primarily due to favorable absorption of fixed costs due to higher production volume, improved mix with a higher proportion of flex via drilling products, reduction in inventory reserves related to the sale of memory repair systems, and decreased manufacturing costs, partially offset by higher warranty costs, and higher inventory and intangible write-offs associated with discontinued products.
Net operating expenses of $85.2 million in 2016 decreased $9.2 million from $94.4 million in 2015 . This decrease was primarily due to the $7.9 million impairment of goodwill for our Component Processing and Micromachining reporting units in 2015 which did not repeat in 2016. Excluding the goodwill impairment, net operating expenses decreased $1.4 million. This

23

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was primarily due to a $2.7 million decrease in labor and related expenses due to the restructuring activities in 2015 and 2016, $1.1 million decrease in patent legal fees and other professional fees due to cost management measures and a $0.7 million decrease in depreciation and amortization expense of fixed assets. These were partially offset by $1.4 million increase in variable pay, $0.8 million increase in restructuring costs primarily relating to the facilities charges for the closure of the Chelmsford, Massachusetts manufacturing plant and a $0.5 million increase in travel expenses related to higher marketing and sales activities with increased sales. Operating loss improved by $27.3 million from $39.7 million in 2015 to $12.5 million in 2016 .
Non-operating income was $0.2 million in 2016 compared to an expense of $3.8 million in 2015 . The change was primarily due to $4.3 million expense on our cost method investment in OmniGuide, Inc. which was fully impaired in 2015.
Benefit from income taxes was $16 thousand in 2016 compared to a provision of $234 thousand in 2015 , primarily due to income tax expense from foreign jurisdictions offset by a benefit arising from pretax losses in the Topwin subsidiary for 2016. Net loss was $12.3 million in 2016 compared to $43.8 million in 2015 .
Results of Operations
The following table presents results of operations data as a percentage of net sales for the years ended April 2, 2016 March 28, 2015 and March 29, 2014 :
 
2016
 
2015
 
2014
Net sales:
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales:
60.6

 
65.6

 
67.0

Gross profit
39.4

 
34.4

 
33.0

Selling, general and administration
27.1

 
31.0

 
28.5

Research, development and engineering
17.6

 
22.1

 
20.9

Restructuring costs
1.5

 
1.3

 
0.6

Impairment of goodwill

 
5.0

 

Gain on sale of property and equipment, net

 

 
(0.7
)
Gain on acquisition of Semiconductor Systems business

 

 
(0.3
)
Operating loss
(6.8
)
 
(25.0
)
 
(15.9
)
Other-than-temporary impairment of cost method investments

 
(2.7
)
 
(5.4
)
Interest and other income, net
0.1

 
0.3

 
0.1

Loss before income taxes
(6.7
)
 
(27.4
)
 
(21.2
)
(Benefit from) provision for income taxes
0.1

 
0.1

 
(0.1
)
Net loss
(6.6
)%
 
(27.5
)%
 
(21.1
)%
Fiscal Year Ended April 2, 2016 Compared to Fiscal Year Ended March 28, 2015
Net Sales


24


The following table presents net sales information by operating segment and product group:
   
2016
 
2015
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Component Processing
 
 
 
 
 
 
 
Interconnect Products (IP)
$
94,121

 
51.0
%
 
$
66,913

 
42.1
%
Component Test Products (CTP)
19,901

 
10.8

 
19,099

 
12.0

Semiconductor Products (SP)
38,262

 
20.8

 
38,586

 
24.2

 
152,284

 
82.6

 
124,598

 
78.3

Micromachining
 
 
 
 
 
 
 
Micromachining Products (MP)
32,107

 
17.4

 
34,520

 
21.7

 
32,107

 
17.4

 
34,520

 
21.7

Net Sales
$
184,391

 
100.0
%
 
$
159,118

 
100.0
%
Net sales for 2016 increased $25.3 million or 15.9% from net sales for 2015 . By segment, Component Processing sales increased by $27.7 million or 22.2% and Micromachining sales decreased by $2.4 million or 7.0% , compared to 2015 .
IP sales for 2016 increased $27.2 million or 40.7% compared to 2015 . The increase in IP sales was primarily driven by higher demand for our flex via drilling products, in particular our new Gemstone system, and increased IP service sales.
CTP sales for 2016 increased $0.8 million or 4.2% compared to 2015 . The increase was primarily driven due to modest reduction in backlog year over year for our component test systems.
SP sales for 2016 decreased $0.3 million or 0.8% compared to 2015 . The decrease in SP revenues was primarily driven by $12.9 million decrease in sales of circuit trim, wafer trim and service activity, mostly offset by $10.0 million increase in sales of our legacy memory repair systems and $1.7 million from the initial sale of our Ultrus advanced scribing system.
MP sales for 2016 decreased $2.4 million or 7.0% compared to 2015 , primarily as a result of lower service revenues and declines in our laser ablation products. This was however, partially offset by increased sales of our new Lumen series platform and the addition of Topwin.
The following table presents net sales information by geographic region:
   
2016
 
2015
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Asia
$
152,259

 
82.6
%
 
$
124,049

 
78.0
%
Americas
21,206

 
11.5

 
18,067

 
11.4

Europe
10,926

 
5.9

 
17,002

 
10.7

 
$
184,391

 
100.0
%
 
$
159,118

 
100.0
%
In 2016 , net sales to Asia increased by $28.2 million primarily due to higher shipments of flex via drilling systems into China and southeast Asia. Net sales to Americas increased by $3.1 million primarily due to the shipment of our new Ultrus advanced scribing system. Europe sales decreased by $6.1 million primarily due to decreased wafer and circuit trim sales, and lower laser ablation sales.
Gross Profit by operating segment
   
2016
 
2015
(In thousands, except percentages)
Gross Profit
 
% of Sales
 
Gross Profit
 
% of Sales
Component Processing
$
66,693

 
43.8
%
 
$
50,970

 
40.9
%
Micromachining
9,386

 
29.2

 
6,383

 
18.5

Corporate and other
(3,376
)
 

 
(2,672
)
 

 
$
72,703

 
39.4
%
 
$
54,681

 
34.4
%
Gross profit was $72.7 million in 2016 compared to $54.7 million in 2015 . Overall gross profit increased due to overall increases in production and sales volumes and lower manufacturing costs as we consolidated facilities and made lean

25

Table of Contents

improvements. These improvements were partially offset by higher warranty costs, and impairments of inventory and an intangible associated with discontinued products.
Gross margin increased to 39.4% in 2016 compared to 34.4% in 2015 . The increase in gross margin was primarily due to favorable absorption of fixed costs due to higher production volume, decreased manufacturing costs, and favorable mix with a higher proportion of flex via drilling products, partially offset by higher warranty costs, and impairments of inventory and an intangible associated with discontinued products.
Gross margin for Component Processing increased from 40.9% to 43.8% primarily due to favorable absorption of fixed costs due to higher volumes, favorable product mix and a reduction in inventory reserves related to the sale of memory repair systems . These were partially offset by higher warranty costs.
Gross margin for Micromachining increased from 18.5% to 29.2% primarily due to lower manufacturing costs and increased absorption on higher system production levels.
Corporate and other cost of sales include expenses not allocated to our two operating segments, including stock compensation, amortization of intangibles, restructuring and other expenses. The change in 2016 is due to impairments of inventory and an intangible associated with discontinued products.
Operating Expenses
   
2016
 
2015
(In thousands, except percentages)
Expense
 
% of Net Sales
 
Expense
 
% of Net Sales
Selling, general and administration
$
49,753

 
27.1
%
 
$
48,525

 
31.0
%
Research, development and engineering
32,400

 
17.6

 
35,166

 
22.1

Impairment of goodwill

 

 
7,889

 
5.0

Restructuring costs
2,824

 
1.5

 
2,069

 
1.3

Acquisition and integration costs
194

 
0.1

 
776

 
0.5

 
$
85,171

 
46.2
%
 
$
94,425

 
59.3
%

Selling, general and administration
Selling, general and administration (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 2016 increased $1.2 million compared to 2015 . This increase was primarily attributable to increases in variable pay of approximately $1.0 million driven by improved attainment of incentive targets and $0.7 million increases related to increased travel, marketing and commissions costs due to higher business volumes. Share-based compensation increased $0.2 million and consisted of $0.9 million of expense related to business acquisition offset by $0.7 million of lower share-based compensation expense due to lower stock price on grant dates and increased forfeitures during the year. Offsetting the above were $0.9 million in labor and related savings due to the cost reduction initiatives and other savings from process efficiencies.
Research, Development and Engineering
Research, development and engineering (RD&E) expenses are primarily comprised of labor and other employee-related expenses, professional fees, project materials, equipment and facilities costs. RD&E expenses for 2016 decreased $2.8 million compared to 2015 . This decrease was primarily due to lower labor, share-based compensation and related costs of $2.2 million due to the restructuring activities, lower expenses for patent legal fees of $0.4 million, and a decrease of $0.3 million in depreciation. These decreases were partially offset by increased variable pay costs of $0.4 million driven by improved attainment of incentive targets.
Impairment of goodwill
The annual review of goodwill for 2016 was performed with no impairment indicated.
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 its new reporting units based on the relative fair value of the respective reporting units. In performance of the annual review of goodwill for the newly formed reporting units, we determined that the carrying value of the component processing and micromachining reporting units exceeded its fair value and hence we recorded an impairment charge of $7.9 million in the fourth quarter of 2015.

26

Table of Contents

Restructuring Costs
In 2015, as a part of the Company’s 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. Restructuring costs of $2.8 million incurred in 2016 primarily related to $1.7 million of employee severance and related benefits, and $1.1 million of charges related to asset write-offs and net remaining lease obligations due to the closure of the Chelmsford, Massachusetts manufacturing plant in the third quarter of 2016.
Restructuring costs for 2015 were $2.1 million , primarily due to employee severance and related benefits for the Chelmsford restructuring plan.
As of April 2, 2016, most of the restructuring activities have been completed, and we expect to pay the accrued expenses primarily related to severance and employee benefits in the first quarter of 2017. Accrued expenses related to the lease obligations will be carried until the end of the lease term in December 2019.
Share-Based Compensation
The table of operating expenses shown above also includes $3.8 million and $3.9 million of share-based compensation expense for 2016 and 2015 , respectively. Share-based compensation expense decreased in 2016 compared to 2015 primarily due to lower stock price on grant dates and increased forfeitures; partially offset by an increased number of time-based restricted stock unit awards granted. Additionally, we incurred $0.9 million of share-based compensation expense in 2016 related to business acquisition.
Non-operating Income and Expense, net
 
2016
 
2015
(In thousands, except percentages)
Interest and Other Income, net
 
% of Net Sales
 
Interest and Other Expense, net
 
% of Net Sales
Loss and other-than-temporary impairment of cost method investment

 
%
 
(4,263
)
 
(2.7
)%
Interest and other income, net
195

 
0.1

 
430

 
0.3

Total non-operating (expense) income
$
195

 
0.1
%
 
$
(3,833
)
 
(2.4
)%
Other-than-temporary impairment of cost method investment
We held a cost method investment in OmniGuide, Inc., of $4.3 million in fiscal 2015 which was written off in the fourth quarter of 2015, as OmniGuide's lender exercised its right to convert the outstanding obligations owed to it by OmniGuide into 100% of OmniGuide's outstanding equity under the applicable financing agreements. No cost method investments were held by the Company at the end of 2015 and 2016.
Interest and Other Income (Expense), net
Interest and other income (expense), net, consists of interest income and expense, market gains and losses on assets held in employees’ deferred compensation accounts, realized and unrealized foreign exchange gains and losses, bank charges, investment management fees, and other miscellaneous non-operating items. Interest and other income, net was $0.2 million in 2016 compared to $0.4 million in 2015 . This change was primarily attributable to a $0.2 million increase in financing costs associated with the establishment of our line of credit in 2016.
Income Taxes
 
2016
 
2015
(In thousands, except percentages)
Income Tax Benefit
 
Effective
Tax Rate
 
Income Tax Provision
 
Effective
Tax Rate
(Benefit from) Provision for income taxes
$
(16
)
 
0.1
%
 
$
234

 
(0.5
)%
The benefit from income taxes for 2016 was $16 thousand on a pretax loss of $12.3 million , an effective tax rate of 0.1% . For 2015 , the provision for income taxes was $234 thousand on a pretax loss of $43.6 million , an effective rate of (0.5)% . The change is primarily due to income from foreign jurisdictions offset by a benefit arising from pretax losses in the Topwin subsidiary for 2016. The provision for income taxes is lower than the statutory rate primarily due to pre-tax losses and the valuation allowance currently maintained against net deferred tax assets. The majority of the income tax paid relates to foreign jurisdictions and the change was primarily a result of the level of income recognized in each foreign location. Our effective tax

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rate is subject to fluctuation based upon the mix of income and relative tax rates between jurisdictions, and the occurrence and timing of numerous discrete events such as changes in tax laws or their interpretations, extensions or expirations of research and experimentation credits, closure of tax years subject to examination, finalization of income tax returns, the relationship of fixed deductions to overall changes in estimated and actual pretax income or loss and the tax jurisdictions where income or loss is generated. Based on currently available information, we are not aware of any further discrete events which are likely to occur that would have a material effect on our financial position, expected cash flows or results of operations.
Fiscal Year Ended March 28, 2015 Compared to Fiscal Year Ended March 29, 2014
Net Sales
The following table presents net sales information by operating segment and product:
   
2015
 
2014
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Component Processing
 
 
 
 
 
 
 
Interconnect Products (IP)
$
66,913

 
42.1
%
 
$
81,180

 
44.8
%
Component Test Products (CTP)
19,099

 
12.0

 
24,441

 
13.5

Semiconductor Products (SP)
38,586

 
24.2

 
35,780

 
19.7

 
124,598

 
78.3

 
141,401

 
78.1

Micromachining
 
 
 
 
 
 
 
Micromachining Products (MP)
34,520

 
21.7

 
39,766

 
21.9

 
34,520

 
21.7

 
39,766

 
21.9

Net Sales
$
159,118

 
100.0
%
 
$
181,167

 
100.0
%
Net sales for 2015 decreased $22.0 million or 12% from net sales for 2014 . By segment, Component Processing sales decreased by $16.8 million or 12% and Micromachining sales decreased by $5.2 million or 13%, compared to 2014.
IP sales for 2015 decreased $14.3 million or 18% compared to 2014. The decrease in IP sales was primarily driven by backlog reduction in 2014 of flex interconnect systems compared to an increase in backlog in 2015 and lower sales to Korea.
CTP sales for 2015 decreased $5.3 million or 22% compared to 2014 . The decrease was primarily driven by continued customer utilization of existing capacity for MLCC systems in 2015, partially offset by an increase in tooling and consumables parts revenue.
SP sales for 2015 increased $2.8 million or 8% compared to 2014 . The increase in SP revenues was primarily driven by increased sales of circuit trim, wafer trim and service activity from the Semiconductor Systems business, which was acquired during the first quarter of 2014.
MP sales for 2015 decreased $5.2 million or 13% compared to 2014, primarily as a result of reduced shipments of advanced microfabrication systems as our largest customer continued to move towards a reuse program and with no new large design wins.
The following table presents net sales information by geographic region:
   
2015
 
2014
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Asia
$
124,049

 
78.0
%
 
$
136,336

 
75.3
%
Americas
18,067

 
11.4

 
31,596

 
17.4

Europe
17,002

 
10.7

 
13,235

 
7.3

 
$
159,118

 
100.0
%
 
$
181,167

 
100.0
%
In 2015 , net sales to Asia decreased by $12.3 million due to higher shipments of flex interconnect systems to Korea in 2014 which did not repeat at the same level in 2015, partially offset by increased system sales for circuit trim and wafer trim. Net sales to Americas decreased by $13.5 million primarily due to reduced sales in our Semiconductor Systems business and to a lesser extent, by reduced MLCC system sales. Europe sales increased by $3.8 million primarily due to increased wafer and circuit trim sales.

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Gross Profit by operating segment
   
2015
 
2014
(In thousands, except percentages)
Gross Profit
 
% of Sales
 
Gross Profit
 
% of Sales
Component Processing
$
50,970

 
40.9
%
 
$
63,914

 
45.2
%
Micromachining
6,383

 
18.5

 
12,175

 
30.6

Corporate and other
(2,672
)
 

 
(16,218
)
 

 
$
54,681

 
34.4
%
 
$
59,871

 
33.0
%
Gross profit was $54.7 million in 2015 compared to $59.9 million in 2014 . Overall gross profit was impacted by lower sales combined with increased warranty costs, partially offset by lower inventory write-offs associated with discontinued products.
Gross margin increased to 34.4% in 2015 compared to 33.0% in 2014 . The increase was primarily the result of lower inventory write-offs associated with discontinued products in 2014, partially offset by lower volumes on relatively fixed manufacturing expenses.
Gross margin for Component Processing decreased from 45.2% to 40.9% primarily due to lower volumes on fixed manufacturing costs, higher warranty costs, and unfavorable product mix.
Gross margin for Micromachining decreased from 30.6% to 18.5% primarily due to lower volumes on fixed manufacturing costs.
Corporate and other cost of sales include expenses not allocated to our two operating segments, including stock compensation, amortization of intangibles, restructuring and other expenses. The change in 2015 is due to lower inventory write-offs associated with discontinued products and lower amortization expense.
Operating Expenses
   
2015
 
2014
(In thousands, except percentages)
Expense
 
% of Net Sales
 
Expense
 
% of Net Sales
Selling, general and administration
$
49,301

 
31.0
%
 
$
51,598

 
28.5
 %
Research, development and engineering
35,166

 
22.1

 
37,839

 
20.9

Impairment of goodwill
7,889

 
5.0

 

 

Restructuring costs
2,069

 
1.3

 
1,070

 
0.6

Gain on sale of property and equipment, net

 

 
(1,301
)
 
(0.7
)
Gain on acquisition of Semiconductor Systems business

 

 
(499
)
 
(0.3
)
 
$
94,425

 
59.3
%
 
$
88,707

 
49.0
 %

Selling, general and administration
Selling, general and administration (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 2015 decreased $2.3 million compared to 2014 . This decrease was primarily attributable to lower expenses for share-based compensation, travel, facilities and training. These decreases were partially offset by higher audit, legal and variable pay costs. Share-based compensation expenses were lower primarily due to the lower quantity of restricted stock unit awards granted, combined with lower fair value of new awards granted in 2015.
Research, Development and Engineering
Research, development and engineering (RD&E) expenses are primarily comprised of labor and other employee-related expenses, professional fees, project materials, equipment and facilities costs. RD&E expenses for 2015 decreased $2.7 million compared to 2014 . This decrease was primarily due to lower expenses for project materials, patent legal fees, travel and consulting, partially offset by higher labor and variable pay costs.
Impairment of goodwill
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

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Company to reassign its reported goodwill to its new reporting units based on the relative fair value of the respective reporting units. The carrying value of goodwill by reporting unit prior to March 28, 2015 was approximately $7.7 million for Topwin, $6.3 million for Component Processing and $1.6 million for Micromachining. As a result of the reorganization and analysis at a segment and reporting unit level, any goodwill allocated to Component Processing and Micromachining was no longer supported by the estimated fair value of the respective businesses and a $7.9 million impairment was recognized in 2015. 
Restructuring Costs
In 2015, as a part of the Company’s 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 restructuring costs of $2.1 million incurred in 2015 were comprised primarily of employee severance and related benefits for the Chelmsford restructuring plan.
Restructuring costs for 2014 were $1.1 million , primarily due to $0.8 million of contractual payments to our former Chief Executive Officer and $0.3 million in accelerated depreciation charges on certain assets that are no longer being utilized.
Gain on Sale of Property and Equipment, net
In 2014, we sold a portion of land and a building at our Portland, Oregon campus for $3.7 million resulting in a pre-tax gain of $1.3 million .
Gain on acquisition of Semiconductor Systems Business
The gain on our acquisition of Semiconductor Systems business was $0.5 million in 2014. This purchase resulted in an overall gain as the estimated fair value of the assets purchased was in excess of the total purchase consideration, primarily due to the recognition of certain intangible assets, comprised of developed technology and order backlog.
Share-Based Compensation
The table of operating expenses shown above also includes $3.9 million and $5.4 million of share-based compensation expense for 2015 and 2014 , respectively. The decrease was primarily due to the lower quantity of restricted stock unit awards granted, combined with lower fair value of new awards granted in 2015.
Non-operating Income and Expense, net
 
2015
 
2014
(In thousands, except percentages)
Interest and Other Expense, net
 
% of Net Sales
 
Interest and Other Expense, net
 
% of Net Sales
Loss and other-than-temporary impairment of cost method investment
(4,263
)
 
(2.7
)%
 
(9,703
)
 
(5.4
)%
Interest and other income, net
430

 
0.3

 
113

 
0.1

Total non-operating (expense) income
$
(3,833
)
 
(2.4
)%
 
$
(9,590
)
 
(5.3
)%
Other-than-temporary impairment of cost method investment
As of March 30, 2013, the Company had made a total investment in the equity of OmniGuide, Inc., of $9.0 million. This investment is accounted for as a cost method investment. In the second quarter of 2014, the Company invested an additional $5.0 million in OmniGuide Series F Preferred Stock. As this Series F Preferred Stock round of equity financing was priced below previous rounds, it was considered a triggering event and the Company recorded a $3.6 million impairment charge on its Series D and Series E investments at that time. In the fourth quarter of 2014, further triggering events were identified due to poor operating results through the end of the year combined with decreasing cash levels. As a result, the Company performed an updated valuation of these investments and recorded an additional impairment of $6.1 million, for a total other-than-temporary impairment of $9.7 million in 2014. Remaining carrying value of this cost method investment as of March 29, 2014 was $4.3 million.
In the fourth quarter of 2015, OmniGuide's lender exercised its right to convert the outstanding obligations owed to it by OmniGuide into 100% of OmniGuide's outstanding equity under the applicable financing agreements. This action resulted in an immediate and total impairment of the Company's ownership of OmniGuide, and accordingly the Company recorded a loss of $4.3 million in the fourth quarter of 2015, resulting in zero carrying value on its Consolidated Balance Sheets at March 28, 2015 .

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Interest and Other Income (Expense), net
Interest and other income (expense), net, consists of interest income and expense, market gains and losses on assets held in employees’ deferred compensation accounts, realized and unrealized foreign exchange gains and losses, bank charges, investment management fees, and other miscellaneous non-operating items. Interest and other income, net was $0.4 million in 2015 compared to $0.1 million in 2014 . This increase was primarily attributable to a $0.6 million gain on liquidation of a foreign subsidiary, which was partially offset by lower interest yields on our investments and market losses on assets held for our deferred compensation plan.
Income Taxes
 
2015
 
2014
(In thousands, except percentages)
Income Tax Provision
 
Effective
Tax Rate
 
Income Tax Benefit
 
Effective
Tax Rate
Provision for (Benefit from) income taxes
$
234

 
(0.5
)%
 
$
(92
)
 
0.2
%
The provision for income taxes for 2015 was $0.2 million on a pretax loss of $43.6 million , an effective tax rate of (0.5)% . For 2014 , the benefit from income taxes was $0.1 million on a pretax loss of $38.4 million , an effective rate of 0.2% . The change in provision for income taxes was primarily due to increased tax expense incurred on our foreign income, partially offset by US tax refunds resulting from the conclusion of a tax audit, a favorable assessment related to the legal settlement in Taiwan and refundable credits. Our effective tax rate is subject to fluctuation based upon the mix of income and relative tax rates between jurisdictions, and the occurrence and timing of numerous discrete events such as changes in tax laws or their interpretations, extensions or expirations of research and experimentation credits, closure of tax years subject to examination, finalization of income tax returns, the relationship of fixed deductions to overall changes in estimated and actual pretax income or loss and the tax jurisdictions where income or loss is generated. Based on currently available information, we are not aware of any further discrete events which are likely to occur that would have a material effect on our financial position, expected cash flows or results of operations.
Financial Condition and Liquidity
At April 2, 2016 , our principal sources of liquidity were cash and cash equivalents of $42.4 million , short-term investments of $15.3 million and accounts receivable of approximately $42.8 million in addition to amounts available under our credit facility. At April 2, 2016 , we had a current ratio of 4.11 and had no outstanding amounts under our credit facility. Working capital of $126.7 million increased $2.1 million compared to the March 28, 2015 balance of $124.6 million .
During 2016, the Company generated $4.7 million in positive operating cash flows, primarily the result of improved operating results. The Company used $11.1 million in cash to purchase additional investments to increase returns on excess cash balances, representing the primary investing cash flow.
In March 2015, the Company entered into a loan and security agreement ("Loan Agreement") with Silicon Valley Bank. 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 April 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. 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 significantly, 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.
As of April 2, 2016 , we have permanently reinvested $37.0 million of foreign earnings primarily related to manufacturing operations in Singapore and China (Topwin). The Company’s net investment exposure in foreign subsidiaries translated into U.S. dollars using the period-end exchange rates at April 2, 2016 and March 28, 2015 was approximately $56.9 million and $64.3 million, respectively. The potential loss in fair value resulting from a hypothetical 10% adverse change in foreign exchange rates would be approximately $5.7 million and $6.4 million at April 2, 2016 and March 28, 2015 , respectively. Foreign exchange rate gains or losses on foreign investments as of April 2, 2016 were reflected as a cumulative translation adjustment, net of tax, and do not affect the Company’s results of operations.
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 has not paid any dividends in 2016.
On December 9, 2011, the Board of Directors authorized a share repurchase program totaling $20 million to acquire shares of the Company’s outstanding common stock. The repurchases are to be made at management’s discretion in the open

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market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and other factors. In the first quarter of 2015 the Company repurchased 207,738 shares for $1.5 million in cash under this authorization at an average price of $7.01 per share, calculated inclusive of commissions and fees. The Company did not repurchase any shares during the subsequent quarters of 2015 or in 2016. In 2014 the Company repurchased 19,832 shares for $0.2 million at an average price of $9.65 per share. The Company has repurchased a total of 227,570 shares to date under this authorization as a part of its publicly announced plan. There is no fixed completion date for the repurchase program.
Our business requires greater levels of working capital than similar sized businesses in some other industries due to the value of the inventory we need to acquire to fill orders and the large accounts receivable we may hold due to the relatively high unit sales prices of our products. If orders increase we expect that working capital demands will also increase for some period before the associated cash flows are realized.
We believe that our existing cash, cash equivalents, short-term investments and our available credit facility are adequate to fund our operations and contractual obligations for at least the next twelve months.
Contractual Obligations
The contractual commitments below represent our estimates of future payments under these obligations. The actual payments may differ from these estimates due to changes in our business needs, cancellation provisions, and other factors. We cannot provide certainty regarding the timing of the payment schedule and the amounts of payments.
The following table summarizes our contractual obligations as of April 2, 2016 , by the fiscal year in which they are due:
(In thousands)
Total
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
Purchase commitments
$
21,580

 
$
21,280

 
$
300

 
$

 
$

 
$

 
$

Operating leases
7,312

 
3,032

 
2,344

 
1,589

 
215

 
132

 

 
$
28,892

 
$
24,312

 
$
2,644

 
$
1,589

 
$
215

 
$
132

 
$

The operating lease amounts include our contractual facilities lease obligation at our Chelmsford, Massachusetts plant, excluding the estimated rental income from the sub lease of this facility . The operations at Chelmsford manufacturing plant ceased in the third quarter of 2016 as a part of the Company’s plan to streamline its manufacturing and development activities.
This table does not include $10.4 million of unrecognized tax benefits due to the uncertainty with respect to the timing of future cash flows as of April 2, 2016 . We are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities and the total amounts of income tax payable and the timing of such tax payments may depend on the resolution of current and future tax examinations which cannot be estimated.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our estimates are based on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Our critical accounting policies and estimates include the following:
Revenue recognition;
Inventory valuation;
Product warranty reserves;
Allowance for doubtful accounts;
Accrued restructuring costs;
Share-based compensation;
Income taxes including the valuation of deferred tax assets;
Fair value measurements;
Valuation of long-lived assets; and
Valuation of goodwill.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and

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risk of loss generally pass to the customer at the time of delivery of the product to a common carrier. Revenue is recognized upon such delivery, provided that fulfillment of acceptance criteria can be demonstrated prior to shipment. Where the acceptance criteria cannot be demonstrated prior to shipment, or in the case of substantially new products, revenue is deferred until acceptance has been received. For multiple element arrangements, the relative fair values of any undelivered elements are deferred until the elements are delivered and acceptance criteria are met. Revenues are recorded net of taxes collected which are required to be submitted to government authorities. Installation services are not essential to the functionality of the delivered equipment and installation revenue is deferred until installation is complete. Historically, neither the costs of installation accrued nor the fair value of installation service revenue deferred has been material.
Revenues associated with sales to customers under local contracts in Japan are recognized upon title transfer, which generally occurs upon customer acceptance. Revenues related to spare parts and consumable sales are generally recognized upon shipment. Revenues related to maintenance and service contracts are generally recognized ratably over the duration of the contracts.
Inventory Valuation
We regularly evaluate the carrying value of inventory based on a combination of factors including, but not limited to, the following: product life cycle, forecasted sales or usage, historical usage rates, estimated service period, product end-of-life dates, estimated current and future market values, service inventory requirements and new product introductions. Purchasing requirements and alternative uses for the inventory are explored within these processes to mitigate inventory exposure. Inventory materials with quantities in excess of forecasted usage are reviewed quarterly for obsolescence. Obsolescence write-downs are typically caused by engineering change orders or product life cycle changes.
Research and development product costs are generally expensed as incurred. Engineering materials that are expected to provide future value are generally classified as raw materials inventory.
Finished goods are reviewed quarterly by product marketing and operating personnel to determine if inventory carrying value exceeds market selling prices. When necessary, we record inventory write-downs as an increase to cost of sales based on the above factors and take into account worldwide quantities on hand, product life cycle and forecasted demand into our analysis. Additionally, from time to time, we make strategic decisions to exit or alter product lines which may result in an inventory write-down. If circumstances related to our inventories change, our estimates of the value of inventory could materially change.
Product Warranty Reserves
We evaluate obligations related to product warranties quarterly. A standard warranty is provided on most of our products over a specified period of time, generally twelve to twenty-four months, at no cost to our customers. Warranty charges are comprised of costs to service the warranty, including labor to repair the system and replacement parts for defective items, as well as other costs incidental to the repairs. Warranty charges are recorded net of any cost recoveries resulting from either successful repair of damaged parts or from warranties offered by our suppliers for defective components. Using historical data, we estimate average warranty cost per system or part type and record the provision for such charges as an element of cost of goods sold upon recognition of the related revenue. Additionally, the overall warranty accrual balance is separately analyzed using the remaining warranty periods outstanding on systems and items under warranty, and any resulting changes in estimates are recorded as an adjustment to cost of sales. If circumstances change, or if a significant change in warranty-related incidents occurs, the impact of the change in the warranty accrual could be material. Current portion of accrued product warranty is included on the Consolidated Balance Sheets as a component of accrued liabilities and non-current portion is included on the Consolidated Balance Sheets as a component of other liabilities.
Allowance for Doubtful Accounts
Credit limits are established by reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of customers to establish and modify their credit limits. On certain foreign sales, we require letters of credit. We regularly evaluate the collectability of our trade receivable balances based on a combination of factors. When a customer’s account becomes past due, we contact the customer to determine the cause. If we determine that a customer may be unable to fully meet its financial obligation to us, such as in the case of a bankruptcy filing or other material events impacting its business, we record a specific reserve for bad debt to reduce the related receivable to the amount we expect to recover based on all available information then available. If circumstances change related to specific customers, our estimates of the recoverability of receivables could materially change. We record estimated bad debt expense as an increase to selling, general and administration expenses.

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Accrued Restructuring Costs
We have engaged, and may continue to engage, in restructuring actions, which require us to make estimates in certain areas including expenses for severance and other employee separation costs. Because we have a history of paying severance benefits, expenses and liabilities associated with exit or disposal activities are recognized when probable and estimable. For further discussion on the restructuring activities and related charges in 2016 , refer to our discussion of “Restructuring Costs” in the “Results of Operations” section above.
Share-Based Compensation
We measure and recognize compensation expense for all share-based payment awards granted to our employees and directors, including employee stock options, stock-settled stock appreciation rights (SARs), non-vested restricted stock units and purchases under the employee stock purchase plan, based on the estimated fair value of the award on the grant date. We use the Black-Scholes valuation model as our method of valuation for stock option and SAR awards.
The use of the Black-Scholes valuation model to estimate the fair value of stock option and SAR awards requires us to make assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates based on our historical data, but these estimates involve inherent uncertainties and the recognition of expense could be materially different in the future.
Compensation expense is only recognized on awards that are estimated to ultimately vest. Therefore, based on historical forfeiture rates and patterns, the estimated future forfeitures are factored into the compensation expense to be recognized over the vesting period. We update our forfeiture estimates at least annually and recognize any changes to accumulated compensation expense in the period of change. If actual forfeitures differ significantly from our estimates, our results of operations could be materially impacted.
Income Taxes
We are subject to income taxes in the United States and in numerous foreign jurisdictions and in the ordinary course of business, there are transactions and calculations where the ultimate tax determination is uncertain. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to the unrecognized tax benefits in income tax expense.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those assets and liabilities are recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. When management determines that it is more likely than not that a deferred tax asset will not be fully realized, a valuation allowance is established to reduce deferred tax assets to the amount expected to be realized. As a result, at the end of fiscal 2013 we recorded a valuation allowance of $46.9 million against our deferred tax assets and attributes. The valuation allowance against our net deferred tax assets and attributes was $93.9 million and $87.6 million at April 2, 2016 and March 28, 2015, respectively. Should management’s assumptions and expectations be inaccurate, our financial condition and results of operations could be adversely affected in future periods.

On November 20, 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), which requires entities to present deferred tax assets (DTAs) and deferred tax liabilities (DTLs) as noncurrent in a classified balance sheet. ASU 2015-17 will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016, with early adoption allowed. During the fourth quarter of Fiscal 2016, we elected to prospectively adopt ASU 2015-17, thus reclassifying $0.2 million of current DTAs net of valuation allowance to noncurrent on the accompanying consolidated balance sheet.
Fair Value Measurements
Fair value is defined under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820 “Fair Value Measurements and Disclosures” (ASC Topic 820). When determining fair value on the financial assets and liabilities, we consider the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
Valuation of Long-Lived Assets     
The assumptions and estimates used to determine future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by various factors, including external factors such as

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industry and economic trends, and internal factors such as changes in our business strategy and our forecasts for specific product lines.
Identified Intangibles
We assess the recoverability of purchased finite-lived intangible assets whenever events or changes in circumstances indicate that an impairment may exist. Recoverability of finite-lived intangible assets is measured by comparing the carrying amount of the asset to the future undiscounted cash flows that the asset is expected to generate. There were no events or circumstances during 2016 that would indicate the carrying value of our long-lived assets may not be recoverable, other than a $0.4 million intangible write-off associated with Topwin developed technology.
We perform an annual impairment assessment in the fourth quarter of each year for indefinite-lived intangible assets, or more frequently if indicators of potential impairment exist, to determine whether it is more likely than not that the carrying value of the assets may not be recoverable. Recoverability of indefinite-lived intangible assets is measured by comparing the carrying amount of the asset to the future discounted cash flows that the asset is expected to generate. If we determine that an individual asset is impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.
Property, Plant and Equipment
Property, plant and equipment is reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to estimated future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Valuation of Goodwill
Goodwill is recorded when the purchase price for an acquisition exceeds the estimated fair value of the net tangible and identified intangible assets acquired. The carrying value of goodwill was $7.4 million as of April 2, 2016 and $7.7 million as of March 28, 2015 . We perform an annual impairment assessment in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine whether the fair value of the reporting unit is less than its carrying value. The assessment of whether goodwill is impaired is sensitive to many financial and valuation assumptions, including projections of future performance, the determination of weighted average cost of capital, and estimates of terminal value. Our projections include assumptions regarding the adoption of new products, expected margins, and other factors, and a significant deterioration or deviation between expectations and actual performance may trigger impairment. Fair value is determined based on the present value of estimated cash flows using available information regarding expected cash flows of the reporting unit, discount rates and the expected long-term cash flow growth rates. Discount rates are determined based on the cost of capital. The estimated fair value of the Topwin reporting unit exceeded the carrying value of the reporting unit by approximately $1.7 million or over 18%.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The primary objectives of our investment activities are to preserve principal and maintain liquidity to meet operating needs. To achieve these objectives, we maintain an investment portfolio of cash, cash equivalents, and investments in a variety of securities, including commercial paper, corporate bonds and U.S. government agency notes.
Interest Rate Risk
Our investment securities are subject to interest rate risk and will decline in value if interest rates increase. The majority of these securities are classified as available-for-sale securities; therefore, the impact on fair value of interest rate changes is reflected as a separate component of shareholders’ equity. Due to the short-term maturity of our investment portfolio, an immediate 10% change in interest rates would not have a material effect on the fair value of our invested assets.
Investment Risk
Our marketable securities are classified as available-for-sale securities measured at fair value. The market value of our investments is influenced by market risks, liquidity risk and the credit worthiness of underlying issuers of our investment. We strive to minimize the investment risk by investing in high quality securities and by utilizing experienced and high credit quality financial institutions to manage the investment portfolio.
Foreign Currency Exchange Rate Risk
We purchase derivative financial instruments on a limited basis and do not use them for trading purposes. We do, however, use derivatives to manage well-defined foreign currency risks. We enter into forward exchange contracts to hedge the value of material non-functional currency monetary asset and liability balances. The net effect of an immediate 10% change in

35

Table of Contents

exchange rates on the forward exchange contracts and the underlying hedged positions would not be material to our financial position or the results of our operations.
The table below summarizes, by currency, the notional amounts of our forward exchange contracts in U.S. dollars as of April 2, 2016 and March 28, 2015 . The “bought” amounts represent the net U.S. dollar equivalents of commitments to purchase foreign currencies, and the “sold” amounts represent the net U.S. dollar equivalents of commitments to sell foreign currencies. The foreign currency amounts have been translated into a U.S. dollar equivalent value using the exchange rates at the reporting date.
 
Bought (Sold)
(In thousands)
2016
 
2015
Japanese Yen
$
5,079

 
$
4,263

Euro
12,073

 
10,354

New Taiwan Dollar
(117
)
 
(831
)
Korean Won
197

 
(3,000
)
British Pound
(2,350
)
 
(2,906
)
Chinese Renminbi
(1,859
)
 
(4,278
)
Singapore Dollar
53

 
(598
)
Canadian Dollar

 
(159
)
 
$
13,076

 
$
2,845


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Table of Contents

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

To the Board of Directors and Shareholders of
Electro Scientific Industries, Inc.

Portland, Oregon
We have audited the accompanying consolidated balance sheet of Electro Scientific Industries, Inc. and subsidiaries (the "Company") as of April 2, 2016, and the related consolidated statements of operations, comprehensive loss, shareholders' equity, and cash flows for the fiscal year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Electro Scientific Industries, Inc. and subsidiaries as of April 2, 2016, and the results of their operations and their cash flows for the fiscal year ended April 2, 2016, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of April 2, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 14, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP
Portland, Oregon
June 14, 2016

37


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Shareholders
Electro Scientific Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Electro Scientific Industries, Inc. and subsidiaries as of March 28, 2015, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the years in the two-year period ended March 28, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Electro Scientific Industries, Inc. and subsidiaries as of March 28, 2015 and the results of their operations and their cash flows for each of the years in the two-year period ended March 28, 2015, in conformity with U.S. generally accepted accounting principles.

/s/KPMG LLP
Portland, Oregon
June 26, 2015


38


ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of April 2, 2016 and March 28, 2015
(In thousands)
2016
 
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
42,413

 
$
50,994

Short-term investments
15,252

 
6,612

Trade receivables, net of allowances of $1,039 and $712
42,770

 
42,295

Inventories, net
60,470

 
56,637

Shipped systems pending acceptance
1,181

 
2,516

Deferred income taxes, net

 
178

Other current assets
5,340

 
6,090

Total current assets
167,426

 
165,322

Non-current assets:
 
 
 
Property, plant and equipment, net of accumulated depreciation of $107,910 and $102,901
24,543

 
25,858

Deferred income taxes, net
914

 
174

Goodwill
7,445

 
7,717

Acquired intangible assets, net of accumulated amortization of $21,146 and $19,880
7,146

 
8,958

Other assets
12,626

 
13,211

Total assets
$
220,100

 
$
221,240

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
16,061

 
$
9,514

Accrued liabilities
18,334

 
18,666

Deferred income taxes, net

 
173

Deferred revenue
6,373

 
12,376

Total current liabilities
40,768

 
40,729

Non-current liabilities:
 
 
 
Income taxes payable
1,266

 
1,176

Deferred income taxes, net
234

 
443

Other liabilities
7,801

 
1,571

Total liabilities
50,069

 
43,919

Commitments and contingencies (Note 19 )


 


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

 

Common stock, without par value; 100,000 shares authorized; 31,613 and 30,704 issued and outstanding
195,024

 
189,134

Accumulated deficit
(23,998
)
 
(11,741
)
Accumulated other comprehensive (loss) income
(995
)
 
(72
)
Total shareholders’ equity
170,031

 
177,321

Total liabilities and shareholders’ equity
$
220,100

 
$
221,240

See Accompanying Notes to Consolidated Financial Statements


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Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended April 2, 2016 March 28, 2015 and March 29, 2014
(In thousands, except per share amounts)
2016
 
2015
 
2014
Net sales:


 


 


Systems
$
142,957

 
$
111,603

 
$
142,054

Service
41,434

 
47,515

 
39,113

Total net sales
184,391

 
159,118

 
181,167

Cost of sales:
 
 
 
 
 
Systems
89,169

 
78,195

 
100,870

Service
22,519

 
26,242

 
20,426

Total cost of sales
111,688

 
104,437

 
121,296

Gross profit
72,703

 
54,681

 
59,871

Operating expenses:
 
 
 
 
 
Selling, general and administration
49,753

 
48,525

 
51,598

Research, development and engineering
32,400

 
35,166

 
37,839

Restructuring costs
2,824

 
2,069

 
1,070

Acquisition and integration costs
194

 
776

 

Impairment of goodwill

 
7,889

 

Gain on sale of property and equipment, net

 

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

 

 
(499
)
Net operating expenses
85,171

 
94,425

 
88,707

Operating loss
(12,468
)
 
(39,744
)
 
(28,836
)
Non-operating income (expense):
 
 
 
 
 
Loss and other-than-temporary impairment of cost method investment

 
(4,263
)
 
(9,703
)
Interest and other income, net
195

 
430

 
113

Total non-operating income (expense)
195

 
(3,833
)
 
(9,590
)
Loss before income taxes
(12,273
)
 
(43,577
)
 
(38,426
)
(Benefit from) provision for income taxes
(16
)
 
234

 
(92
)
Net loss
$
(12,257
)
 
$
(43,811
)
 
$
(38,334
)
Net loss per share—basic
$
(0.39
)
 
$
(1.43
)
 
$
(1.28
)
Net loss per share—diluted
$
(0.39
)
 
$
(1.43
)
 
$
(1.28
)
Weighted average number of shares—basic
31,411

 
30,611

 
29,974

Weighted average number of shares—diluted
31,411

 
30,611

 
29,974

Cash dividends paid per outstanding common share
$

 
$
0.24

 
$
0.32


See Accompanying Notes to Consolidated Financial Statements


40

Table of Contents


ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the years ended April 2, 2016 March 28, 2015 and March 29, 2014

(In thousands)
2016
 
2015
 
2014
Net loss
$
(12,257
)
 
$
(43,811
)
 
$
(38,334
)
Other comprehensive (loss) income:
 
 
 
 
 
Foreign currency translation adjustment, net of taxes of $0, $0 and $21
(922
)
 
(384
)
 
37

Accumulated other comprehensive (loss) income related to benefit plan obligation, net of taxes of ($21), ($13), and $19
(4
)
 
(25
)
 
22

Net unrealized (loss) gain on available-for-sale securities, net of taxes of $1, ($5), and $5
3

 
(15
)
 
9

Comprehensive loss
$
(13,180
)
 
$
(44,235
)
 
$
(38,266
)

See Accompanying Notes to Consolidated Financial Statements

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Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended April 2, 2016 March 28, 2015 and March 29, 2014

 
Common Stock
 
Retained
Earnings (Accumulated Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Shareholders’
Equity
(In thousands)
Shares
 
Amount
 
Balance at March 30, 2013
29,583

 
$
176,631

 
$
87,228

 
$
283

 
$
264,142

Cash dividends paid ($0.32 per outstanding common share)

 

 
(9,558
)
 

 
(9,558
)
Employee stock plans
592

 
6,753

 

 

 
6,753

Share repurchases
(20
)
 
(191
)
 

 

 
(191
)
Net loss

 

 
(38,334
)
 

 
(38,334
)
Other comprehensive income
 
 
 
 
 
 
69

 
69

Balance at March 29, 2014
30,155

 
183,193

 
39,336

 
352

 
222,881

Cash dividends paid ($0.24 per outstanding common share)

 

 
(7,266
)
 

 
(7,266
)
Employee stock plans
757

 
4,555

 

 

 
4,555

Share repurchases
(208
)
 
(1,456
)
 

 

 
(1,456
)
Business acquisition, equity interest

 
2,842

 

 

 
2,842

Net loss

 

 
(43,811
)
 

 
(43,811
)
Other comprehensive loss
 
 
 
 
 
 
(424
)
 
(424
)
Balance at March 28, 2015
30,704

 
189,134

 
(11,741
)
 
(72
)
 
177,321

Employee stock plans
909

 
5,827

 

 

 
5,827

Business acquisition (Note  6 )

 
63

 

 

 
63

Net loss

 

 
(12,257
)
 

 
(12,257
)
Other comprehensive loss
 
 
 
 
 
 
(923
)
 
(923
)
Balance at April 2, 2016
31,613

 
$
195,024

 
$
(23,998
)
 
$
(995
)
 
$
170,031



See Accompanying Notes to Consolidated Financial Statements

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Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended April 2, 2016 March 28, 2015 and March 29, 2014
(In thousands)
2016
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
Net loss
$
(12,257
)
 
$
(43,811
)
 
$
(38,334
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities (net of acquisitions):
 
 
 
 
 
Depreciation and amortization
7,343

 
7,817

 
7,642

Amortization of acquired intangible assets
1,376

 
1,502

 
2,985

Share-based compensation expense
5,103

 
4,542

 
6,105

Provision for doubtful accounts
329

 
53

 

Loss (gain) on sale of property and equipment, net
862

 
(6
)
 
(1,138
)
Gain on acquisition of Semiconductor Systems business

 

 
(499
)
Loss and other-than-temporary impairment of cost method investment

 
4,263

 
9,703

Impairment of goodwill

 
7,889

 

(Increase) decrease in deferred income taxes
(877
)
 
(54
)
 
4,377

Changes in operating accounts, net of acquisitions:
 
 
 
 
 
Decrease (increase) in trade receivables, net
2,984

 
(7,965
)
 
(2,195
)
(Increase) decrease in inventories
(7,303
)
 
1,091

 
7,567

Decrease (increase) in shipped systems pending acceptance
1,631

 
(462
)
 
(1,047
)
Decrease (increase) in other current assets
1,154

 
(200
)
 
(728
)
Increase (decrease) in accounts payable and accrued liabilities
9,048

 
(4,013
)
 
(13,694
)
(Decrease) increase in deferred revenue
(4,691
)
 
1,861

 
140

Net cash provided by (used in) operating activities
4,702

 
(27,493
)
 
(19,116
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
Purchase of investments
(380,841
)
 
(414,705
)
 
(268,132
)
Proceeds from sales and maturities of investments
369,700

 
450,507

 
294,182

Purchase of property, plant and equipment
(3,693
)
 
(5,374
)
 
(7,583
)
Proceeds from sale of property, plant and equipment
232

 
154

 
3,657

Decrease (increase) in other assets
790

 
(2,638
)
 
438

Cash paid for business acquisitions, net of cash acquired

 
(7,737
)
 
(9,731
)
Minority equity investment

 

 
(5,000
)
Net cash (used in) provided by investing activities
(13,812
)
 
20,207

 
7,831

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
Proceeds from issuance of common stock
1,362

 
1,863

 
2,237