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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended August 31, 2002

Commission File Number: 0-12853

ELECTRO SCIENTIFIC INDUSTRIES, INC.

(an Oregon corporation)

93-0370304
(I.R.S. Employer Identification No.)

13900 N.W. Science Park Drive, Portland, Oregon 97229

Registrant’s telephone number: (503) 641-4141

Registrant’s web address: www.esi.com

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|

The number of shares outstanding of the Registrant’s Common Stock at August 31, 2002 was 27,712,357 shares.



ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

  Page No.
 
Part I.   Financial Information 2
       
Item 1. Consolidated Financial Statements (Unaudited) 2
       
             Consolidated Balance Sheets
             August 31, 2002 and June 1, 2002* 		2
       
             Consolidated Statements of Operations 4
             Three Months ended
             August 31, 2002 and September 1, 2001
       
             Consolidated Statements of Cash Flows
             Three Months Ended August 31, 2002
             and September 1, 2001 		5
       
             Notes to Consolidated Financial Statements 6
       
Item 2. Management’s Discussion and Analysis of Financial
             Condition and Results of Operations 		11
       
Item 3. Market Risks 23
       
Item 4. Controls & Procedures 23
       
Part II. Other Information 24
       
Item 1. Legal Proceedings 24
       
Item 2. Changes in Securities and Use of Proceeds 24
       
Item 6. Exhibits and Reports on Form 8K 24
       
Signature 25
       
Certifications 26

* Audited

1



ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

Part I. Financial Information

Item 1. Consolidated Financial Statements

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)


Aug. 31, 2002 June 1, 2002*
 
 
 
ASSETS        
     
Current assets:
   Cash and cash equivalents $ 38,321        $ 29,435  
   Marketable securities   190,865     181,019  
   Restricted securities   6,308     6,353  
 
      Total cash and securities   235,494     216,807  
       
   Trade receivables, net   58,906     55,810  
   Income tax refund receivable   8,423     13,948  
   Inventory   63,018     63,690  
   Deferred income taxes   7,630     7,630  
   Other current assets   5,810     5,260  
 
      Total current assets   379,281     363,145  
 
       
Long-term marketable securities   59,750     73,445  
Long-term restricted securities   9,019     12,047  
             
Property, plant and equipment, at cost   97,202     96,233  
   Less - accumulated depreciation   (39,206 )   (37,449 )
 
      Net property, plant and equipment   57,996     58,784  
 
       
Deferred income taxes   —     882  
Other assets   19,422     16,944  
 
Total assets $ 525,468   $ 525,247  
 

The accompanying notes are an integral part of these statements.

*Audited

2



ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)


Aug. 31, 2002 June 1, 2002*
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY           
     
Current liabilities:          
   Accounts payable $ 4,554   $ 3,246
   Accrued liabilities   13,700     16,062
   Deferred revenue   2,171     1,948
           Total current liabilities   20,425     21,256
           
Convertible subordinated notes   146,122     145,897
Total liabilities $ 166,547   $ 167,153
           
Shareholders’ equity:          
   Preferred stock, without par value; 1,000 shares authorized;          
       no shares issued   —     —
   Common stock, without par value;
       100,000 shares authorized;
       27,712 and 27,619 shares issued and outstanding at
       August 31, 2002 and June 1, 2002, respectively		 $ 137,291   $ 136,370
   Retained earnings   221,535     221,377
   Accumulated other comprehensive income   95     347
Total shareholders’ equity   358,921     358,094
Total liabilities and shareholders’ equity $ 525,468   $ 525,247

The accompanying notes are an integral part of these statements.

* Audited

3



ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(unaudited)


Three Months Ended
Aug. 31, 2002 Sept. 1, 2001
 
 
 
Net sales $ 42,961        $ 49,507  
             
Cost of sales   22,985     24,557  
Cost of sales - non-recurring   —     3,497  
 
      Gross margin   19,976     21,453  
             
Operating expenses:            
   Selling, service and administrative   13,180     18,987  
   Research, development and engineering   7,668     12,164  
   Non-recurring operating items   —     4,351  
 
      Total operating expenses   20,848     35,502  
 
             
Operating loss   (872 )   (14,049 )
             
Interest income   3,549     1,937  
Interest expense   (2,007 )   (27 )
Other income (expense), net   (437 )   186  
 
             
Income (loss) before income taxes   233     (11,953 )
             
Provision (benefit) for income taxes   75     (3,944 )
 
             
Net income (loss) $ 158   $ (8,009 )
 
             
Net income (loss) per share - basic $ 0.01   $ (0.30 )
 
             
Net income (loss) per share - diluted $ 0.01   $ (0.30 )
 
             
Weighted average number of shares - basic   27,650     27,172  
Weighted average number of shares - diluted   27,902     27,172  

The accompanying notes are an integral part of these statements.

4



ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


Three Months Ended
Aug. 31, 2002 Sept. 1, 2001
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:            
      Net income (loss) $ 158   $ (8,009 )
Adjustments to reconcile net income (loss) to cash provided by                 
(used in) operating activities:            
      Depreciation and amortization   2,381     2,743  
      Tax benefit of stock options exercised   57     548  
      Other non-cash charges   318     2,231  
      Deferred income taxes   397     4,859  
Changes in operating accounts:            
      (Increase) decrease in trade receivables   (1,382 )   12,907  
      (Increase) decrease in inventories   793     (2,606 )
      Decrease in income tax receivable   5,525     —  
      Increase in other current assets   (521 )   (892 )
      Decrease in current liabilities   (2,489 )   (26,736 )
Net cash provided by (used in) operating activities   5,237     (14,955 )
     
CASH FLOWS FROM INVESTING ACTIVITIES:            
Purchase of property, plant and equipment   (1,869 )   (8,641 )
Maturity of restricted securities   3,073     —  
Purchase of securities   (36,538 )   (48,517 )
Proceeds from sales of securities and maturing securities   40,613     36,365  
Increase in other assets   (2,496 )   (218 )
Net cash provided by (used in) investing activities   2,783     (21,011 )
     
CASH FLOWS FROM FINANCING ACTIVITIES:            
Proceeds from exercise of stock options and stock plans   866     1,532  
Net cash provided by financing activities   866     1,532  
     
NET CHANGE IN CASH AND CASH EQUIVALENTS   8,886     (34,434 )
     
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   29,435     68,522  
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 38,321   $ 34,088  

Cash payments for interest were $3,330 and $10 for the three months ended August 31, 2002 and September 1, 2001, respectively. Cash refunds for income taxes were $5,863 for the three months ended August 31, 2002. Cash payments for income taxes were $2,330 for the three months ended September 1, 2001.

The accompanying notes are an integral part of these statements.

5



ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data unless otherwise noted)
(unaudited)

Note 1 - Basis of Presentation

We have prepared the condensed consolidated financial statements included herein without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted in these interim statements. We believe that the interim statements include all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of results for the interim periods. These condensed consolidated financial statements are to be read in conjunction with the financial statements and notes thereto included in the Company’s 2002 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to current year presentation.

Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

Note 2 - Accounts Receivable, Net

We entered into an agreement that allows us to sell accounts receivable from selected customers at a discount to a financial institution. Receivables sold under these provisions have terms and credit risk characteristics similar to our overall receivables portfolio. Receivable sales have the effect of increasing cash and reducing accounts receivable and days sales outstanding. Accounts receivable sales under these agreements were $7.1 million for the period ended August 31, 2002 and $9.0 million for the twelve-month period ended June 1, 2002. Discounting fees were recorded as interest expense and were not material for the three months ended August 31, 2002 and September 1, 2001. At August 31, 2002, $7.8 million of receivables sold under these agreements remained outstanding, compared to $9.0 million outstanding at June 1, 2002.

Note 3 - Inventories

Inventories are principally valued at standard costs, which approximate the lower of cost (first-in, first-out) or market. Components of inventories were as follows:


  Aug. 31, 2002   June 1, 2002
 
 
Raw materials and purchased parts $ 43,298        $ 45,340
Work-in-process   1,432     1,942
Finished goods   18,288     16,408
     
Total inventories $ 63,018   $ 63,690

6



ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands except per share data unless otherwise noted)
(unaudited)

Note 4 - Earnings Per Share

We compute net income per share in accordance with Statement of Financial Accounting Standards 128, “Earnings Per Share” (SFAS 128). All earnings per share amounts in the following table are presented to conform to the SFAS 128 requirements.


Three Months Ended
Aug. 31, 2002 Sept.  1, 2001
 
 
 
             
Net income (loss) $ 158        $ (8,009 )
Weighted average number of share of common stock            
and common stock equivalents outstanding:            
   Weighted-average number of shares outstanding—basic   27,650     27,172  
   Dilutive effect of employee stock options   252     —  
   Weighted-average number of shares outstanding—diluted   27,902     27,172  
Net income (loss) per share - basic $ 0.01   $ (0.30 )
Net income (loss) per share - diluted $ 0.01   $ (0.30 )

For purposes of computing diluted earnings per share, weighted average common share equivalents do not include the following stock options or shares issuable upon conversion of our 4¼% convertible subordinated notes due 2006 because inclusion would have an anti-dilutive effect on the earnings per share calculation.


  Three Months Ended
  Aug. 31, 2002   Sept. 1, 2001
 
 
Employee stock options 3,777        4,237
4¼% convertible subordinated notes 3,947   —

Note 5 - Comprehensive Income (Loss)

The components of comprehensive income (loss), net of tax, are as follows:


Three Months Ended
Aug. 31, 2002 Sept. 1, 2001
 
 
 
             
Net income (loss) $ 158           $ (8,009 )
             
Net unrealized gain on derivative instruments   14     88  
Foreign currency translation adjustment   (493 )   2  
Net unrealized gain (loss) on securities   227     (184 )