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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 November 30, 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 November 30, 2002 was 27,719,627 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 Condensed Balance Sheets 2
             November 30, 2002 and June 1, 2002
      
             Consolidated Statements of Operations 4
             Three Months and Six Months Ended November 30, 2002 and December 1, 2001
      
             Consolidated Statements of Cash Flows 5
             Six Months Ended November 30, 2002 and December 1, 2001
      
             Notes to Consolidated Condensed Financial Statements 6
      
Item 2. Management’s Discussion and Analysis of Financial 12
             Condition and Results of Operations
      
Item 3. Market Risks 25
      
Item 4. Controls & Procedures 25
      
Part II. Other Information 26
      
Item 1. Legal Proceedings 26
      
Item 4. Submission of Matters to a Vote of Security Holders 27
      
Item 6. Exhibits and Reports on Form 8K 27
      
Signature 28
      
Certifications 29
      
Exhibit 35

1



ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

Part I. Financial Information

Item 1. Consolidated Financial Statements

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


  Nov. 30, 2002   June 1, 2002  
 
 
 
ASSETS        
      
Current assets:            
   Cash and cash equivalents $ 29,152            $ 29,435  
   Marketable securities   223,686     181,019  
   Restricted securities   9,438     6,353  
           Total cash and securities   262,276     216,807  
      
   Trade receivables, net   52,487     55,810  
   Income tax refund receivable   13,262     13,948  
   Inventory   54,447     63,690  
   Deferred income taxes   7,630     7,630  
   Other current assets   7,399     5,260  
            Total current assets   397,501     363,145  
      
Long-term marketable securities   41,487     73,445  
Long-term restricted securities   5,998     12,047  
      
Net property, plant and equipment held for sale   7,599     —  
      
Property, plant and equipment, at cost   83,157     96,233  
    Less - accumulated depreciation   (33,479 )   (37,449 )
           Net property, plant and equipment   49,678     58,784  
      
Deferred income taxes   —     882  
Other assets   18,076     16,944  
Total assets $ 520,339   $ 525,247  

The accompanying notes are an integral part of these statements.

2



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


  Nov. 30, 2002   June 1, 2002
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
     
Current liabilities:                   
   Accounts payable $ 4,307   $ 3,246
   Accrued liabilities   17,509     16,062
   Deferred revenue   2,001     1,948
           Total current liabilities   23,817     21,256
     
Convertible subordinated notes   146,347     145,897
Total liabilities $ 170,164   $ 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;          
       27,720 and 27,619 shares issued and outstanding at          
       November 30, 2002 and June 1, 2002, respectively $ 137,768   $ 136,370
   Retained earnings   211,987     221,377
   Accumulated other comprehensive income   420     347
Total shareholders’ equity   350,175     358,094
Total liabilities and shareholders’ equity $ 520,339   $ 525,247

The accompanying notes are an integral part of these statements.

3



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


Three Months Ended Six Months Ended
Nov. 30, 2002 Dec. 1, 2001 Nov. 30, 2002 Dec. 1, 2001
 
 
 
 
 
     
Net sales $ 43,302          $ 39,606          $ 86,263          $ 89,113  
     
Cost of sales   34,508     19,937     57,493     47,991  
    Gross margin   8,794     19,669     28,770     41,122  
     
Operating expenses:                        
  Selling, service and administrative   17,171     13,430     30,351     32,417  
  Research, development and engineering   6,945     8,167     14,613     20,331  
  Non-recurring operating items   —     1,620     —     5,971  
    Total operating expenses   24,116     23,217     44,964     58,719  
Operating loss   (15,322 )   (3,548 )   (16,194 )   (17,597 )
     
Interest income   2,353     1,620     5,902     3,557  
Interest expense   (1,774 )   (51 )   (3,781 )   (78 )
Other income (expense), net   701     (208 )   264     (22 )
Loss before income taxes   (14,042 )   (2,187 )   (13,809 )   (14,140 )
     
Benefit for income taxes   (4,494 )   (722 )   (4,419 )   (4,666 )
     
Net loss $ (9,548 ) $ (1,465 ) $ (9,390 ) $ (9,474 )
     
Net loss per share - basic $ (0.34 ) $ (0.05 ) $ (0.34 ) $ (0.35 )
     
Net loss per share - diluted $ (0.34 ) $ (0.05 ) $ (0.34 ) $ (0.35 )
     
Weighted average number of shares - basic   27,714     27,246     27,682     27,199  
Weighted average number of shares - diluted   27,714     27,246     27,682     27,199  

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)


Six Months Ended
Nov. 30, 2002 June 1, 2002
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:            
         Net loss $ (9,390 )          $ (9,474 )
Adjustments to reconcile net loss to cash provided by (used in)
operating activities: 		           
         Depreciation and amortization   4,728     5,532  
         Tax benefit of stock options exercised   181     731  
         Other non-cash charges   11,249     930  
         Deferred income taxes   400     4,859  
Changes in operating accounts:            
         Decrease in trade receivable   4,815     24,510  
         (Increase) decrease in inventory   1,186     (1,027 )
         Decrease in income tax refund receivable   686     —  
         Increase in other current assets   (2,102 )   (882 )
         Increase (decrease) in current liabilities   1,096     (33,498 )
      
Net cash provided by (used in) operating activities   12,849     (8,319 )
      
      
CASH FLOWS FROM INVESTING ACTIVITIES:            
Purchase of property, plant and equipment   (6,164 )   (9,486 )
Proceeds from the sale of property, plant and equipment   45     633  
Maturity of restricted securities   2,964     —  
Purchase of securities   (141,941 )   (89,891 )
Proceeds from sales of securities and maturing securities   131,793     74,740  
Increase in other assets   (1,046 )   (801 )
      
Net cash used in investing activities   (14,349 )   (24,805 )
      
      
CASH FLOWS FROM FINANCING ACTIVITIES:            
Proceeds from exercise of stock options and stock plans   1,217     3,253  
      
Net cash provided by financing activities   1,217     3,253  
      
      
NET CHANGE IN CASH AND CASH EQUIVALENTS   (283 )   (29,871 )
      
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   29,435     68,522  
      
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,152   $ 38,651  
      

Cash payments for interest were $3,368 and $12 for the six months ended November 30, 2002 and December 1, 2001, respectively. Cash refunds for income taxes were $5,152 for the six months ended November 30, 2002. Cash payments for income taxes were $2,334 for the six months ended December 1, 2001.

The accompanying notes are an integral part of these statements.

5



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

Note 1 — Basis of Presentation

We have prepared the condens