Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - ELECTRO SCIENTIFIC INDUSTRIES INCex-322q218certification.htm
EX-32.1 - EXHIBIT 32.1 - ELECTRO SCIENTIFIC INDUSTRIES INCex-321q218certification.htm
EX-31.2 - EXHIBIT 31.2 - ELECTRO SCIENTIFIC INDUSTRIES INCex-312q218certification.htm
EX-31.1 - EXHIBIT 31.1 - ELECTRO SCIENTIFIC INDUSTRIES INCex-311q218certification.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-12853
 
 
 
ELECTRO SCIENTIFIC INDUSTRIES, INC.
 
 
 

Oregon
 
93-0370304
(State or other jurisdiction of incorporation
or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
13900 N.W. Science Park Drive, Portland, Oregon
 
97229
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: 503-641-4141
Registrant’s web address: www.esi.com
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨    
Accelerated filer 
ý
Non-accelerated filer
¨    
Smaller reporting company
¨
Emerging growth company
¨


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares outstanding of the Registrant’s Common Stock as of November 3, 2017 was 33,491,734 shares.
 



ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
2018 FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
 
Part I
FINANCIAL INFORMATION
 
Financial Statements (Unaudited)
 
 
 
 
 
 
Part II
OTHER INFORMATION
 
 






ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
Sep 30, 2017
 
Apr 1, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
47,973

 
$
56,642

Short-term investments
32,802

 
5,743

Trade receivables, net of allowances of $474 and $603
47,565

 
40,494

Inventories, net
61,423

 
58,942

Shipped systems pending acceptance
7,765

 
5,713

Other current assets
5,309

 
6,180

Total current assets
202,837

 
173,714

Non-current assets:
 
 
 
Property, plant and equipment, net of accumulated depreciation of $80,860 and $112,075, (PP&E)
18,874

 
21,619

Goodwill
2,626

 
3,027

Acquired intangible assets, net of accumulated amortization of $22,676 and $21,994
5,883

 
6,564

Other assets
17,819

 
19,821

Total assets
$
248,039

 
$
224,745

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
24,378

 
$
21,213

Accrued liabilities
32,050

 
22,186

Deferred revenue
15,782

 
14,712

Total current liabilities
72,210

 
58,111

Non-current liabilities:
 
 
 
Long-term debt
12,982

 
13,489

Income taxes payable
1,285

 
1,036

Other liabilities
7,956

 
7,578

Total liabilities
94,433

 
80,214

Commitments and contingencies (See Note 12: Commitments & Contingencies)


 


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

 

Common stock, without par value; 100,000 shares authorized; 34,067 and 33,260 issued and outstanding
208,670

 
207,152

Accumulated deficit
(54,246
)
 
(61,407
)
Accumulated other comprehensive loss
(818
)
 
(1,214
)
Total shareholders’ equity
153,606

 
144,531

Total liabilities and shareholders’ equity
$
248,039

 
$
224,745

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


3


ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Fiscal quarter ended
 
Two fiscal quarters ended
(In thousands, except per share amounts)
Sep 30, 2017
 
Oct 1, 2016
 
Sep 30, 2017
 
Oct 1, 2016
Net sales:
 
 
 
 
 
 
 
Systems
$
60,316

 
$
21,442

 
$
122,409

 
$
59,642

Services
10,651

 
8,216

 
21,242

 
17,684

Total net sales
70,967

 
29,658

 
143,651

 
77,326

Cost of sales:
 
 
 
 
 
 
 
Systems
38,179

 
14,146

 
79,605

 
36,568

Services
6,256

 
4,532

 
11,094

 
8,970

Total cost of sales
44,435

 
18,678

 
90,699

 
45,538

Gross profit
26,532

 
10,980

 
52,952

 
31,788

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
11,648

 
12,766

 
24,456

 
25,637

Research, development and engineering
8,274

 
7,760

 
17,208

 
15,390

Restructuring costs
2,162

 

 
3,373

 

Acquisition and integration costs

 
335

 

 
335

Total operating expenses
22,084

 
20,861

 
45,037

 
41,362

Operating income (loss)
4,448

 
(9,881
)
 
7,915

 
(9,574
)
Non-operating (expense) income:
 
 
 
 
 
 
 
Interest and other (expense) income, net
(229
)
 
206

 
(413
)
 
128

Total non-operating (expense) income
(229
)
 
206

 
(413
)
 
128

Income (loss) before income taxes
4,219

 
(9,675
)
 
7,502

 
(9,446
)
(Benefit from) provision for income taxes
(41
)
 

 
340

 
347

Net income (loss)
$
4,260

 
$
(9,675
)
 
$
7,162

 
$
(9,793
)
Net income (loss) per share - basic
$
0.13

 
$
(0.30
)
 
$
0.21

 
$
(0.30
)
Net income (loss) per share - diluted
$
0.12

 
$
(0.30
)
 
$
0.21

 
$
(0.30
)
Weighted average number of shares - basic
33,861

 
32,396

 
33,647

 
32,109

Weighted average number of shares - diluted
34,874

 
32,396

 
34,716

 
32,109

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


4


ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
Fiscal quarter ended
 
Two fiscal quarters ended
(In thousands)
Sep 30, 2017
 
Oct 1, 2016
 
Sep 30, 2017
 
Oct 1, 2016
Net income (loss)
$
4,260

 
$
(9,675
)
 
$
7,162

 
$
(9,793
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of taxes of $0, $0, $0 and $0
180

 
47

 
388

 
(139
)
Accumulated other comprehensive income related to benefit plan obligation, net of taxes of $(3), $2, $(5) and $(2)
5

 
5

 
9

 
9

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

 
(1
)
 
(1
)
 
(4
)
Other comprehensive income (loss):
185

 
51

 
396

 
(134
)
Comprehensive income (loss)
$
4,445

 
$
(9,624
)
 
$
7,558

 
$
(9,927
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

5


ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Two fiscal quarters ended
(In thousands)
Sep 30, 2017
 
Oct 1, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
7,162

 
$
(9,793
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Non-cash restructuring charges
13,858

 

Depreciation and amortization
3,469

 
3,592

Share-based compensation expense
2,797

 
3,136

Amortization of acquired intangible assets
657

 
554

Provision for (benefit from) doubtful accounts
371

 
(235
)
Loss on disposal of property and equipment, net

 
40

Impairment of inventory

 
1,170

(Increase) decrease in deferred income taxes
(31
)
 
87

Changes in operating accounts, net of acquisitions:

 

Increase (decrease) in accounts payable and accrued liabilities
12,392

 
(6,100
)
(Increase) decrease in trade receivables, net
(7,094
)
 
13,373

Increase in inventories
(7,874
)
 
(3,669
)
Increase in shipped systems pending acceptance
(2,051
)
 
(2,712
)
Increase in deferred revenue
1,070

 
4,577

Decrease (increase) in other current assets
970

 
(43
)
Net cash provided by operating activities
25,696

 
3,977

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of investments
(38,336
)
 
(228,921
)
Proceeds from sales and maturities of investments
10,861

 
240,209

Purchase of property, plant and equipment
(1,445
)
 
(2,710
)
Proceeds from sale of property, plant and equipment
37

 
7

Cash paid for business acquisitions, net of cash acquired

 
(2,010
)
Increase in other assets
(4,503
)
 
(71
)
Net cash (used in) provided by investing activities
(33,386
)
 
6,504

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Repayment of debt
(212
)
 

Payment of withholding taxes on stock-based compensation
(1,684
)
 
(793
)
Proceeds from issuance of common stock
665

 
654

Net cash used in financing activities
(1,231
)
 
(139
)
Effect of exchange rate changes on cash
260

 
(70
)
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(8,661
)
 
10,272

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD
57,732

 
42,413

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
$
49,071

 
$
52,685

SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Cash paid for interest
$
(331
)
 
$
(25
)
Cash paid for income taxes
(500
)
 
(251
)
Income tax refunds received
67

 
6

Net (decrease) increase in PP&E and other assets related to transfers from inventory
(2,052
)
 
3,128

Non-cash additions to PP&E
112

 
270

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

6


ELECTRO SCIENTIFIC INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with United States generally accepted accounting principles (U.S. GAAP) have been condensed or omitted in these interim statements. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in Electro Scientific Industries, Inc.'s (the Company) Annual Report on Form 10-K for its fiscal year ended April 1, 2017. These interim statements include all adjustments (consisting of only normal recurring adjustments and accruals) necessary for a fair presentation of results for the interim periods presented. The results for interim periods are not necessarily indicative of the results of operations for the entire year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates.
Management believes that the estimates used are reasonable. Significant estimates made by management include: revenue recognition; inventory valuation; accrued restructuring costs; share-based compensation; income taxes, including the valuation of deferred tax assets; valuation of long-lived assets, including intangibles; valuation of goodwill and acquisition accounting.
There have been no significant changes to the Company's significant accounting policies from those presented in Note 2: Recent Accounting Pronouncements to the consolidated financial statements included in the Company's Annual Report on Form 10-K for its fiscal year ended April 1, 2017. All references to years or quarters relate to fiscal years or fiscal quarters unless otherwise noted. The fiscal quarters ended September 30, 2017 and October 1, 2016 each consisted of 13-week periods. Similarly, the two quarters ended September 30, 2017 and the two quarters ended October 1, 2016 each consisted of 26-week periods.

7


2. Recent Accounting Pronouncements
Adopted accounting pronouncements:
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, “Compensation – Stock Compensation – Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies the accounting for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and the accounting for forfeitures. ASU 2016-09 was effective for the Company as of April 2, 2017, the beginning of fiscal 2018. Adopting ASU 2016-09 increased diluted weighted average shares outstanding by approximately 40 thousand shares in the first quarter of 2018 due to the change in recognition of excess tax benefits in the calculation. The ASU is expected to increase the volatility of the Company's diluted shares outstanding on a go-forward basis.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” ASU 2015-11 simplifies the measurement of inventory by requiring companies to measure inventory at the lower of cost and net realizable value as opposed to measuring the lower of cost of market where the market value was determined based off of three different measures. ASU 2015-11 was effective for the Company as of April 2, 2017, the beginning of fiscal 2018. Adopting ASU 2015-11 has not had a material effect on the Company's inventory valuation.
Recently issued accounting pronouncements not yet adopted
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in order to (i) improve disclosures related to an entity's risk management activities through better transparency and understandability and (ii) simplify and reduce the complexity of hedge accounting by preparers. ASU 2017-12 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods, which would be the Company's fiscal year ending March 28, 2020. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. While the Company does not expect the adoption of ASU 2017-12 to have a material effect on its business, the Company is still evaluating any potential impact that adoption of ASU 2017-12 may have on its financial position, results of operations or cash flows.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which amends the scope of modification accounting surrounding share-based payment arrangements as issued in ASU 2016-09 by providing guidance on the various types of changes which would trigger modification accounting for share-based payment awards, specifically an entity would not apply modification accounting under ASC 718 if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, which would be the Company's fiscal year ending March 30, 2019. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. While the Company does not expect the adoption of ASU 2017-09 to have a material effect on its business, the Company is still evaluating any potential impact that adoption of ASU 2017-09 may have on its financial position, results of operations or cash flows.
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires companies to disaggregate the current-service-cost component from other components of net benefit cost and provides specific guidance for presentation in the income statement. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, which would be the Company's fiscal year ending March 30, 2019. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. While the Company does not expect the adoption of ASU 2017-07 to have a material effect on its business, the Company is still evaluating any potential impact that adoption of ASU 2017-07 may have on its financial position, results of operations or cash flows.

8


In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date for implementation of ASU 2014-09 by one year, making the new guidance effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted no earlier than the original effective date. The FASB has continued to issue ASU topics to further clarify ASU 2014-09. These have included ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20. The effective date and transition requirements of these ASU topics are the same as the effective date and transition requirements of ASU 2015-14. The new standards are effective for the Company's fiscal year ending March 30, 2019, beginning with the first quarter of that fiscal year.
The new standard permits adoption by using either (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The Company has not yet finalized which transition method will be used; however, at this time it expects to adopt the modified retrospective approach. The final determination of the transition method depends on a number of factors including the impact on comparability, the ability to support related disclosures, and the overall nature and significance of the associated changes to the financial statements. The Company has developed an implementation plan and assigned cross-functional internal resources to perform a comprehensive assessment of the new standard and its impact on the financial statements of the Company. This assessment is ongoing and includes identification, consideration, and quantification of the impact of the new standard on the Company's financial statements, accounting policies, processes, control environment and systems. The outcome of this evaluation will be the implementation of supporting processes and systems that enable timely and accurate reporting under the new standard as well as the determination of which transition method is most appropriate.
While the Company continues to assess all potential impacts under the new standard, a preliminary assessment would indicate that the new standard is unlikely to drive a significant change to the amount or timing of revenue recognition related to system sales or service contracts, the Company's major revenue streams. There may be some impact related to the allocation of value and timing of recognition in situations where service contracts, which the Company expects to be recognized over time, are sold together with systems, which it expects to be primarily recognized at a point in time. The Company believes that certain aspects of the new guidance will require significant judgment, including identification of relevant performance obligations and quantification of the consideration to which the entity expects to be entitled in exchange for those goods or services. Further, in connection with the adoption of the standard, there is a requirement to capitalize certain costs, which for the Company primarily comprises commission expenses for sales representatives. Any such costs required to be capitalized would amortize over the period of performance for the underlying contracts. The Company is still evaluating the impact of capitalizing costs to execute a contract, however the primary potential impact is expected to relate to commissions on service contracts with a duration approximating or exceeding one year. The impact related to contracts with a duration over one year is not expected to be significant and the Company expects to elect the practical expedient under the new standard for costs with a duration less than one year and expense those items as incurred. This preliminary assessment is based on the Company's analysis of actual historical revenue transactions under the new guidance and presumes certain conclusions as it relates to accounting policies under the new standard. Due to the complexity of certain of the Company's contracts, the actual revenue recognition treatment required under the new standard for these arrangements may be dependent on contract-specific terms and may vary from this overall expectation. The Company currently expects that necessary operational changes will be implemented prior to the adoption date. As the Company’s assessment of the new standard’s impacts is ongoing, including the areas described above, the Company cannot reasonably provide further estimates of the quantitative impacts to its financial statements at this time.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, to improve and simplify the accounting for the income tax consequences of intra-entity transfers of assets other than inventory, requiring companies to recognize income tax consequences upon the transfer of the asset to a third party. ASU 2016-16 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, which would be the Company's fiscal year ending March 30, 2019. While the Company does not expect the adoption of ASU 2016-16 to have a material effect on its business, the Company is still evaluating any potential impact that adoption of ASU 2016-16 may have on its financial position, results of operations or cash flows.

9


In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosing key information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, which would be the Company's fiscal year ending March 28, 2020. The Company is still evaluating any potential impact that adoption of ASU 2016-02 may have on its financial position, results of operations or cash flows.
3. Fair Value Measurements
Financial Assets and Liabilities Measured at Fair Value
ASC Topic 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include the following:
Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2, defined as inputs that are observable either directly or indirectly such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and other inputs that can be corroborated by observable market data; and
Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and April 1, 2017 was as follows (in thousands):
September 30, 2017
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market securities
$
2,182

 
$

 
$

 
$
2,182

U.S. treasury fund
5,997

 

 

 
5,997

Commercial paper

 
4,796

 

 
4,796

Repurchase agreements

 
5,000

 

 
5,000

Total cash equivalents
$
8,179

 
$
9,796

 
$

 
$
17,975

Short term investments - available for sale:
 
 
 
 
 
 
 
U.S. treasury fund
$
1,504

 
$

 
$

 
$
1,504

Commercial paper

 
29,097

 

 
29,097

Corporate bonds

 
2,201

 

 
2,201

Total short-term investments - available for sale
$
1,504

 
$
31,298

 
$

 
$
32,802

Forward purchase or (sale) contracts:
 
 
 
 
 
 
 
Japanese Yen
$

 
$
54

 
$

 
$
54

New Taiwan Dollar

 
(18
)
 

 
(18
)
Korean Won

 
(21
)
 

 
(21
)
Euro

 
47

 

 
47

British Pound

 
81

 

 
81

Chinese Renminbi

 
14

 

 
14

Total forward contracts
$

 
$
157

 
$

 
$
157

Deferred compensation plan assets:*
 
 
 
 
 
 
 
Mutual funds and exchange traded funds
$
2,519

 
$

 
$

 
$
2,519

Money market securities
954

 

 

 
954

Total deferred compensation plan assets
$
3,473

 
$

 
$

 
$
3,473


10


April 1, 2017
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market securities
$
22,395

 
$

 
$

 
$
22,395

Commercial paper

 
4,945

 

 
4,945

Total cash equivalents
$
22,395

 
$
4,945

 
$

 
$
27,340

Short term investments - available for sale:
 
 
 
 
 
 
 
Commercial paper
$

 
$
5,743

 
$

 
$
5,743

Total short-term investments - available for sale
$

 
$
5,743

 
$

 
$
5,743

Forward purchase or (sale) contracts:
 
 
 
 
 
 
 
Japanese Yen
$

 
$
9

 
$

 
$
9

New Taiwan Dollar

 
20

 

 
20

Korean Won

 
39

 

 
39

Euro

 
(96
)
 

 
(96
)
British Pound

 
16

 

 
16

Chinese Renminbi

 
(5
)
 

 
(5
)
Singapore Dollar

 
(1
)
 

 
(1
)
Total forward contracts
$

 
$
(18
)
 
$

 
$
(18
)
Deferred compensation plan assets:*
 
 
 
 
 
 
 
Mutual funds and exchange traded funds
$
845

 
$

 
$

 
$
845

Money market securities
2,213

 

 

 
2,213

Total deferred compensation plan assets
$
3,058

 
$

 
$

 
$
3,058

*These investments represent assets held in trust for the deferred compensation plan
For Level 1 assets, the Company utilized quoted prices in active markets for identical assets.
For Level 2 assets, exclusive of forward contracts, the Company utilized quoted prices in active markets for similar assets. For forward contracts, spot prices at September 30, 2017 and April 1, 2017 were utilized to calculate fair values.
During the first two quarters of 2018 and 2017, there were no transfers between Level 1, 2 or 3 assets.

11


Investments
The Company’s investments, other than money market securities for which there is no unrealized gain or loss, at September 30, 2017 and April 1, 2017 were as follows (in thousands): 
 
 
 
Unrealized
 
 
September 30, 2017
Cost
 
Gain
 
Loss
 
Fair Value
Available-for-sale securities (current):
 
 
 
 
 
 
 
U.S. treasury fund
$
7,501

 
$

 
$

 
$
7,501

Commercial paper
33,893

 

 

 
33,893

Corporate Bonds
2,202

 

 
(1
)
 
2,201

Repurchase Agreements
5,000

 

 

 
5,000

Total investments (current)
$
48,596

 
$

 
$
(1
)
 
$
48,595

Available-for-sale securities (non-current):
 
 
 
 
 
 
 
Mutual funds, exchange traded funds and money market securities*
$
3,247

 
$
226

 
$

 
$
3,473

Total investments (non-current)
$
3,247

 
$
226

 
$

 
$
3,473

 
 
 
Unrealized
 
 
April 1, 2017
Cost
 
Gain
 
Loss
 
Fair Value
Available-for-sale securities (current):
 
 
 
 
 
 
 
Commercial paper
$
10,688

 
$

 
$

 
$
10,688

Total investments (current)
$
10,688

 
$

 
$

 
$
10,688

Available-for-sale securities (non-current):
 
 
 
 
 
 
 
Mutual funds, exchange traded funds and money market securities*
$
2,974

 
$
84

 
$

 
$
3,058

Total investments (non-current)
$
2,974

 
$
84

 
$

 
$
3,058

*These investments represent assets held in trust for the deferred compensation plan
For purposes of determining gross realized gains and losses and reclassification out of accumulated other comprehensive income (loss), the cost of securities sold is based on specific identification. Net unrealized holding gains and losses on current available-for-sale securities included in accumulated other comprehensive income (loss) were insignificant as of September 30, 2017 and April 1, 2017.
4. Trade Accounts Receivable
Trade accounts receivable consisted of the following:
(In thousands)
Sep 30, 2017
 
Apr 1, 2017
Current trade accounts receivable, net
$
47,565

 
$
40,494

Non-current trade accounts receivable
194

 
489

 
$
47,759

 
$
40,983

Non-current trade accounts receivable are included in Other assets in the Condensed Consolidated Balance Sheets.
5. Inventories
Inventories are principally valued at standard cost, which approximates the lower of cost and net realizable value on a first-in, first-out basis. Components of inventories were as follows:
(In thousands)
Sep 30, 2017
 
Apr 1, 2017
Raw materials and purchased parts
$
43,824

 
$
41,383

Work-in-process
13,753

 
13,829

Finished goods
3,846

 
3,730

 
$
61,423

 
$
58,942

6. Other Assets
Other assets consisted of the following:
(In thousands)
Sep 30, 2017
 
Apr 1, 2017
Demo and leased equipment, net
$
8,353

 
$
11,011

Long term deposits
3,755

 
2,872

Non-current restricted cash
1,098

 
1,090

Non-current deferred income taxes, net
844

 
890

Other non-current assets
3,769

 
3,958

 
$
17,819

 
$
19,821

Depreciation expense for demo and leased equipment totaled $0.1 million in the second quarter of 2018 and $0.1 million in the second quarter of 2017. For the two fiscal quarters ended September 30, 2017 depreciation expense for demo and leased equipment totaled $0.2 million compared to $0.2 million for the two fiscal quarters ended October 1, 2016. Of the total $8.4 million and $11.0 million of demo and leased equipment at September 30, 2017 and April 1, 2017, $4.8 million and $1.1 million were leased assets at customer sites generating revenue.
Included in Other non-current assets are long-term investments held in a trust for the deferred compensation plan, non-current trade accounts receivable and other items.

12


7. Accrued Liabilities
Accrued liabilities consisted of the following:
(In thousands)
Sep 30, 2017
 
Apr 1, 2017
Payroll-related liabilities
$
10,318

 
$
6,335

Customer deposits
6,221

 
1,242

Product warranty accrual
4,929

 
3,394

Purchase order commitments and receipts
3,631

 
2,522

Restructuring costs payable
2,466

 
4,996

Professional fees payable
1,024

 
734

Current portion, long-term debt
410

 
434

Other current liabilities
3,051

 
2,529

 
$
32,050

 
$
22,186

Included in other current liabilities above are accrued amounts for value-added taxes, income taxes, freight, and other similar items.
8. Product Warranty
The following is a reconciliation of the changes in the aggregate product warranty accrual:
 
Fiscal quarter ended
 
Two fiscal quarters ended
(In thousands)
Sep 30, 2017
 
Oct 1, 2016
 
Sep 30, 2017
 
Oct 1, 2016
Product warranty accrual, beginning
$
6,538

 
$
5,947

 
$
5,474

 
$
5,734

Warranty charges incurred, net
(2,666
)
 
(1,263
)
 
(5,111
)
 
(3,314
)
Provision for warranty charges
3,284

 
837

 
6,793

 
3,101

Product warranty accrual, ending
$
7,156

 
$
5,521

 
$
7,156

 
$
5,521

Net warranty charges incurred include labor charges and costs of replacement parts for system repairs under warranty. These costs are recorded net of any estimated cost recoveries resulting from either successful repair of damaged parts or from warranties offered by the Company’s suppliers for defective components. The provision for warranty charges reflects the estimate of future anticipated net warranty costs to be incurred for all products under warranty at quarter end and is recorded to cost of sales. Of the total of $7.2 million and $5.5 million of product warranty accruals as of September 30, 2017 and October 1, 2016, $2.3 million and $1.0 million were non-current and were included in Other liabilities on the Condensed Consolidated Balance Sheets.
9. Deferred Revenue
Generally, revenue is recognized upon fulfillment of acceptance criteria at the Company's factory and transfer of risk and title. Revenue is deferred whenever title transfer is pending, risk has not transferred, and/or acceptance criteria have not yet been fulfilled. Deferred revenue arises from, among other factors, sales to Japanese customers, shipments of substantially new products and shipments with custom specifications and other acceptance criteria where the Company cannot demonstrate a track record of acceptance. For sales involving multiple element arrangements, the relative selling price of any undelivered elements, including installation services and similar items, is deferred until the elements are delivered and acceptance criteria are met. Revenue related to maintenance and service contracts is deferred and recognized ratably over the duration of the contracts.
The following is a reconciliation of the changes in deferred revenue:
 
Fiscal quarter ended
 
Two fiscal quarters ended
(In thousands)
Sep 30, 2017
 
Oct 1, 2016
 
Sep 30, 2017
 
Oct 1, 2016
Deferred revenue, beginning
$
15,616

 
$
9,757

 
$
15,397

 
$
7,685

Revenue deferred
31,182

 
9,119

 
46,652

 
19,472

Revenue recognized
(30,429
)
 
(7,293
)
 
(45,680
)
 
(15,574
)
Deferred revenue, ending
$
16,369

 
$
11,583

 
$
16,369

 
$
11,583

Of the total of $16.4 million and $11.6 million of deferred revenue at September 30, 2017 and April 1, 2017, $0.6 million and $0.6 million were non-current and were included in Other liabilities on the Condensed Consolidated Balance Sheets.

13


10. Long-term Debt
On January 9, 2017, ESI Leasing, LLC (ESI Leasing), a wholly owned subsidiary of the Company, entered into a loan agreement (Loan Agreement) with First Technology Federal Credit Union (Lender). The Loan Agreement provides for a term loan from the Lender to ESI Leasing in the principal amount of $14 million (Loan). The interest rate of the Loan is fixed at 4.75% per annum, except that it may be increased if certain covenants under the Loan Agreement are not satisfied and after and during the continuation of an “Event of Default” as defined in the Loan Agreement. The Loan amortizes over a period of approximately 20 years, but the maturity date of the loan is January 1, 2027, meaning that, if ESI Leasing does not prepay or refinance the Loan, the balance of the principal of the Loan will become due on January 1, 2027. ESI Leasing will pay monthly principal and interest payments on the Loan totaling annual amounts of $1.1 million through the maturity of the loan. The Company unconditionally guarantees the loan to ESI Leasing.
The principal maturities for each of the upcoming twelve month periods ending on September 30 are as follows:
(In thousands)
2018
 
2019
 
2020
 
2021
 
2022
Principal maturities
$
444

 
$
466

 
$
487

 
$
512

 
$
537

Total debt currently outstanding on the Loan Agreement at the end of fiscal 2017 was:
(In thousands)
Sep 30, 2017
 
Apr 1, 2017
Total debt outstanding
$
13,392

 
$
13,923

Less: Current portion, long-term debt
(410
)
 
(434
)
Long-term debt
$
12,982

 
$
13,489

Deferred debt issuance costs related to the above long-term debt as of September 30, 2017 and April 1, 2017 were $320 thousand and $337 thousand, respectively.
11. Revolving Credit Facility
The Company is party to a loan and security agreement (Credit Facility) with Silicon Valley Bank (SVB), which was initially entered into on March 20, 2015 and amended on July 12, 2016. The Credit Facility provides for a senior secured asset-based revolving facility with availability up to $30 million, including a $15 million sublimit for letters of credit. In the fourth quarter of 2017, the Company amended and extended the Credit Facility by one year. With this extension, the Credit Facility expires March 20, 2019. At September 30, 2017, the Company had no amounts outstanding under the Credit Facility, was in compliance with all covenants, and was not in default under the agreement. The commitment fee on the amount of unused credit was 0.3 percent. As amended, the Credit Facility allows for a greater level of EBITDA losses, but reduces the level of permitted acquisitions and purchases of capital equipment. If the Company fails to meet the covenants in its Credit Facility or its lenders fail to fund, access to the facility may be limited or the facility may become unavailable altogether.
12. Commitments & Contingencies
The Company mitigates credit risk by transacting with highly rated counterparties for foreign exchange contracts, letters of credit and other transactions where counterparty risk is a factor. The Company has evaluated the non-performance risks associated with the Company's lenders and other parties and believes them to be insignificant.
From time to time the Company may be party to litigation arising in the normal course of business. Currently, the Company is not party to any litigation it believes would have a material adverse effect on the Company's financial position, results of operations or cash flows.
13. Shareholders’ Equity
Share Repurchase Program
In December 2011, the Board of Directors authorized a share repurchase program totaling $20.0 million to acquire shares of the Company's outstanding common stock. The repurchases are to be made at management’s discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and other factors. The Company did not repurchase any shares during the first two quarters of 2018 or 2017. There is no expiration date for the repurchase program.

14


14. Accumulated Other Comprehensive Income
The following is a reconciliation of the changes in accumulated other comprehensive income (AOCI):
 
Foreign currency translation adjustment
 
Accumulated other comprehensive income related to benefit plan obligation
 
Net unrealized loss on available-for-sale securities
 
Total
Balance at April 1, 2017
$
(1,242
)
 
$
45

 
$
(17
)
 
$
(1,214
)
Other comprehensive income (loss) before reclassifications and taxes
388

 
14

 
(1
)
 
401

Amounts reclassified from AOCI

 

 

 

Tax effect

 
(5
)
 

 
(5
)
Other Comprehensive income (loss)
388

 
9

 
(1
)
 
396

Balance at September 30, 2017
$
(854
)
 
$
54

 
$
(18
)
 
$
(818
)
15. Share-Based Compensation
The Company's share-based compensation consists of stock-settled stock appreciation rights (SARs), restricted stock unit awards with a service condition (time-based RSUs), restricted stock unit awards with a performance condition (performance-based RSUs), restricted stock unit awards with a market performance condition (market-based RSUs) and an employee stock purchase plan.
The Company recognizes expense related to the fair value of SARs and the 1990 Employee Stock Purchase Plan (ESPP) using the Black-Scholes model to estimate the fair value of awards on the date of grant. The fair value of time-based and performance-based restricted stock units (RSUs) are measured on the grant date based on the market value of the Company's common stock. The market-based RSUs must achieve the total shareholder return (TSR) measures in order for the awards to vest, and the grant date fair value of the awards is calculated using a Monte Carlo simulation model.
Except for performance-based RSUs, the Company recognizes compensation expense for all share-based compensation awards, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Expense for performance-based RSUs is recognized based on the probability of achievement of the performance criteria. The compensation cost for market-based RSUs is recognized over the related service period, even if the market condition is never satisfied.
The Company granted a total of 396,400 time-based RSUs and 197,400 market-based RSUs during the first two quarters of 2018, but did not grant any SARs or performance-based RSUs. Grants for the second quarter of 2018 consisted of 70,800 time-based RSUs.
Share-based compensation expense under the stock incentive plans is included in the Company’s Condensed Consolidated Statements of Operations as follows:
 
Fiscal quarter ended
 
Two fiscal quarters ended
(In thousands)
Sep 30, 2017
 
Oct 1, 2016
 
Sep 30, 2017
 
Oct 1, 2016
Cost of sales
$
77

 
$
136

 
$
144

 
$
256

Selling, general and administrative
1,070

 
1,205

 
2,131

 
2,182

Research, development and engineering
183

 
177

 
333

 
371

Total share-based compensation expense
$
1,330

 
$
1,518

 
$
2,608

 
$
2,809

The Company does not have any capitalizable share-based compensation costs for the two fiscal quarters ended September 30, 2017 and October 1, 2016, respectively. As of September 30, 2017, the Company had $9.6 million of total unrecognized share-based compensation costs, net of estimated forfeitures, which are expected to be recognized over a weighted average period of 2.4 years.
16. Product and Geographic Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker (CODM) is its Chief Executive Officer (CEO).

15


The Company operates in a single segment, defined as a manufacturer of high-technology microfabrication and related equipment. This segment, which also represents the consolidated entity, sells products into a variety of end markets that are grouped into four major categories for the purpose of providing an understanding of the principal end markets for the products manufactured by the Company, specifically: 1) Printed Circuit Board (PCB), 2) Component Test, 3) Semiconductor, and 4) Industrial Machining.
The following table presents net sales information by the four major market categories addressed by the Company's single segment:
 
Fiscal quarter ended
 
Two fiscal quarters ended
(In thousands)
Sep 30, 2017
 
Oct 1, 2016
 
Sep 30, 2017
 
Oct 1, 2016
Printed Circuit Board
$
43,541

 
$
13,527

 
$
95,859

 
$
44,445

Component Test
7,677

 
4,990

 
15,858

 
9,592

Semiconductor
12,028

 
7,222

 
18,765

 
14,831

Industrial Machining
7,721

 
3,919

 
13,169

 
8,458

Net Sales
$
70,967

 
$
29,658

 
$
143,651

 
$
77,326

Net sales by geographic area, based on the location of the end user, were as follows:
 
Fiscal quarter ended
 
Two fiscal quarters ended
(In thousands)
Sep 30, 2017
 
Oct 1, 2016
 
Sep 30, 2017
 
Oct 1, 2016
Asia
$
64,053

 
$
25,721

 
$
130,616

 
$
66,169

Americas
2,936

 
2,236

 
7,106

 
5,254

Europe
3,978

 
1,701

 
5,929

 
5,903

Net Sales
$
70,967

 
$
29,658

 
$
143,651

 
$
77,326

17. Restructuring and Cost Management Plans
2017 Corporate Restructuring:
In the fourth quarter of 2017, the Company initiated a restructuring plan to improve business effectiveness and streamline operations to achieve a stated target profit level for the Company as a whole. As a part of the restructuring plan, the management team was reorganized from a business unit to a functional structure; the Company closed facilities in Montreal, Canada; Napa, California; and Sunnyvale, California; the Company discontinued certain products; and the Company made select reductions in headcount across the Company. Actions under this plan are largely completed as of the end of the second fiscal quarter of 2018, except facilities charges and other costs which will extend beyond that time, with an estimated future cost of approximately $0.4 million and $0.2 million, of which the majority is expected to be paid in cash.
Total expenses related to the plan were $16.5 million in the first two quarters of 2018 and $7.6 million in the fourth quarter of 2017. Included in the 2018 expenses are approximately $13.3 million of charges impacting gross margins primarily related to impairment of other assets and inventory stemming from the product portfolio program reviews. Operating expense charges included $2.5 million of facilities and fixed assets charges related to abandoned facilities and discontinued products and $0.6 million of employee severance and related costs. The change in total estimated costs primarily related to inventory and other asset write-offs stemming from the product portfolio program reviews that occurred during the first two quarters of 2018. Product portfolio reviews are ongoing.
The following table presents the total expected restructuring costs as of September 30, 2017 (in thousands):
 
Total Expected Costs for the Plan
 
Costs Recognized from inception of the plan through the Quarter ended Sep 30, 2017
 
Remaining Costs to be Recognized Subsequent to Sep 30, 2017
Employee severance and related personnel costs
$
4,165

 
$
4,165

 
$

Site closure costs
2,090

 
1,690

 
400

Current asset impairments and other gross profit charges(1)
14,947

 
14,947

 

Non-current asset impairments
3,032

 
3,032

 

Other Costs
427

 
227

 
200

Total
$
24,661

 
$
24,061

 
$
600

(1) Current asset impairments include inventory charges recorded in cost of sales.

16


The following table presents the amounts payable related to the 2017 Corporate Restructuring (in thousands):
 
Employee severance and related personnel costs
 
Site closure costs
 
Current asset impairments and other gross profit charges(1)
 
Non-current asset impairments
 
Other Costs
 
Total
Balance as of April 2, 2016
$

 
$

 
$

 
$

 
$

 
$

Costs incurred
3,588

 
888

 
1,669

 
1,376

 
66

 
7,587

Cash payments
(341
)
 

 

 

 
(66
)
 
(407
)
Non-cash items

 

 
(1,669
)
 
(1,376
)
 

 
(3,045
)
Balance as of April 1, 2017
$
3,247

 
$
888

 
$

 
$

 
$

 
$
4,135

Costs incurred
577

 
800

 
13,278

 
1,657

 
163

 
16,475

Cash (payments) receipts
(3,672
)
 
(863
)
 
(1,750
)
 
32

 
(163
)
 
(6,416
)
Non-cash items

 

 
(10,876
)
 
(1,689
)
 

 
(12,565
)
Balance as of September 30, 2017
$
152

 
$
825

 
$
652

 
$

 
$

 
$
1,629

(1) Asset and facilities costs include inventory charges recorded in cost of sales.
Other restructuring plans:
The Company's previously disclosed restructuring plans are largely complete, except for facilities charges and legal entity closure charges which are expected to be incurred through the end of December 2018. Please see Note 26: Restructuring and Cost Management Plans to the Company’s financial statements included in its Annual Report on Form 10-K for the fiscal year ending April 1, 2017. Net restructuring costs related to these plans were $0.4 million in 2018 and $0.4 million in 2017. The Company does not expect to incur any future expenses on these plans. The amounts payable of $0.8 million at September 30, 2017 are expected to be future cash outflows, primarily relating to facility expenses.
The following table presents the amounts related to restructuring costs payable (in thousands):
Restructuring & cost management amounts payable as of April 2, 2016
$
757

Cash payments and other adjustments
(297
)
Costs incurred
401

Restructuring & cost management amounts payable as of April 1, 2017
861

Cash payments and other adjustments
(380
)
Costs incurred
356

Restructuring & cost management amounts payable as of September 30, 2017
$
837

Overall restructuring reserve:
As of September 30, 2017, and April 1, 2017, the amount of unpaid restructuring costs included in accrued liabilities on the Consolidated Balance Sheets were $2.5 million and $5.0 million, respectively. Included in the payable balance are amounts for severance and employee benefits, asset retirement obligation and net lease commitments.

17


18. Earnings (Loss) Per Share
The following is a reconciliation of weighted average shares outstanding used in the calculation of basic and diluted earnings (loss) per share:
 
Fiscal quarter ended
 
Two fiscal quarters ended
(In thousands, except per share data)
Sep 30, 2017
 
Oct 1, 2016
 
Sep 30, 2017
 
Oct 1, 2016
Net income (loss)
$
4,260

 
$
(9,675
)
 
$
7,162

 
$
(9,793
)
Weighted average shares used for basic earnings per share
33,861

 
32,396

 
33,647

 
32,109

Incremental diluted shares
1,013

 

 
1,069

 

Weighted average shares used for diluted earnings per share
34,874

 
32,396

 
34,716

 
32,109

Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.13

 
$
(0.30
)
 
$
0.21

 
$
(0.30
)
Diluted
$
0.12

 
$
(0.30
)
 
$
0.21

 
$
(0.30
)
Awards of options, SARs and RSUs representing an additional 0.3 million and 2.7 million shares of stock for the second quarter of 2018 and 2017, respectively, and 0.6 million and 2.4 million shares of stock for the first two quarters of 2018 and 2017, respectively, were not included in the calculation of diluted net earnings per share because their effect would have been antidilutive.
19. Business Acquisitions
Fiscal 2017
On August 1, 2016, the Company acquired all of the outstanding shares of Visicon Technologies, Inc. (Visicon), a leading supplier of high-accuracy and high-throughput measurement and defect detection systems based in Napa, California. The consideration under the merger agreement is subject to adjustment for indebtedness, seller's transaction expenses, working capital and other items.
Based on closing working capital levels and other adjustments, the Company paid $2.0 million in cash and issued 603,939 shares of ESI common stock, valued at approximately $4.2 million. The value of the common stock is based on the closing price of stock on August 1, 2016. A portion of the shares issued in connection with the agreement were reserved in escrow to serve as a source of payment for any purchase price adjustments or indemnity claims by the Company. The sellers have contractually agreed to limitations on the sale of the shares of common stock they received in connection with the sale of Visicon; specifically, no shares could be sold for six months following closing, after which twenty-five percent of the shares become salable each quarter thereafter. The shares issued as a part of this merger represented a non-cash investing activity of $4.2 million.
The Company finalized the valuation of assets acquired, liabilities assumed, and consideration in the first quarter of 2018. The amounts shown below represent the fair value of the associated assets acquired, liabilities assumed and consideration transferred as of the acquisition date. The total estimated purchase price of $6.2 million, net of cash acquired, was allocated to the underlying assets acquired and liabilities assumed based on estimated fair value, as shown in the following table:
(In thousands)
 
Accounts receivable
$
391

Inventory
982

Prepaid expense and other current assets
116

Property, plant and equipment
737

Acquired intangibles
3,300

Goodwill
2,626

Other assets
26

Accounts payable and other accrued liabilities
(1,952
)
Total purchase price, net of cash acquired
$
6,226


18


The acquisition provided the Company with a portfolio of standalone defect detection systems for the medical device and consumer electronics markets. In addition to a standalone product portfolio and associated value streams, the acquisition provided complementary technology for integrated verification of laser machining, to allow the Company to expand its presence into the medical device market, present an opportunity for enhanced vertical integration and result in synergies with the Company's current consumer electronics customer base.
None of the goodwill is deductible for tax purposes. The acquired intangible assets consisted primarily of approximately $2.1 million of developed technology. Identified intangible assets are expected to be amortized over their useful lives of one to six years.
The operating results of the acquired entity are included in the Company’s results of operations since the date of acquisition. Pro forma financial information has not been provided for the acquisition of Visicon as it is not material to the Company’s operations and financial position.
Fiscal 2015
The Company acquired all of the outstanding shares of Wuhan Topwin Optoelectronics Technology Co., Ltd. (Topwin), a Chinese manufacturer of laser-based systems. In connection with this acquisition, the Company issued 145,442 shares and treated that as compensation to an employee of the Company who was previously an owner of Topwin. The compensation expense was recognized over the service period and from acquisition through the second quarter of fiscal 2018, the Company has recognized $1.7 million in share-based compensation expense related to this acquisition.

19


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The statements contained in this report that are not statements of historical fact, including without limitation statements containing the words “believes”, “expects”, “projects”, “anticipates,” “plan,” “continue,” “could,” “estimates,” “intends,” “should,” “will,” “may” and similar words, constitute forward-looking statements that are subject to a number of risks and uncertainties. Forward looking statements include any statements regarding anticipated sales, gross margins, our profitability in future periods, sources of our future revenue, the effect of new guidance on revenue recognition, the effect of our adoption of accounting pronouncements or standards, our ability to complete our corporate restructuring in a timely manner and implement our new functional structure, our expectation of restructuring costs, the expected benefits of our acquisition of Visicon, future impairment of goodwill, future anticipated net warranty costs, our products’ ability to satisfy the needs of manufacturers, our relationships with suppliers and customers, trends that drive increases in applications for laser processing, the size and growth of our markets, our growth of foreign operations, our intent to reinvest foreign earnings, our customer concentrations, our ability to leverage our differentiated capability in the market, overseas production capabilities, our ability to maintain and expand our core technologies and product applications, future payments of cash dividends, the adequacy of our liquidity and financing, our ability to resolve legal proceedings, our expectation that we will invest in new product development and enhancements, and working capital requirements and resources. From time to time, we may make other forward-looking statements. Investors are cautioned that such forward-looking statements involve estimates, assumptions, risks, and uncertainties and are subject to an inherent risk that actual results may differ materially. Factors that may cause or contribute to differences include those discussed below in Item 1A Risk Factors.
Overview of Business
Electro Scientific Industries, Inc. and its subsidiaries (ESI, we, our, or the Company) is a leading supplier of innovative laser-based microfabrication 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 flexible and rigid printed circuit board (PCB), semiconductor devices, advanced semiconductor packaging, consumer electronics, electronic sensors, touch-panel glass, flat panel liquid crystal displays (LCDs), applications within the automotive, aerospace, medical and display end markets as well as 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.
The second quarter of 2018 ended September 30, 2017, the first quarter of 2018 ended July 1, 2017, and the second quarter of 2017 ended October 1, 2016 were all 13-week periods. Similarly, the two quarters ended September 30, 2017 and the two quarters ended October 1, 2016 each consisted of 26-week periods.

20



Results of Operations

Second Quarter 2018 Highlights:
Orders in the second quarter of 2018 were $128.9 million, growing 360% versus the second quarter of 2017. It was the highest order level in over ten years. The order levels reflected a healthy environment, strong technology and market drivers, and seasonal strength in several of our markets. Orders from our PCB customers more than tripled versus a year ago as flexible PCB manufacturers ramped up capacity to meet the demand from consumer electronics manufacturers. Flexible circuit demand is growing due to unit growth in consumer electronics devices, more flexible circuits per device, plus new materials, technologies and applications utilizing complex flexible circuits. Demand for our semiconductor products was also above the level from a year ago, reflecting a healthy semiconductor capital spending environment. Orders for our new UltrusTM wafer scribing tool were driven by initial high volume production orders associated with a trend toward new manufacturing technologies and thinner wafers. The healthy capacity investment environment also drove higher demand for our semiconductor trim, wafer marking, and legacy memory repair tools. Component Test (CT) product demand was up more than double compared to last year, reflecting increased capacity spend on the part of MLCC manufacturers. This market has recently been capacity constrained driven by increased in consumer electronics, automotive and radio frequency (RF) end markets. Demand for our Industrial Machining (IM) products grew year-over-year primarily due to orders for our GarnetTM micromachining systems.
Total net sales increased by 139% year-over-year to $71.0 million in the second quarter of 2018, due primarily to the higher order levels in the prior quarter compared to the year-ago period. Backlog increased by $47.0 million during the quarter.
Operating expenses of $22.1 million increased by $1.2 million year-over-year on higher variable expenses related to higher revenues and improved profitability and $2.2 million of restructuring costs, partially offset by lower fixed expenses as a result of our restructuring program announced in February 2017.
Net income was $0.12 per diluted share, compared to a loss of $0.30 per share a year ago, on higher sales and gross profit, partially offset by higher operating and restructuring expenses.
Operating cash flow was $18.3 million, compared to a cash use of $7.5 million in the second quarter of 2017, on higher net income.
Significant progress was made on the restructuring announced in February 2017, and these actions are largely completed as of the end of the second quarter of 2018. We are now operating fully within our new lower fixed cost structure as of the end of the second quarter of 2018.
Second Quarter 2018 Ended September 30, 2017 Compared to Second Quarter 2017 Ended October 1, 2016
The following table presents results of operations data as a percentage of net sales:
 
Fiscal quarter ended
 
Sep 30, 2017
 
Oct 1, 2016
Net sales
100.0
 %
 
100.0
 %
Cost of sales
62.6

 
63.0

Gross profit
37.4

 
37.0

Selling, general and administrative
16.5

 
43.0

Research, development and engineering
11.7

 
26.2

Acquisition and integration costs

 
1.1

Restructuring costs
3.0

 

Operating income (loss)
6.2

 
(33.3
)
Interest and other (expense) income, net
(0.3
)
 
0.7

Total non-operating (expense) income
(0.3
)
 
0.7

Income (loss) before income taxes
5.9

 
(32.6
)
Provision for income taxes
(0.1
)
 

Net income (loss)
6.0
 %
 
(32.6
)%

21


Net Sales
The following table presents net sales information by product group:
 
Fiscal quarter ended
  
Sep 30, 2017
 
Oct 1, 2016
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Printed Circuit Board
$
43,541

 
61.4
%
 
$
13,527

 
45.6
%
Component Test
7,677

 
10.8

 
4,990

 
16.8

Semiconductor
12,028

 
16.9

 
7,222

 
24.4

Industrial Machining
7,721

 
10.9

 
3,919

 
13.2

Net Sales
$
70,967

 
100.0
%
 
$
29,658

 
100.0
%
Net sales for the second quarter of 2018 increased $41.3 million or 139.3% from net sales for the second quarter of 2017.
Sales of products into the PCB market for the second quarter of 2018 increased $30.0 million or 221.9% compared to the second quarter of 2017. This was primarily driven by increased sales of our flex circuit drilling systems. The higher demand for flex drilling systems reflected an unusually healthy market environment in 2018 compared to the very weak environment in the second quarter of 2017. The strong environment was driven by unit growth in consumer electronics and associated capacity additions plus new materials, technologies and applications that require increase level of complex flexible circuits.
Sales of products into the CT market for the second quarter of 2018 increased $2.7 million or 53.8% compared to second quarter of 2017, primarily driven by stronger capacity buying by MLCC manufacturers, particularly for consumer electronics and automotive applications.
Sales of products into semiconductor applications for second quarter of 2018 increased $4.8 million or 66.5% compared to second quarter of 2017. This increase was primarily driven by sales of legacy memory repair systems into the semiconductor industry, which had not occurred in the second quarter of 2017, as well as an increase in sales of our wafer mark and wafer trim products.
Sales of products into IM applications for the second quarter of 2018 increased $3.8 million or 97.0% compared to the second quarter of 2017. This was primarily due to incremental sales of our GarnetTM micromachining system, higher sales of our laser ablation products into the research and materials science industries, and increased service revenue.
The following table presents net sales information by geographic region:
 
Fiscal quarter ended
  
Sep 30, 2017
 
Oct 1, 2016
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Asia
$
64,053

 
90.3
%
 
$
25,721

 
86.7
%
Americas
2,936

 
4.1

 
2,236

 
7.5

Europe
3,978

 
5.6

 
1,701

 
5.7

Net Sales
$
70,967

 
100.0
%
 
$
29,658

 
100.0
%
Net sales to Asia increased by $38.3 million or 149.0% primarily due to higher sales of flex via drilling products and memory repair products. Net sales to Americas increased due principally to higher sales of Visicon inspection products and laser ablation products. Europe sales increased due to higher wafer trim and circuit trim product sales.
Gross Profit
 
Fiscal quarter ended
  
Sep 30, 2017
 
Oct 1, 2016
(In thousands, except percentages)
Gross Profit
 
% of Net Sales
 
Gross Profit
 
% of Net Sales
Gross Profit
$
26,532

 
37.4
%
 
$
10,980

 
37.0
%
Gross profit was $26.5 million for the second quarter of 2018, an increase of $15.6 million compared to $11.0 million in the second quarter of 2017. The gross profit increase was primarily driven by higher net sales, while the slight gross margin increase was primarily driven by the leveraged effect of higher sales volume, partially offset by $6.1 million of inventory and other asset impairment charges.

22


Operating Expenses
 
Fiscal quarter ended
  
Sep 30, 2017
 
Oct 1, 2016
(In thousands, except percentages)
Expense
 
% of Net Sales
 
Expense
 
% of Net Sales
Selling, general and administrative
$
11,648

 
16.5
%
 
$
12,766

 
43.0
%
Research, development and engineering
8,274

 
11.7

 
7,760

 
26.2

Restructuring costs
2,162

 
3.0

 

 

Acquisition and integration costs

 

 
335

 
1.1

Operating Expenses
$
22,084

 
31.2
%
 
$
20,861

 
70.3
%
Selling, general and administrative
Selling, general and administrative (SG&A) expenses primarily consist of labor and other employee-related expenses, including share-based compensation expense, travel expenses, professional fees, sales commissions and facilities costs. SG&A expenses for the second quarter of 2018 decreased $1.1 million compared to the second quarter of 2017. The decrease was primarily due to lower labor and facilities costs due to the corporate restructuring, partially offset by increased variable expenses due to higher revenues and improved profitability.
Research, Development and Engineering
Research, development and engineering (RD&E) expenses primarily comprise labor and other employee-related expenses, including share-based compensation expense, professional fees, project materials costs, equipment costs and facilities costs. RD&E expenses for the second quarter of 2018 increased $0.5 million compared to the second quarter of 2017, primarily due to increased variable expenses on higher corporate sales and improved profitability.
Restructuring and cost management plans
In the fourth quarter of 2017, we initiated a restructuring plan to improve business effectiveness, streamline operations and achieve a stated target profit level for the Company as a whole. Restructuring costs of $2.2 million incurred in the second quarter of 2018 consisted primarily of $1.2 million of fixed asset write-offs, $0.5 million of severance and related benefits charges, and $0.5 million of facilities lease obligations, and . See Note 17: Restructuring and Cost Management Plans for further discussion.
Non-operating Income and Expense
 
Fiscal quarter ended
  
Sep 30, 2017
 
Oct 1, 2016
(In thousands, except percentages)
Non-Operating (Expense)
Income
 
% of Net Sales
 
Non-Operating (Expense)
Income
 
% of Net Sales
Interest and other (expense) income, net
$
(229
)
 
(0.3
)%
 
$
206

 
0.7
%
Total non-operating (expense) income
$
(229
)
 
(0.3
)%
 
$
206

 
0.7
%
Non-operating income and expense, net, consists of interest income and expense, market gains and losses on assets held in employees’ deferred compensation accounts, realized and unrealized foreign exchange gains and losses, bank charges, investment management fees, and other miscellaneous non-operating items, such as investment impairment. Net non-operating expense was $229 thousand in the second quarter of 2018 compared to income of $206 thousand in the second quarter of 2017. The increased expense in the second quarter of 2018 was due primarily to interest on term loan executed in January 2017.

23


Income Taxes
 
Fiscal quarter ended
 
Sep 30, 2017
 
Oct 1, 2016
(In thousands, except percentages)
Income Tax Benefit
 
Effective
Tax Rate
 
Income Tax Provision
 
Effective
Tax Rate
(Benefit from) provision for income taxes
$
(41
)
 
(1.0
)%
 
$

 
%
The income tax benefit for the second quarter of 2018 was $41 thousand on pretax income of $4.2 million, an effective tax rate of (1.0)%. For the second quarter of 2017, the income tax provision was zero on pretax loss of $9.7 million, an effective rate of zero. The change in provision for taxes primarily relates to the timing of income between quarters given changes in full year income projections. Additionally, provision for taxes has not increased in proportion to the increase in pretax income due to the utilization of deferred tax assets arising from historical net operating losses.
Two Quarters Ended September 30, 2017 Compared to Two Quarters Ended October 1, 2016
Results of Operations
The following table presents results of operations data as a percentage of net sales:
 
Two fiscal quarters ended
 
Sep 30, 2017
 
Oct 1, 2016
Net sales
100.0
 %
 
100.0
 %
Cost of sales
63.1

 
58.9

Gross profit
36.9

 
41.1

Selling, general and administrative
17.1

 
33.2

Research, development and engineering
12.0

 
19.9

Acquisition and integration costs

 
0.4

Restructuring costs
2.3

 

Operating income (loss)
5.5

 
(12.4
)
Interest and other (expense) income, net
(0.3
)
 
0.2

Total non-operating (expense) income
(0.3
)
 
0.2

Income (loss) before income taxes
5.2

 
(12.2
)
Provision for income taxes
0.2

 
0.4

Net income (loss)
5.0
 %
 
(12.7
)%
Net Sales
The following table presents net sales information by product group:
 
Two fiscal quarters ended
  
Sep 30, 2017
 
Oct 1, 2016
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Printed Circuit Board
$
95,859

 
66.7
%
 
$
44,445

 
57.5
%
Component Test
15,858

 
11.0

 
9,592

 
12.4

Semiconductor
18,765

 
13.1

 
14,831

 
19.2

Industrial Machining
13,169

 
9.2
%
 
8,458

 
10.9
%
Net Sales
$
143,651

 
100.0
%
 
$
77,326

 
100.0
%
Net sales for the first two quarters of 2018 increased $66.3 million or 85.8% from net sales for the first two quarters of 2017.
Sales of products into the PCB market for the first two quarters of 2018 increased $51.4 million or 115.7% compared to the first two quarters of 2017. This was primarily driven by increased system sales in our flex drilling systems. The higher demand for flex drilling systems reflected a generally healthy environment, as well as strong technology and market drivers, primarily in consumer electronics, compared to the unusually weak environment in the first two quarters of 2017.

24


Sales of products into the CT market for the first two quarters of 2018 increased $6.3 million or 65.3% compared to the first two quarters of 2017, primarily driven by stronger capacity buying by MLCC manufacturers, particularly for consumer electronics and automotive applications.
Sales of products into semiconductor applications for the first two quarters of 2018 increased $3.9 million or 26.5% compared to the first two quarters of 2017. The increase was primarily driven by higher sales of legacy memory repair systems in 2018 compared to 2017, reflecting strength in the memory semiconductor market, and increased sales of semiconductor trim products.
Sales of products into IM applications for the first two quarters of 2018 increased $4.7 million or 55.7% compared to the first two quarters of 2017. This was primarily due to incremental system sales related to our Visicon acquisition, higher GarnetTM system sales and increased service revenue.
The following table presents net sales information by geographic region:
 
Two fiscal quarters ended
  
Sep 30, 2017
 
Oct 1, 2016
(In thousands, except percentages)
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Asia
$
130,616

 
90.9
%
 
$
66,169

 
85.6
%
Americas
7,106

 
4.9

 
5,254

 
6.8

Europe
5,929

 
4.1

 
5,903

 
7.6

Net Sales
$
143,651

 
100.0
%
 
$
77,326

 
100.0
%
Net sales in Asia increased to $130.6 million in the first two quarters of 2018, an increase of $64.4 million compared to $66.2 million in the first two quarters of 2017 primarily due to higher flex via drilling sales. Americas increased to $7.1 million in the first two quarters of 2018, an increase of $1.8 million compared to $5.3 million in the first two quarters of 2017. This was primarily due to higher sales of systems associated with our Visicon acquisition, and higher sales of semiconductor trim products.
Gross Profit
 
Two fiscal quarters ended
  
Sep 30, 2017
 
Oct 1, 2016
(In thousands, except percentages)
Gross Profit
 
% of Net Sales
 
Gross Profit
 
% of Net Sales
Gross Profit
$
52,952

 
36.9
%
 
$
31,788

 
41.1
%
Gross profit was $53.0 million for the first two quarters of 2018, an increase of $21.2 million compared to the first two quarters of 2017. Gross profit increased primarily due to higher net sales and production volumes. Gross margin was 36.9% and 41.1% for the first two quarters of 2018 and 2017, respectively. Gross margins in 2018 were negatively impacted by $13.3 million of charges for the impairment of inventory and other assets related to discontinued products, as a result of our portfolio review process, partially offset by favorable absorption of fixed costs due to higher production volumes.
Operating Expenses
 
Two fiscal quarters ended
  
Sep 30, 2017
 
Oct 1, 2016
(In thousands, except percentages)
Expense
 
% of Net Sales
 
Expense
 
% of Net Sales
Selling, general and administrative
$
24,456

 
17.1
%
 
$
25,637

 
33.2
%
Research, development and engineering