Electro Scientific: Esi Announces Second Quarter Fiscal 2014 Results

The following excerpt is from the company's SEC filing.

PORTLAND, Ore. – October 31, 2013 – Electro Scientific Industries, Inc. (NASDAQ:ESIO), a leading supplier of innovative laser-based manufacturing solutions for the microtechnology industry, today announced results for its fiscal 2014 second quarter ended September 28, 2013. Financial measures are provided on both a GAAP and non-GAAP basis, which excludes the impact of purchase accounting, equity compensation, and other items.

Revenue in the second quarter was $59.6 million, compared to $46.2 million in the first quarter of 2014 and $80.2 million in the second quarter of last fiscal year. On a GAAP basis, net loss was $2.8 million or $0.09 per share, compared to net loss of $3.3 million or $0.11 per share in the prior quarter. On a non-GAAP basis, second quarter net income was $2.6 million or $0.09 per diluted share, compared to net income of $0.4 million or $0.01 per diluted share in the first quarter of fiscal 2014 and net income of $7.0 million or $0.23 per diluted share in the second quarter of fiscal 2013.

“I'm pleased to report another good quarter for ESI with revenues, gross margin and non-GAAP earnings per share at the high end of our outlook,” stated Nick Konidaris, president and CEO of ESI. “We also continued to execute on our growth initiatives that will expand our markets and unlock incremental revenue opportunities.”

Orders for the second quarter were $46.2 million, compared to $58.3 million in the prior quarter. Konidaris continued, “The demand environment was challenging this quarter, due to a lull in advanced microfabrication demand, delays in the adoption of next-generation strengthened glass, and the absorption of capacity ordered earlier in the year.”

GAAP gross margin was 41.3%. Non-GAAP gross margin was 43.2% compared to 43.9% in the prior quarter. Operating expenses were $23.9 million, up from $22.5 million in the prior quarter. On a non-GAAP basis operating expenses increased to $22.1 million due mainly to incremental development costs associated with strategic design wins in the semiconductor business and a full quarter of expenses from our acquired Semiconductor Systems division. Non-GAAP operating income was $3.7 million compared to $0.5 million in the first quarter.

At quarter end, cash and investments decreased to $132 million. The company generated $5.6 million in cash from operations during the quarter, paid $1.7 million as a net working capital adjustment associated with its acquisition of the Semiconductor Systems business, and paid $2.4 million for the quarterly dividend of $0.08 per share. The company also used $5.0 million to increase its equity investment in OmniGuide, Inc., a provider of fiber technology for minimally invasive micro-surgical cutting and coagulation. The terms of this latest round of financing resulted in a non-cash impairment charge of $3.6 million related to ESI's investment in previous rounds.

Based on recent order levels, ESI expects revenues for the third quarter of fiscal 2014 to be in the low $40 million range. Non-GAAP loss per share is expected to be $0.05 to $0.09. Additionally, we expect fiscal year revenues to be down approximately 10% from 2013.

Konidaris concluded, “In the near term we are facing the impact of a lull in equipment demand for consumer electronics applications and a delay in the adoption of next-generation strengthened glass. However, we are pleased with progress in our growth strategy, as we aggressively pursue promising opportunities in consumer electronics, 3D semiconductor packaging and enabling laser technologies. We are heavily engaged with our customers and believe that our laser microfabrication solutions will continue to enable new functionality, drive down cost, increase yield and improve the quality of consumer electronics devices."

The company will hold a conference call today at 5:00 p.m. ET. The session will include a review of the financial results, operational performance and business outlook, and also a question and answer period.

The conference call can be accessed by calling 888-339-2688 (domestic participants) or 617-847-3007 (international participants). The conference ID number is 74406194. A live audio webcast can be accessed at www.esi.com. Upon completion of the call, an audio replay will be accessible through November 10, 2013, at 888-286-8010 (domestic participants) or 617-801-6888 (international participants), passcode 52011583. The webcast will be available on ESI’s website for one year.

In this press release, we have presented financial measures which have not been determined in accordance with generally accepted accounting principles (GAAP) and are therefore non-GAAP financial measures. Non-GAAP financial measures exclude the impact of purchase accounting, equity compensation, restructuring charges and other items. We believe that this presentation of non-GAAP financial measures allows investors to better assess the company’s operating performance by comparing it to prior periods on a more consistent basis. We have included a reconciliation of various non-GAAP financial measures to those measures reported in accordance with GAAP. Because our calculation of

non-GAAP financial measures may differ from similar measures used by other companies, investors should be careful when comparing our non-GAAP financial measures to those of other companies.

ESI is a leading supplier of innovative, laser-based manufacturing solutions for the microtechnology industry. Our systems enable precise structuring and testing of micron to submicron features in electronic devices, semiconductors, LEDs and other high-value components. We partner with our customers to make breakthrough technologies possible in the microelectronics, semiconductor and other emerging industries. Founded in 1944, ESI is headquartered in Portland, Ore., with global operations from the Pacific Northwest to the Pacific Rim. More information is available at www.esi.com.

This press release includes forward-looking statements about the markets we serve, growth initiatives, revenue and earnings per share. These forward-looking statements are based on information available to us on the date of this release and we assume no obligation to update these forward-looking statements for any reason. Actual results may differ materially from those in the forward-looking statements. Risks and uncertainties that may affect the forward-looking statements include: the risk that anticipated growth opportunities may be smaller than anticipated or may not be realized; risks related to the relative strength and volatility of the electronics industry—which is dependent on many factors, including component prices, global economic strength and political stability, timing of consumer product introductions and overall demand for electronic devices (such as semiconductors, printed circuit boards, displays, LEDs, capacitors and other components) used in wireless telecommunications equipment, computers and consumer and automotive electronics; the health of the financial markets and availability of credit for end customers and related effect on the global economy; the volatility associated with the industries we serve which includes the relative level of capacity and demand, and financial strength of the manufacturers; the risk that customer orders may be canceled or delayed; the ability of the company to respond promptly to customer requirements; the risk that the company may not be able to ship products on the schedule required by customers, whether as a result of production delays, supply delays, or otherwise; the ability of the company to develop, manufacture and successfully deliver new products and enhancements; the risk that customer acceptance of new or customized products may be delayed; the risk that large orders and related revenues may not be repeated; the company’s need to continue investing in research and development; the company’s ability to hire and retain key employees; the company’s ability to create and sustain intellectual property protection around its products; the risk that competing or alternative technologies could reduce demand for our products; risks related to the integration of the Semiconductor Systems business; foreign currency fluctuations; the company’s ability to utilize recorded deferred tax assets; taxes, interest or penalties resulting from tax audits; and changes in tax laws or the interpretation of such tax laws.

Operating Results:          Fiscal quarter ended Two fiscal quarters ended Sep 28, 2013 Jun 29, 2013 Sep 29, 2012 Sep 28, 2013 Sep 29, 2012Net sales$59,647 $46,172 $80,152 $105,819 $139,121Cost of sales35,015 26,786 46,632 61,801 81,948Gross profit24,632 19,386 33,520 44,018 57,173 41% 42% 42% 42% 41%Operating expenses:         Selling, service and administration14,251 14,547 15,114 28,798 30,777Research, development and engineering9,719 8,425 10,527 18,144 20,061Gain on acquisition of Semiconductor Systems business(35) (464) — (499) —Net operating expenses23,935 22,508 25,641 46,443 50,838Operating income (loss)697 (3,122) 7,879 (2,425) 6,335Non-operating (expense) income:         Other-than-temporary impairment of cost based investments(3,588) — — (3,588) —Interest and other income (expense), net80 (60) 91 20 (59)Total non-operating (expense) income(3,508) (60) 91 (3,568) (59)(Loss) income before income taxes(2,811) (3,182) 7,970 (5,993) 6,276(Benefit from) provision for income taxes(33) 101 2,759 68 2,009Net (loss) income$(2,778) $(3,283) $5,211 $(6,061) $4,267Net (loss) income per share—basic$(0.09) $(0.11) $0.18 $(0.20) $0.15Net (loss) income per share—diluted$(0.09) $(0.11) $0.17 $(0.20) $0.14

Financial Position As Of:      Sep 28, 2013 Jun 29, 2013 Mar 30, 2013Assets     Current assets:     Cash and cash equivalents$71,975 $73,765 $88,913Short-term investments49,897 50,265 56,144Trade receivables, net34,701 38,199 31,779Inventories70,208 74,074 63,067Shipped systems pending acceptance549 1,857 1,007Deferred income taxes, net1,737 1,734 1,682Other current assets4,890 3,894 3,898Total current assets233,957 243,788 246,490Non-current assets:     Non-current investments10,388 12,299 12,329Property, plant and equipment, net28,209 28,091 27,894Non-current deferred income taxes, net3,421 3,708 3,766Goodwill7,889 7,889 7,889Acquired intangible assets, net8,283 9,108 9,088Other assets16,770 13,584 14,752Total assets$308,917 $318,467 $322,208Liabilities and shareholders' equity     Current liabilities:     Accounts payable$15,534 $16,721 $16,958Accrued liabilities22,353 24,891 24,930Deferred revenue7,855 10,766 10,196Total current liabilities45,742 52,378 52,084Non-current income taxes payable6,214 5,885 5,982Shareholders' equity:     Preferred and common stock180,069 178,469 176,631Retained earnings76,402 81,567 87,228Accumulated other comprehensive income490 168 283Total shareholders' equity256,961 260,204 264,142Total liabilities and shareholders' equity$308,917 $318,467 $322,208End of period shares outstanding30,018 29,915 29,583

 Fiscal quarter ended Two fiscal quarters ended Sep 28, 2013 Jun 29, 2013 Sep 29, 2012 Sep 28, 2013 Sep 29, 2012Sales detail:         Interconnect & Microfabrication Group$38,301 $34,417 $69,137 $72,718 $116,969Semiconductor Group10,935 5,613 3,184 16,548 6,616Components Group10,411 6,142 7,831 16,553 15,536Total$59,647 $46,172 $80,152 $105,819 $139,121          Gross margin %41% 42% 42% 42% 41%Selling, service and administration expense %24% 32% 19% 27% 22%Research, development and engineering expense %16% 18% 13% 17% 14%Operating income (loss) %1% (7%) 10% (2%) 5%Effective tax rate %1% (3%) 35% (1%) 32%Weighted average shares outstanding - basic29,967 29,745 29,339 29,856 29,228Weighted average shares outstanding - diluted29,967 29,745 29,961 29,856 29,912End of period employees626 623 679 626 679

Reconciliation of GAAP to Non-GAAP Financial Measures:       Fiscal quarter ended Two fiscal quarters ended Sep 28, 2013 Jun 29, 2013 Sep 29, 2012 Sep 28, 2013 Sep 29, 2012          Gross profit per GAAP$24,632 $19,386 $33,520 $44,018 $57,173Purchase accounting965 689 545 1,654 882Equity compensation189 185 217 374 433Non-GAAP gross profit$25,786 $20,260 $34,282 $46,046 $58,488Non-GAAP gross margin43.2% 43.9% 42.8% 43.5% 42.0%          Operating expenses per GAAP$23,935 $22,508 $25,641 $46,443 $50,838Purchase accounting357 266 129 623 249Equity compensation1,045 2,449 1,683 3,494 4,444Acquisition and integration costs590 404 70 994 859Restructuring credits(90) — — (90) —Legal settlement costs— 55 — 55 —Gain on purchase of acquisition of Semiconductor Systems business(35) (464) — (499) —Non-GAAP operating expenses$22,068 $19,798 $23,759 $41,866 $45,286% of Net sales37% 43% 30% 40% 33%          Operating income (loss) per GAAP$697 $(3,122) $7,879 $(2,425) $6,335Non-GAAP adjustments to gross profit1,154 874 762 2,028 1,315Non-GAAP adjustments to operating expenses1,867 2,710 1,882 4,577 5,552Non-GAAP operating income$3,718 $462 $10,523 $4,180 $13,202% of Net sales6% 1% 13% 4% 9%          Non-operating (expense) income, net per GAAP$(3,508) $(60) $91 $(3,568) $(59)Other-than-temporary impairment of cost based investments3,588 — — 3,588 —Non-GAAP non-operating income (expense)$80 $(60) $91 $20 $(59)          Net (loss) income per GAAP$(2,778) $(3,283) $5,211 $(6,061) $4,267Non-GAAP adjustments to gross profit1,154 874 762 2,028 1,315Non-GAAP adjustments to operating expenses1,867 2,710 1,882 4,577 5,552Non-GAAP adjustments to non-operating expense3,588 — — 3,588 —Income tax effect of other non-GAAP adjustments(1,193) 54 (848) (1,139) (2,259)Non-GAAP net income$2,638 $355 $7,007 $2,993 $8,875% of Net sales4% 1% 9% 3% 6%Basic Non-GAAP net income per share$0.09 $0.01 $0.24 $0.10 $0.30Diluted Non-GAAP net income per share$0.09 $0.01 $0.23 $0.10 $0.30

Consolidated Condensed Statements of Cash Flows:         Fiscal quarter ended Two fiscal quarters ended Sep 28, 2013 Jun 29, 2013 Sep 29, 2012 Sep 28, 2013 Sep 29, 2012Net (loss) income$(2,778) $(3,283) $5,211 $(6,061) $4,267Non-cash adjustments and changes in operating activities8,369 (5,417) (16,413) 2,952 (4,117)Net cash provided by (used in) operating activities5,591 (8,700) (11,202) (3,109) 150Net cash (used in) provided by investing activities(5,796) (3,087) (360) (8,883) 5,766Net cash used in financing activities(2,020) (3,175) (2,202) (5,195) (5,097)Effect of exchange rate changes on cash435 (186) 404 249 357NET CHANGE IN CASH AND CASH EQUIVALENTS(1,790) (15,148) (13,360) (16,938) 1,176CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD73,765 88,913 84,316 88,913 69,780CASH AND CASH EQUIVALENTS AT END OF PERIOD$71,975 $73,765 $70,956 $71,975 $70,956

The above information was disclosed in a filing to the SEC. To see this filing in its entirety, click here. Electro Scientific Industries next reports earnings on October 31, 2013.

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