[January 31, 2013]

ESI Announces Third Quarter Fiscal 2013 Results

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 2013 third quarter ended December 29, 2012. Financial measures are provided on both a GAAP and non-GAAP basis.

Revenue in the third quarter was $37.9 million, compared to $80.2 million in the second quarter of 2013 and $49.8 million in the third quarter of last fiscal year. On a GAAP basis, net income was $6.8 million or $0.23 per diluted share, compared to $5.2 million or $0.17 per diluted share in the prior quarter and a loss of $1.9 million or $0.07 per share in the third quarter of fiscal 2012. GAAP income included $15.4 million in pre-tax net settlement proceeds from patent infringement litigation. On a non-GAAP basis, third quarter net loss was $1.5 million or $0.05 per share, compared to second quarter income of $7.0 million or $0.23 per diluted share and income of $0.5 million or $0.02 per diluted share in the third quarter of fiscal 2012.

"Solid execution enabled us to deliver respectable results on significantly lower revenues in the third quarter," stated Nick Konidaris, president and CEO of ESI. "In addition, strong ongoing operating cash flow and successful settlement of our patent dispute enabled us to declare and pay a $2.00 per share special dividend to our shareholders while preserving our ability to grow the company and pursue our strategy."

Orders were $26.3 million, compared to $35.0 million in the prior quarter. "Slow capital spending in our core markets, combined with timing of design wins in laser microfabrication, pushed orders lower in the third quarter," continued Konidaris. "Nonetheless, we continue to see an active funnel related to consumer electronics, and we remain optimistic about our long term opportunities."

GAAP gross margin was 34.9%, compared to 41.8% last quarter and included $1.2 million of inventory write-downs related to discontinuing our investment in LED package test. "Given the extended overcapacity in LED and ongoing commoditization of package test, we have decided to redirect our investments into more attractive opportunities," stated Konidaris. Non-GAAP gross margin was 39.9% compared to 42.8% in the prior quarter on lower volume.

GAAP operating expenses declined significantly due to the patent settlement proceeds, a $1.3 million gain on the sale of a building in China, and lower operational spending. Non-GAAP operating expenses, which exclude the settlement and building sale proceeds, decreased by $4.7 million due to lower variable expenses and discretionary expense control. "We were pleased with our flexible cost structure and our ability to reduce costs quickly on lower volumes," continued Konidaris. Non-GAAP operating loss was $3.9 million, compared to income of $10.5 million in the prior quarter.

Balance Sheet and Cash Flow

At quarter end, cash and investments totaled $171 million. The company generated $27.4 million of operating cash during the quarter. Inventories increased by $1 million and receivables decreased by $40 million, yielding a DSO of 45 days. In addition, during the quarter, the company paid a one-time special dividend of $2.00 per share or $59 million.

Fourth Quarter 2013 Outlook

Based on recent order levels, ESI expects revenues for the fourth quarter of fiscal 2013 to be roughly flat with the third quarter. Non-GAAP loss per share is expected to be $0.05 to $0.09.

Konidaris concluded, "We believe last quarter reflected trough demand levels in most of our markets. While we expect to see order levels improve in our fourth quarter, the ongoing overcapacity condition and increased volatility in some of our markets lead us to refocus our investments and lower the cost structure of the company. Looking forward, we will be concentrating our efforts on the growing opportunities in laser microfabrication for consumer electronics, including glass singulation, emerging technologies related to semiconductor 3D packaging, and leveraging proprietary laser capability. As a result, we expect to be a leaner, more focused company with increased ability to weather the cyclicality in our business and deliver profitable growth."

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) or 617-847-3007 (international). The conference ID number is 90492586. A live audio webcast can be accessed at www.esi.com. Upon completion of the call, an audio replay will be accessible through February 10, 2013, at 888-286-8010 (domestic) or 617-801-6888 (international), passcode 35054562. The webcast will be available on ESI's website for one year.

Discussion of Non-GAAP Financial Measures

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.

About ESI

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.

Forward-Looking Statements

This press release includes forward-looking statements about the markets we serve, growth, 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, and overall demand for electronic devices (such as capacitors, semiconductor memory devices and advanced electronic packages) 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 risk that the company may not be able 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 we may incur unanticipated costs or expenses in connection with our acquisition of Eolite Systems; the risk that competing or alternative technologies could reduce demand for our products; 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.

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