0001169232-08-003611.txt : 20081007
<SEC-HEADER>0001169232-08-003611.hdr.sgml : 20081007
<ACCEPTANCE-DATETIME>20081007060105
ACCESSION NUMBER: 0001169232-08-003611
CONFORMED SUBMISSION TYPE: SC 13D/A
PUBLIC DOCUMENT COUNT: 2
FILED AS OF DATE: 20081007
DATE AS OF CHANGE: 20081007
GROUP MEMBERS: DAVID NIERENBERG
GROUP MEMBERS: THE D3 FAMILY BULLDOG FUND, L.P.
GROUP MEMBERS: THE D3 FAMILY CANADIAN FUND, L.P.
GROUP MEMBERS: THE D3 FAMILY FUND, L.P.
GROUP MEMBERS: THE DIII OFFSHORE FUND, L.P.
GROUP MEMBERS: THE NIERENBERG INVESTMENT MANAGEMENT OFFSHORE, INC.
SUBJECT COMPANY:
COMPANY DATA:
COMPANY CONFORMED NAME: ELECTRO SCIENTIFIC INDUSTRIES INC
CENTRAL INDEX KEY: 0000726514
STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690]
IRS NUMBER: 930370304
STATE OF INCORPORATION: OR
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: SC 13D/A
SEC ACT: 1934 Act
SEC FILE NUMBER: 005-34524
FILM NUMBER: 081111117
BUSINESS ADDRESS:
STREET 1: 13900 NW SCIENCE PARK DR
CITY: PORTLAND
STATE: OR
ZIP: 97229
BUSINESS PHONE: 5036414141
MAIL ADDRESS:
STREET 1: 13900 NW SCIENCE PARK DRIVE
CITY: PORTLAND
STATE: OR
ZIP: 97229-5497
FILED BY:
COMPANY DATA:
COMPANY CONFORMED NAME: NIERENBERG INVESTMENT MANAGEMENT CO
CENTRAL INDEX KEY: 0001282683
IRS NUMBER: 911677205
FILING VALUES:
FORM TYPE: SC 13D/A
MAIL ADDRESS:
STREET 1: 19605 NE 8TH ST
CITY: CAMAS
STATE: WA
ZIP: 98607
</SEC-HEADER>
<DOCUMENT>
<TYPE>SC 13D/A
<SEQUENCE>1
<FILENAME>d75077_sc13da.txt
<DESCRIPTION>AMENDMENT NO. 11
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. 11)
ELECTRO SCIENTIFIC INDUSTRIES INC. (ESIO)
- --------------------------------------------------------------------------------
(Name of Issuer)
- --------------------------------------------------------------------------------
Common Stock
(Title of Class of Securities)
285229100
- --------------------------------------------------------------------------------
(CUSIP Number)
David Nierenberg
The D3 Family Funds
19605 NE 8th Street
Camas, WA 98607
(360) 604-8600
- --------------------------------------------------------------------------------
With a copy to:
Henry Lesser, Esq.
DLA Piper US LLP
2000 University Avenue
East Palo Alto, CA 94303
(650) 833-2000
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
- --------------------------------------------------------------------------------
October 6, 2008
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition that is the subject of this Schedule 13D and is filing this
schedule because of ss.ss. 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the
following box [ ].
<PAGE>
- --------------------------------------------------------------------------------
NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (entities only)
1 The D3 Family Fund, L.P.
- --------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (See Instructions)
(a) [X]
2 (b) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS (See Instructions)
WC
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6 Washington
- --------------------------------------------------------------------------------
NUMBER OF SHARES 7 SOLE VOTING POWER
BENEFICIALLY 0
----------------------------------------------------
OWNED BY
EACH SHARED VOTING POWER
REPORTING 8 598,762 Common shares (2.2%)
----------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH 0
----------------------------------------------------
10 SHARED DISPOSITIVE POWER
598,762
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
For the reporting person listed on this page, 598,762; for all
reporting persons as a group, 4,060,127 shares (15.0%)*
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES (See Instructions) [ ]
- --------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13 15.0%*
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON (See Instructions)
PN
- --------------------------------------------------------------------------------
*See Item 5 of this Amendment
2
<PAGE>
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (entities only)
The D3 Family Bulldog Fund, L.P.
- --------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (See Instructions)
(a) [X]
2 (b) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS (See Instructions)
WC
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6 Washington
- --------------------------------------------------------------------------------
NUMBER OF SHARES 7 SOLE VOTING POWER
BENEFICIALLY 0
----------------------------------------------------
OWNED BY
EACH SHARED VOTING POWER
REPORTING 8 2,414,476 common shares (8.9%)
----------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH 0
----------------------------------------------------
10 SHARED DISPOSITIVE POWER
2,414,476
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
For the reporting person listed on this page, 2,414,476; for all
reporting persons as a group, 4,060,127 shares (15.0%)*
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES (See Instructions) [ ]
- --------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13 15.0%*
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
PN
- --------------------------------------------------------------------------------
*See Item 5 of this Amendment
3
<PAGE>
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (entities only)
The D3 Family Canadian Fund, L.P.
- --------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (See Instructions)
(c) [X]
2 (d) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS (See Instructions)
WC
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6 Washington
- --------------------------------------------------------------------------------
NUMBER OF SHARES 7 SOLE VOTING POWER
BENEFICIALLY 0
----------------------------------------------------
OWNED BY
EACH SHARED VOTING POWER
REPORTING 8 232,475 common shares (0.9%)
----------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH 0
----------------------------------------------------
10 SHARED DISPOSITIVE POWER
232,475
- --------------------------- ----------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
For the reporting person listed on this page, 232,475 shares; for
all reporting persons as a group, 4,060,127 shares (15.0%)*
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES (See Instructions) [ ]
- --------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13 15.0%*
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
PN
- --------------------------------------------------------------------------------
*See Item 5 of this Amendment
4
<PAGE>
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (entities only)
The DIII Offshore Fund, L.P.
- --------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (See Instructions)
(a) [X]
2 (b) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS (See Instructions)
WC
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6 Bahamas
- --------------------------------------------------------------------------------
NUMBER OF SHARES 7 SOLE VOTING POWER
BENEFICIALLY 0
----------------------------------------------------
OWNED BY
EACH SHARED VOTING POWER
REPORTING 8 814,414 common shares (3.0%)
----------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH 0
----------------------------------------------------
10 SHARED DISPOSITIVE POWER
814,414
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
For the reporting person listed on this page, 814,414; for all
reporting persons as a group, 4,060,127 shares (15.0%)*
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES (See Instructions) [ ]
- --------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13 15.0%*
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
PN
- --------------------------------------------------------------------------------
*See Item 5 of this Amendment
5
<PAGE>
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (entities only)
Nierenberg Investment Management Company, Inc.
- --------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (See Instructions)
(a) [X]
2 (b) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS (See Instructions)
AF
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6 Washington
- -------------------------------------------------------------------------------
NUMBER OF SHARES 7 SOLE VOTING POWER
BENEFICIALLY 0
----------------------------------------------------
OWNED BY
EACH SHARED VOTING POWER
REPORTING 8 4,060,127 shares (15.0%)*
----------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH 0
----------------------------------------------------
10 SHARED DISPOSITIVE POWER
4,060,127 shares
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
For the reporting person listed on this page, 4,060,127; for all
reporting persons as a group, 4,060,127 shares (15.0%)*
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES (See Instructions) [ ]
- --------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13 15.0%*
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
CO
- --------------------------------------------------------------------------------
*See Item 5 of this Amendment
6
<PAGE>
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (entities only)
Nierenberg Investment Management Offshore, Inc.
- --------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (See Instructions)
(a) [X]
2 (b) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS (See Instructions)
AF
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6 Bahamas
- --------------------------------------------------------------------------------
NUMBER OF SHARES 7 SOLE VOTING POWER
BENEFICIALLY 0
----------------------------------------------------
OWNED BY
EACH SHARED VOTING POWER
REPORTING 8 814,414 common shares (3.0%)
----------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH 0
----------------------------------------------------
10 SHARED DISPOSITIVE POWER
814,414 common shares
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
For the reporting person listed on this page, 814,414 for all
reporting persons as a group, 4,060,127 shares (15.0%)*
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES (See Instructions) [ ]
- --------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13 15.0%*
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
CO
- --------------------------------------------------------------------------------
*See Item 5 of this Amendment
7
<PAGE>
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (entities only)
David Nierenberg
- --------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (See Instructions)
(c) [X]
2 (d) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS (See Instructions)
AF
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6 United States of America
- --------------------------------------------------------------------------------
NUMBER OF SHARES 7 SOLE VOTING POWER
BENEFICIALLY 0
----------------------------------------------------
OWNED BY
EACH SHARED VOTING POWER
REPORTING 8 4,060,127 shares (15.0%)*
----------------------------------------------------
PERSON 9 SOLE DISPOSITIVE POWER
WITH 0
----------------------------------------------------
10 SHARED DISPOSITIVE POWER
4,060,127 shares
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
For the reporting person listed on this page, 4,060,127; for all
reporting persons as a group, 4,060,127 shares (15.0%)*
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES (See Instructions) [ ]
- --------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13 15.0%*
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
IN
- --------------------------------------------------------------------------------
*See Item 5 of this Amendment
8
<PAGE>
This Amendment No. 11 to Schedule 13D (this "Amendment") amends the
below-indicated items from the Schedule 13D previously filed by or on behalf of
the undersigned parties (the "Reporting Persons") (the "Schedule 13D"), by
supplementing such Items with the information below:
Item 4. Purpose of Transaction
The Reporting Persons are calling upon ESIO to commit to an immediate
and continuing substantial share repurchase program. The Reporting Persons have
also requested an exemption that would allow them to acquire up to 19.99% of
ESIO's shares, should they so choose, without triggering ESIO's shareholder
rights plan. These requests were made in a letter dated October 6, 2007 which
the Reporting Persons, through David Nierenberg, sent to ESIO's CEO Nick
Konidaris. The letter is attached to this filing and is incorporated by
reference herein.
The statements by the Reporting Persons in the above-referenced letter
regarding their investment in ESIO represent solely their own analyses and
judgments, based on publicly-available information and their own internal
evaluation thereof. Those statements are not intended, and should not be relied
on, as investment advice to any other investor or prospective investor. To the
extent those statements reflect assessments of possible future developments,
those assessments are forward-looking statements that are inherently subject to
the uncertainties associated with all assessments of future events; actual
developments may materially differ as a result of circumstances affecting ESIO
and/or extrinsic factors such as developments in ESIO's industry and the
economic environment. The Reporting Persons reserve the right to change their
internal evaluation of this investment in the future, as well as to increase or
decrease their investment depending on their evaluation, and to discuss ESIO and
their investment in it with the directors and executive officers of ESIO and
third parties, without further amending the Schedule 13D except as required by
applicable rules.
Item 5. Interest in Securities of the Issuer
(a, b) The Reporting Persons, in the aggregate, beneficially own
4,060,127 common shares, constituting approximately 15.02% of the outstanding
shares.
The last purchases of ESIO shares by any of the Reporting Persons were
on July 24, 2008. Based on what was then the most reason publicly-reported
number of ESIO shares outstanding (27,090,598 as of June 6, 2008, as set forth
in ESIO's June 11, 2008 Form 10-K for the transition period June 3, 2007 to
March 29, 2008), those purchases resulted in the Reporting Persons then
beneficially owning in the aggregate 14.99% of ESIO's outstanding common shares.
Subsequent to those last purchases of ESIO shares by the Reporting Persons, in
its August 5, 2008 Form 10-Q for the quarter ended June 28, 2008, ESIO reported
a reduced number of outstanding common shares as of July 31, 2008 (27,026,125).
For the purposes of this Amendment, the Reporting Persons have calculated their
aggregate percentage beneficial ownership (15.02%) based on that later lower
reported number.
Item 7. Material to be filed as Exhibits
Exhibit 1 to this Amendment is the letter referred to in response to
Item 4 of this Amendment.
9
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, each of the
undersigned certifies that the information set forth in the Statement is true,
complete and correct.
D3 Family Fund, L.P., D3 Family Bulldog
Fund, L.P., and D3 Family Canadian Fund, L.P.
By: Nierenberg Investment Management
Company, Inc.
Its: General Partner
October 7, 2008 By: /s/ David Nierenberg
- ------------------------- ----------------------------------------
David Nierenberg, President
DIII Offshore Fund, L.P.
By: Nierenberg Investment Management
Offshore, Inc.
Its: General Partner
October 7, 2008 By: /s/ David Nierenberg
- ------------------------- ----------------------------------------
David Nierenberg, President
Nierenberg Investment Management
Company, Inc.
October 7, 2008 By: /s/ David Nierenberg
- ------------------------- -----------------------------------------
David Nierenberg, President
Nierenberg Investment Management
Offshore, Inc.
October 7, 2008 By: /s/ David Nierenberg
- ------------------------- -----------------------------------------
David Nierenberg, President
October 7, 2008 /s/ David Nierenberg
- ------------------------- ---------------------------------------------
David Nierenberg
10
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>2
<FILENAME>d75077_ex99-1.txt
<DESCRIPTION>LETTER
<TEXT>
Exhibit 1
THE D3 FAMILY FUNDS
October 6, 2008
Mr. Nick Konidaris, President and Chief Executive Officer
Electro Scientific Industries, Inc.
13900 NW Science Park Drive
Portland, OR 97229
Dear Nick,
ESI and the D3 Funds have enjoyed a productive dialogue about what we hope the
company might do with its cash. We are living in unusual times: the current
volatility in the stock market; the anxieties which cause it; the large share
repurchase programs announced by Microsoft, Nike, Hewlett-Packard, and Sysco on
September 22; the downturn of several of your served markets; and the SEC's
temporary relaxation of share repurchase rule 10b-18 prompt us to resume our
discussion with you and the Board of Directors about the company's financial
strategy.
We believe that ESI has, and can generate, sufficient cash over the next three
years both to fund an aggressive share repurchase program which would halve the
share count and to double the company's revenues through organic growth and
acquisitions. We urge you and ESI's Board of Directors to commit to and commence
such a program right now, while the share price is weak. We believe that the
company has the financial strength to do this without incurring debt.
While we discuss in this letter a three year share repurchase program, we view
the next three years as the opening phase of what we hope will become an even
longer term program by ESI to grow earnings per share (EPS) and increase return
on invested capital (ROIC) by managing three variables, rather than just two:
revenue growth, costs, and capital structure.. Similar long term programs have
been used successfully to build shareholder value at Teledyne from 1972 to 1984,
and for decades at Loews Corporation and Washington Post. At Teledyne, for
example, the company's repurchases enabled it to increase EPS nearly six times
faster than net income.
Our request is a strong endorsement of your leadership of ESI, the Board's
governance of the company, ESI's strong market share positions, its fortress
balance sheet, and its long term growth prospects. We would not seek to own more
of ESI unless we believed strongly that it is an excellent company with a bright
future.
You and your management team have accomplished a great deal since you joined ESI
four years ago. You inherited an accounting mess which has been rectified. You
broke down the silos separating the company's business units to stimulate the
sharing of core technologies and the development of new products. You rebuilt
the senior management of the company. You committed to make product development
customer driven and you have fulfilled that promise. You sought to double the
company's served markets from $300M to $600M and you have achieved that
objective, introducing high margin new products in all three of your businesses.
1
Nierenberg Investment Management Company, Inc., 19605 NE 8th Street, Camas, WA
98607 (360)604-8600 Fax (360)604-1811
<PAGE>
You are developing growth opportunities organically, such as wafer singulation,
and by acquisition and investment, such as New Wave Research. Therefore, when
you commit, as you recently did in the AEA presentation on August 12, 2008, to
doubling ESIO's served market again over the next three years ( AEA
presentation, slide 75), your accomplishments certainly entitle you to the
benefit of the doubt.
It must be frustrating to you and your colleagues at ESI that your progress is
not reflected in the company's share price.
We believe that there is one more thing which ESI should do to round out its
accomplishments: use your current and future financial strength to launch a long
term program to boost the company's ROIC and EPS by halving the share count. We
say "long term program" to distinguish it from repurchases which are episodic,
interrupted, discontinuous, and/or small. As the three examples we cited
demonstrate, the most successful repurchase programs are large and they persist
over a long period of time. A long term program would improve substantially the
two ratios of greatest importance to investors; smaller, discontinuous programs
may not accomplish much at all. They generally fail to demonstrate serious and
sustainable commitment. Repurchasing shares is like going on a diet;
fundamentally changing habits works better than fits and starts. Most diets
fail, as do most repurchases---unless they are programmed to become a new habit,
which is what we are advocating here.
We believe that the correct way to assess the company's ability to halve the
share count resembles how you think about the company's growth strategy: plan
over at least a three year period of time. The problem with a momentary snap
shot of ESI's balance sheet is that it omits real opportunities for the company
to monetize several non-cash assets over time and the company's proven ability
to generate strong cash flow from operations throughout the business cycle. The
latter, in fact, enabled ESI to generate nearly $23 million of cash per year
over the past five years (slide 77 of the AEA presentation). As we will
demonstrate in this letter, looking only at the company's current cash balance,
which is all ESI showed in the AEA presentation and the May 22 New York Investor
Day presentation, leaves out over half the cash which we believe could be
generated for repurchases and acquisitions during the next three years.
To flesh out our analysis, we use the company's most recent Form 10-Q and 10-K,
your AEA presentation, and commentary from the company's most recent earnings
call. Our numbers are based on data from ESI in the public domain and
assumptions we have made based on your data.
For the quarter ending June 28, 2008 ESI showed cash and current investments of
$138.365 million. (Form 10-Q)
For the quarter ending June 28, 2008 ESI had non-current investments of $16.605
million, of which $14.506 million was in the form of Auction Rate Securities
(ARS) at estimated fair value after a $5.1 million impairment charge. The rest
was unimpaired investments with a maturity longer than one year. While neither
of these investments would be liquid immediately without a haircut, over a three
year planning horizon we assume that ESI can recover $16.605M of cash. (Perhaps
you might recover more.) (Form 10-Q, footnote 5)
2
Nierenberg Investment Management Company, Inc., 19605 NE 8th Street, Camas, WA
98607 (360)604-8600 Fax (360)604-1811
<PAGE>
For the quarter ending June 28, 2008 "other assets" were $38.097 million,
including $9.719 million for the All-Ring patent suit court bond in Taiwan.
(Form 10-Q, footnote 7) From our recent conversations with ESI's CFO, we believe
that during the next three years ESI should be able to monetize that $9.719
million, by replacing the cash escrow with a letter of credit.
For the quarter ending June 28, 2008 ESI showed property, plant and equipment,
net of depreciation, of $47.610 million. (Form 10-Q) Of this, $42.648 million is
land and buildings at historical cost, less depreciation of the buildings, owned
free and clear. (Form 10-K, footnote 8) In its recent presentations and earnings
calls, ESI management has mentioned the company's progress transferring
manufacturing to a contract manufacturer in Singapore. In fact, management has
articulated the goal of outsourcing over half of manufacturing over the next
three years. Moreover, ESI is locating a growing portion of its engineering
staff in locations other than Portland. While it is impossible for us, from
outside the company, to be precise or accurate about how much excess land and
buildings ESI may own today or in the future, we know that the company will
assess regularly how large a real estate "footprint" it needs as it continues
transferring manufacturing and engineering to other locations. While we are not
urging the company to monetize all real estate, or to sell now, we do advocate
monetizing excess land and buildings over the next three years. In the absence
of a specific number from ESI, we guesstimate that the company could generate at
least $20 million here.
Now we will shift the spotlight from the balance sheet to three year revenue and
operating cash flow growth, as the company seeks to double its served markets
(AEA slide 75) and as the semiconductor and electronics capital equipment
industries ultimately climb out of their trough. Today ESI's revenues are
approximately one-third of its served market: $220 million out of $650 million.
Assuming that ESI's revenues remain approximately 30-35% of a served market
which you project could grow to $1.3 billion in three years, ESI would grow
revenues to $400 million in 2011. (If this feels aggressive, allow more time. It
doesn't alter our point.)
ESI has on many occasions publicly endorsed a business model of 50% gross
margins, 30% below the line costs, and a 20% operating margin (AEA slide 76),
once the company reached a $90 million quarterly revenue run rate. Therefore,
when you reach the $400 million run rate, ESI should generate approximately
$53.5 million in annual profit after tax (13% after tax return on sales, plus
$1.5 million of after-tax interest income).
Obviously we cannot forecast when this might happen. But for the purpose of a
three or four year illustration, we modeled that after tax profits would reach
$53.5 million linearly over a three year period, climbing from zero this fiscal
year, to $17.8 million in fiscal 2010 (mostly calendar 2009), $35.7 million in
fiscal 2011, and $53.5 million in fiscal 2012. Total profits over the four
fiscal years would be $107 million, a number which is in line with your
operating cash flows over the past five years, even though ESI is projected to
double in size from today.
To estimate ESI's operating cash flow from fiscal 2009-2012 we also must project
depreciation, capital expenditures, inventories and receivables. To simplify
this exercise, however, we will assume that ESI's annual depreciation expense
should roughly equal capital expenditures. This feels reasonable because the
company recently completed a major investment in information systems and because
the company probably has, or soon will have, excess real estate. ESI's recent
inventory turns ratio has been about 1.5 times. Over the next three years the
CFO hopes to double
3
Nierenberg Investment Management Company, Inc., 19605 NE 8th Street, Camas, WA
98607 (360)604-8600 Fax (360)604-1811
<PAGE>
turns to 3 times. Given ESI's current high inventory levels,
given that ESI's contract manufacturer will hold a growing portion of inventory
on its balance sheet rather than ESI's, this goal sounds achievable to us. Thus,
if the company doubles revenues over the next three years, it should not need to
increase its aggregate investment in inventory. Finally, if ESI maintained
accounts receivable at 70 days, (where it was on June 28, 2008, using form
10-Q), keeping receivables in line with revenues would require $18 million.
Finally, we will assume that over the next three years ESI executives and
employees will continue to exercise their vested stock options. While nobody can
forecast precisely when this might happen, or how much cash these exercises
might generate, a conservative number for cash which might be generated from
this might be $15 million.
Let's combine all of the current and projected cash sources in one table:
<TABLE>
<CAPTION>
Source of cash: Amount (in millions of dollars)
- --------------- -------------------------------
<S> <C>
Current cash and short term investments, 6/28/08 138.3
Non-current investments, 6/28/08 16.6
All-Ring court bond, 6/28/08 9.7
Excess company owned real estate, next three years 20.0
Estimated accumulated after-tax profits, FY 2009-2012 107.0
Estimated accumulated depreciation and cap ex, FY 2009-2012 0
Estimated additional inventory investment, FY 2009-2012 0
Estimated additional receivables investment, FY 2009-2012 (18.0)
Estimated cash from options exercises, FY 2009-2012 15.0
</TABLE>
TOTAL CURRENT AND THREE YEAR CASH: $288.6 million
This combination of a snap shot and a dynamic three year perspective, consistent
with your market development planning horizon, produces a very large sum of free
cash, which is more than double ESI's current cash and short term investments
and more than 70% of the company's current market capitalization.
To us, therefore, it seems unfortunate that the scope and purpose of the
company's current share repurchasing is limited to offsetting the dilutive
effects of stock options and restricted stock issuance. With this much cash
today, and so much more to come, ESI could halve its share count while still
retaining sufficient free cash to make two more acquisitions the size of New
Wave Research, without using debt and while retaining over half its current real
estate.
If, hypothetically, ESI were to repurchase 14 million shares at an average price
of $16 over the next several years, this program would require $224 million,
leaving almost $65 million for possible acquisitions and other corporate uses.
This is what we recommend that the Board of ESI commit to doing and commence
right away. We do not recommend that you establish another 10b5-1 program, nor
do we recommend a Dutch Auction. We request a multi-year program of using cash,
monetizable assets, and free cash flow from future operations to halve the share
count. Now is the time to begin putting larger amounts of cash to work.
4
Nierenberg Investment Management Company, Inc., 19605 NE 8th Street, Camas, WA
98607 (360)604-8600 Fax (360)604-1811
<PAGE>
Let's think about what this could mean for ESI's long term shareholders, who
have patiently endured stock market neglect and ESI's unacceptably low ROIC: If
three or four years from now ESI were to generate $400 million in revenues and
$53.5 million of fully taxed profits on a fully diluted share count of only 14
million, earnings per share would rise from break-even today to $3.82. And,
depending on the prices paid to repurchase shares, the company would grow ROIC
into double digit territory. Assuming a typical market multiple of 15 times
earnings, ESI's share price would roughly quadruple to $57.32. Assuming a 20
multiple, which could result from a three or four year run of rapidly increasing
EPS and ROIC, ESI's share price could rise to $76.40, five times where it is
today. We believe that all other possible uses of cash should be benchmarked
against these scenarios. ESI is fortunate that its acquisition of NWR appears to
be successful. But all of us know that acquisitions are inherently risky. It may
be better to buy more of what you already know--your own shares--than incurring
the risks of buying other things which you cannot know as well as you know
yourself. We are not opposed to smart acquisitions like NWR. We certainly want
ESI to grow.
In closing, we would like to raise a separate but related point: the amendment
to ESI's shareholder rights agreement which the company disclosed in August
pointed out that for six years Third Avenue has been permitted to own up to
19.99% of ESI's shares without triggering the poison pill. Given our lengthy and
positive record as a shareholder of the company, we would appreciate the Board
affording us the same status as Third Avenue, which might enable us to increase
our investment in ESI as our circumstances warrant.
Nick, we do recognize that these are unprecedented and frightening times in the
public markets. We see that your served industries are suffering through a
trough. We know, as fellow members of the Portland community, that ESI has
reduced headcount this year and we are mindful of the pain that this has caused.
We also know, however, that as long and painful as these downturns are, they
always do come to an end. Teledyne, Loews, and the Washington Post initiated
their long term repurchase programs during troubled times. Troubled times are
when the bargains are the greatest, whether they are bargains buying your own
shares or bargains buying other companies. Despite the pain and the uncertainty,
now is a time of special opportunity. On September 22, four large, well regarded
companies announced major repurchase programs. This month we will endure mutual
fund tax loss selling season. Over the next three months other hedge funds are
likely to continue de-leveraging and preparing for investor withdrawals. It
could be a terrific time for ESI to put the shareholders' money to work.
Ultimately, when the markets settle down, and when they envision the turn in
your industry's fortunes, you know what could happen to your share price: it
could zoom 100-200% in a couple of months, leaving all who didn't pounce earlier
saying "could have, should have, would have." The time to move is now.
Thanks for considering our views.
Sincerely yours,
/s/David Nierenberg
5
Nierenberg Investment Management Company, Inc., 19605 NE 8th Street, Camas, WA
98607 (360)604-8600 Fax (360)604-1811
</TEXT>
</DOCUMENT>
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