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NEWP > SEC Filings for NEWP > Form 10-K on 14-Mar-2013All Recent SEC Filings

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Form 10-K for NEWPORT CORP


14-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. These statements are based on assumptions that we consider reasonable. When used in this report, the words "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "should," "will," "would," and similar expressions or the negative of such expressions are intended to identify these forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in Item 1 (Business) and Item 1A (Risk Factors) of Part I of this Annual Report on Form 10-K.

Overview

We are a global supplier of advanced-technology products and systems, including lasers, photonics instrumentation, precision positioning and vibration isolation products and systems, optical components, subassemblies and subsystems, three-dimensional non-contact measurement and advanced automated manufacturing systems. Our products are used worldwide in industries including scientific research, microelectronics, defense/security, life and health sciences and industrial markets.

During 2012, we operated within three distinct business segments, our Photonics and Precision Technologies (PPT) Division, our Lasers Division and our Ophir Division. These three divisions represent our reportable segments for our fiscal years 2011 and 2012, and our PPT and Lasers Divisions represent our reportable segments for fiscal year 2010, in the financial statements which are included in this Annual Report on Form 10-K. All of our divisions offer a broad array of advanced technology products and services to original equipment manufacturer (OEM) and end-user customers across a wide range of applications in all of our targeted end markets. In January 2013, we reorganized our operations to create three new operating groups, our Photonics Group, our Lasers Group and our Optics Group. These operating groups will represent our reportable segments commencing in the first quarter of 2013. Additional information regarding our new operating groups is included under the heading "Reorganization of Operating Groups" on page 11.

The following is a discussion and analysis of certain factors that have affected our results of operations and financial condition during the periods included in the accompanying consolidated financial statements.

Acquisitions and Divestitures

Acquisition of Vistek Assets

On October 10, 2012, we acquired substantially all of the assets of Advanced Vibration Technologies, Inc., a corporation doing business under the trade name of Vistek (Vistek), for a purchase price of $2.5 million. The purchase price was paid in cash at closing, of which $0.25 million was deposited at closing into escrow until October 10, 2013, to secure certain indemnification obligations of Vistek and its sole shareholder under the asset purchase agreement. We incurred $49 thousand in transaction costs, which have been expensed as incurred and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations. This acquisition expanded our vibration control and isolation product offerings. The results of the Vistek business are included in the results of our PPT Division in the accompanying financial statements.

Acquisition of ILX

On January 13, 2012, we acquired all of the outstanding capital stock of ILX Lightwave Corporation (ILX) by means of a merger of our wholly owned subsidiary with and into ILX. The total purchase price for the acquisition was $9.0 million. An initial purchase price of $9.3 million was paid in cash at closing, of which $1.2 million was deposited at closing into escrow until July 12, 2013, to secure certain indemnification and other obligations of the ILX securityholders. The purchase price was subsequently reduced by $0.3 million, based on a calculation of ILX's net assets at closing. We incurred $0.1 million in transaction costs, which have been expensed as incurred and are


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included in selling, general and administrative expenses in the accompanying consolidated statements of operations. This acquisition expanded our optical power meter, laser diode instrumentation and fiber optic source product offerings, and added laser diode and light emitting diode (LED) burn-in, test and characterization systems to our product portfolio. The results of ILX are included in the results of our PPT Division in the accompanying financial statements.

Purchase Price Allocation for 2012 Acquisitions

The consideration paid for our acquisitions is allocated to the assets acquired, net of the liabilities assumed, based upon their estimated fair values as of the date of the acquisition. The estimated fair values of intangible assets acquired were determined using an income approach. The excess of the purchase price over the estimated fair value of the assets acquired, net of the estimated fair value of the liabilities assumed, is recorded as goodwill. Below is a summary of the purchase price, assets acquired and liabilities assumed:

                                                       Vistek
(In thousands)                               ILX      Business     Total
Assets acquired and liabilities assumed:
Cash                                       $    44   $        -   $     44
Accounts receivable                          1,224            -      1,224
Inventories                                    861           81        942
Other assets                                   587           26        613
Goodwill                                     3,762          273      4,035
Developed technology                         2,800        1,200      4,000
Customer relationships                       1,100          900      2,000
Other intangible assets                      1,090           20      1,110
Deferred income taxes                       (1,841 )          -     (1,841 )
Other liabilities                             (644 )          -       (644 )
                                           $ 8,983   $    2,500   $ 11,483

The goodwill related to our acquisition of ILX has been allocated to our PPT Division and will not be deductible for tax purposes, as it was a merger. The goodwill related to our acquisition of the Vistek business has been allocated to our PPT division and will be deductible for tax purposes as it was an asset purchase.

Acquisition of Opticoat Assets

On December 29, 2011, we acquired substantially all of the assets of Opticoat SRL (Opticoat) for a purchase price of $3.0 million in cash, of which $2.0 million was paid upon the closing and $1.0 million was held back to secure certain obligations of Opticoat under the acquisition agreement. We paid an additional $0.85 million in 2012 and absent any indemnification claims by us, we will pay the remaining $0.15 million in 2013. The present value of these payments was determined to be $2.9 million. We incurred $0.1 million in transaction costs, which have been expensed as incurred and are included in selling, general and administrative expenses in the accompanying statements of operations. This acquisition expanded our capabilities and capacity in the manufacturing of precision optical components and coatings.

Acquisition of Ophir

On October 4, 2011, we acquired all of the outstanding capital stock of Ophir Optronics Ltd. (Ophir) for $242.3 million in cash, of which $242.1 million was allocated to the purchase price and $0.2 million was allocated to the fair value of unearned compensation related to unvested stock options. We funded the purchase price with a combination of $162.8 million of cash on hand and $79.5 million of the net proceeds we received from the senior secured credit facility we obtained in October 2011, described more fully under the heading "Liquidity and Capital Resources" on page 55. We incurred $4.7 million in transaction costs, which have been expensed as incurred and are included in selling, general and administrative expenses in the accompanying statements of operations. This acquisition added Ophir's precision infrared optics and lens assemblies, laser measurement instrumentation and three-dimensional non-contact measurement sensors and equipment to our product offerings.


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Acquisition of High Q

On July 29, 2011, we acquired all of the capital stock of High Q Technologies GmbH (High Q). The total purchase price was $18.5 million, consisting of an initial purchase price of $17.2 million, $2.9 million of which was deposited into escrow until December 31, 2013 to secure representations and warranties made by the sellers, and a subsequent payment of $1.3 million, which was paid to the sellers based on a calculation of High Q's net assets at closing. We incurred $0.4 million in transaction costs, which have been expensed as incurred and are included in selling, general and administrative expenses in the accompanying statements of operations. This acquisition broadened our ultrafast laser capabilities, particularly for applications in the life and health sciences and industrial markets, and expanded our presence in European laser markets.

Prior to the closing of the acquisition, High Q sold the building that houses its corporate headquarters and its operations to a company established by the then-largest shareholder of High Q for 3.5 million ($4.6 million as of December 29, 2012), and leased the building from the purchaser for a period of at least ten years. High Q financed the purchase price of the building pursuant to a loan agreement with the purchaser that is secured by a mortgage on the building in favor of High Q. Such loan will be repaid over ten years and accrues interest at an annual rate of 2.0%. The principal balance of the loan was 3.2 million ($4.3 million) as of December 29, 2012. As of December 29, 2012, the current portion of the loan was $0.3 million and is included in prepaid expenses and other current assets, and the long-term portion of the loan was $4.0 million and is included in investments and other assets, in the accompanying consolidated balance sheets.

Purchase Price Allocation for 2011 Acquisitions



Below is a summary of the purchase price, assets acquired and liabilities
assumed for our acquisitions in 2011:



(In thousands)                               Ophir      High Q     Opticoat      Total
Assets acquired and liabilities assumed:
Cash                                       $  23,233   $  5,989   $        -   $  29,222
Accounts receivable                           18,732      1,494            -      20,226
Inventories                                   30,370      7,829            -      38,199
Other current assets                           4,478      5,957            -      10,435
Goodwill                                      66,524      6,745        1,302      74,571
Developed technology                          41,530      6,300          705      48,535
In-process research and development            9,560          -            -       9,560
Customer relationships                        56,640      1,350          148      58,138
Other intangible assets                       13,970      4,170            -      18,140
Property and equipment                        41,652      1,436          917      44,005
Other noncurrent assets                       13,917        225            -      14,142
Short-term borrowings                         (7,082 )  (10,699 )          -     (17,781 )
Accounts payable                              (7,756 )   (1,792 )          -      (9,548 )
Other current liabilities                    (17,562 )   (3,690 )          -     (21,252 )
Long-term debt                                (9,781 )   (4,161 )          -     (13,942 )
Deferred income taxes                        (23,292 )   (2,063 )          -     (25,355 )
Other noncurrent liabilities                 (10,973 )     (585 )       (137 )   (11,695 )
Non-controlling interests                     (2,076 )        -            -      (2,076 )
                                           $ 242,084   $ 18,505   $    2,935   $ 263,524

For our Ophir and Opticoat acquisitions, the goodwill has been allocated to our Ophir Division and will not be deductible for tax purposes. For our High Q acquisition, the goodwill has been allocated to our Lasers Division, a portion of which will be deductible for Austrian tax purposes.

In 2012, we determined that goodwill and other assets related to Ophir were impaired and recorded impairment charges of $130.9 million. Of these charges, $67.8 million related to goodwill, $62.6 million related to other acquired intangible assets and $0.5 million related to fixed assets. See "Impairment Charges" on page 53 for additional information.


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Divestiture of Hilger Crystals Limited

On July 19, 2010, we sold all of the outstanding capital stock of our Hilger Crystals Limited subsidiary. We received $4.0 million in cash as consideration for the sale. We recognized a net loss of $0.5 million related to this transaction in 2010. The net asset value of Hilger Crystals Limited at the time of the sale was $2.5 million, including $0.6 million of goodwill allocated to the business, and we incurred charges totaling $1.4 million related to the pension plan associated with the business, a charge of $0.4 million to write off an inter-company receivable that will not be repaid by the new owner and $0.2 million in legal and consulting fees related to this transaction. In 2012, we recognized a gain of $0.2 million related to an earn-out associated with this transaction. Such gain and loss have been included in (Gain) loss on sale of assets and related costs in the accompanying consolidated statements of operations. In addition, during 2010, we recognized $0.6 million in previously unrealized foreign currency losses as a non-operating expense upon the disposition of this business, which is included in interest and other expense, net in the accompanying consolidated statements of operations.

The assets of the Hilger Crystals Limited business had previously been included in our PPT Division. Below is a summary of the assets and liabilities disposed of:

(In thousands)
Assets and liabilities disposed of:

Current assets                        $ 1,714
Other assets                            1,775
Current liabilities                    (1,020 )
                                      $ 2,469

Fiscal Year End

We use a 52/53-week accounting fiscal year. Our fiscal year ends on the Saturday closest to December 31, and our fiscal quarters end on the Saturday closest to the end of each corresponding calendar quarter. Fiscal year 2012 (referred to herein as 2012) ended on December 29, 2012, fiscal year 2011 (referred to herein as 2011) ended on December 31, 2011 and fiscal year 2010 (referred to herein as 2010) ended on January 1, 2011. Each of these fiscal years consisted of 52 weeks.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements included in this Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate these estimates and assumptions on an ongoing basis. We base our estimates on our historical experience and on various other factors which we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of certain expenses that are not readily apparent from other sources. Our significant accounting policies are discussed in Note 1 (Organization and Summary of Significant Accounting Policies) of the Notes to Consolidated Financial Statements, included in Item 15 (Exhibits, Financial Statement Schedules) of this Annual Report on Form 10-K. The accounting policies that involve the most significant judgments, assumptions and estimates used in the preparation of our financial statements are those related to revenue recognition, allowances for doubtful accounts, pension plans, inventory reserves, warranty obligations, asset impairment, income taxes and stock-based compensation expense. The judgments, assumptions and estimates used in these areas by their nature involve risks and uncertainties, and in the event that any of them prove to be inaccurate in any material respect, it could have a material adverse effect on our reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.


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Revenue Recognition

We recognize revenue after title to and risk of loss of products have passed to the customer, or delivery of the service has been completed, provided that persuasive evidence of an arrangement exists, the fee is fixed or determinable and collectability is reasonably assured. We recognize revenue and related costs for arrangements with multiple deliverables, such as equipment and installation, as each element is delivered or completed based upon its relative selling price, determined based upon the price that would be charged on a standalone basis. If a portion of the total contract price is not payable until installation is complete, we do not recognize such portion as revenue until completion of installation; however, we record the full cost of the product at the time of shipment. Revenue for extended service contracts is recognized over the related contract periods. Certain sales to international customers are made through third-party distributors. A discount below list price is generally provided at the time the product is sold to the distributor, and such discount is reflected as a reduction in net sales. Freight costs billed to customers are included in net sales, and freight costs incurred are included in selling, general and administrative expenses. Sales taxes collected from customers are recorded on a net basis and any amounts not yet remitted to tax authorities are included in accrued expenses and other current liabilities.

In the event that we determine that all of the criteria for recognition of revenue have not been met for a transaction, the amount of revenue that we recognize in a given reporting period could be adversely affected. In particular, our ability to recognize revenue for high-value product shipments could cause significant fluctuations in the amounts of revenue reported from period to period depending on the timing of the shipments and the terms of sale of such products.

Our customers (including distributors) generally have 30 days from the original invoice date (generally 60 days for international customers) to return a standard catalog product purchase for exchange or credit. Catalog products must be returned in the original condition and meet certain other criteria. Custom, option-configured and certain other products as defined in the terms and conditions of sale cannot be returned without our consent. For certain products, we establish a sales return reserve based on the historical product returns. If actual product returns exceed our established sales return reserves, our net sales would be adversely affected.

Accounts and Notes Receivable

We record reserves for specific receivables deemed to be at risk for collection, as well as a reserve based on our historical collections experience. We estimate the collectability of customer receivables on an ongoing basis by reviewing past due invoices and assessing the current creditworthiness of each customer. A considerable amount of judgment is required in assessing the ultimate realization of these receivables.

Certain of our Japanese customers provide us with promissory notes on the due date of the receivable. The payment dates of the promissory notes generally range between 60 and 150 days from the original receivable due date. For balance sheet presentation purposes, amounts due to us under such promissory notes are reclassified from accounts receivable to notes receivable. At December 29, 2012 and December 31, 2011, notes receivable, net totaled $1.5 million and $2.1 million, respectively. Certain of these promissory notes are sold with recourse to banks in Japan with which we regularly do business. The sales of these receivables have been accounted for as secured borrowings, as we have not met the criteria for sale treatment in accordance with Accounting Standards Codification (ASC) 860-30, Transfers and Servicing - Secured Borrowing and Collateral. The principal amount of the promissory notes sold with recourse is included in both notes receivable, net and short-term borrowings until the underlying note obligations are ultimately satisfied through payment by the customers to the banks. At December 29, 2012 and December 31, 2011, the principal amount of such promissory notes included in notes receivable, net and short-term borrowings in the accompanying consolidated balance sheets totaled $0.4 million and $1.3 million, respectively.


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Pension Plans

Several of our non-U.S. subsidiaries have defined benefit pension plans covering substantially all full-time employees at those subsidiaries. Some of the plans are unfunded, as permitted under the plans and applicable laws. For financial reporting purposes, the calculation of net periodic pension costs is based upon a number of actuarial assumptions, including a discount rate for plan obligations, an assumed rate of return on pension plan assets and an assumed rate of compensation increase for employees covered by the plan. All of these assumptions are based upon our judgment, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact future expense recognition and the cash funding requirements of our pension plans.

We account for our Israeli pension plans using the shut-down method of accounting. Under the shut-down method, the liability is calculated as if it was payable as of each balance sheet date, on an undiscounted basis. In addition, the assets and liabilities of the plans are accounted for on a gross basis.

Inventories

We state our inventories at the lower of cost (determined on either a first-in, first-out (FIFO) or average cost basis) or fair market value and include materials, labor and manufacturing overhead. Inventories that are expected to be sold within one year are classified as current inventories and are included in inventories, and inventories that we expect to hold for longer than one year are included in investments and other assets in the accompanying consolidated balance sheets. We write down excess and obsolete inventory to net realizable value. Once we write down the carrying value of inventory, a new cost basis is established, and we do not increase the newly established cost basis based on subsequent changes in facts and circumstances. In assessing the ultimate realization of inventories, we make judgments as to future demand requirements and compare those requirements with the current and committed inventory levels. We record any amounts required to reduce the carrying value of inventory to net realizable value as a charge to cost of sales. Should actual demand requirements differ from our estimates, we may be required to reduce the carrying value of inventory to net realizable value, resulting in a charge to cost of sales which would adversely affect our operating results.

Warranty

Unless otherwise stated in our product literature or in our agreements with our customers, products sold by our PPT Division generally carry a one-year warranty from the original invoice date on all product materials and workmanship, other than filters and gratings products, which generally carry a 90 day warranty. Products of this division sold to OEM customers generally carry longer warranties, typically 15 to 19 months. Products sold by our Lasers Division carry warranties that vary by product and product component, but that generally range from 90 days to two years. In certain cases, such warranties for Lasers Division products are limited by either a set time period or a maximum amount of usage of the product, whichever occurs first. Products sold by our Ophir Division generally carry a one-year warranty, except for laser beam profilers and dental CAD/CAM scanners, which generally carry a two-year warranty. Defective products will either be repaired or replaced, generally at our option, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for warranties relating to a product (based on historical experience) as a component of cost of sales at the time revenue for that product is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage and/or service delivery costs negatively differ from our estimates, revisions to the estimated warranty obligation would be required which could adversely affect our operating results. Short-term accrued warranty obligations, which expire within one year, are included in accrued expenses and other current liabilities and long-term warranty obligations are included in deferred income taxes and other liabilities in the accompanying consolidated balance sheets. Short-term warranty obligations were $3.4 million and $4.3 million as of December 29, 2012 and December 31, 2011, respectively. As of December 29, 2012 and December 31, 2011, the amounts accrued for long-term warranty obligations were not material.


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Impairment of Assets

We assess the impairment of long-lived assets at least annually and whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments, related primarily to the future profitability and/or future value of the assets. Changes in our . . .

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