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NEWP > SEC Filings for NEWP > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for NEWPORT CORP


9-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in conjunction with our Annual Report on Form 10-K for the year ended December 29, 2012 previously filed with the SEC. This discussion contains descriptions of our expectations regarding future trends affecting our business. Words such as "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "should," "will," "would," or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance or condition, trends in our business, or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements and other forward-looking statements made elsewhere in this report are made in reliance upon safe harbor provisions in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, including, but not limited to those factors set forth and discussed elsewhere in this Quarterly Report on Form 10-Q and in Item 1 (Business) and Item 1A (Risk Factors) of Part I, and Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) of Part II, of our Annual Report on Form 10-K for the year ended December 29, 2012. In light of the significant uncertainties inherent in the forward-looking information included in this report, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved and readers are cautioned not to place undue reliance on such forward-looking information. Except as required by law, we undertake no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

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 equipment and advanced automated manufacturing systems. Our products are used worldwide in a variety of industries including scientific research, defense and security, microelectronics, life and health sciences and industrial markets. Prior to 2013, we operated within three distinct business segments: our Lasers Division, our Photonics and Precision Technologies Division and our Ophir Division. In January 2013, we reorganized our operations to create three new operating groups: our Photonics Group, our Lasers Group and our Optics Group. All of these groups 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.

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.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires that we 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. 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 liabilities, inventory reserves, warranty obligations, asset impairment, income taxes and stock-based compensation. 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 effect on our reported amounts of assets and liabilities at the date of the financial statements and on the reported amounts of revenues and expenses during the reporting periods. A summary of these critical accounting policies is included in Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) of Part II of our Annual Report on Form 10-K for the fiscal year ended December 29, 2012. There have been no material changes to the critical accounting policies disclosed in our Annual Report on Form 10-K.


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Stock-Based Compensation



The total stock-based compensation expense included in our consolidated
statements of income and comprehensive income was as follows:



                                                  Three Months Ended
                                               March 30,      March 31,
(In thousands)                                    2013          2012
Cost of sales                                   $     209     $      117
Selling, general and administrative expenses        1,820          1,839
Research and development expense                      240            258
                                                $   2,269     $    2,214

Results of Operations for the Three Months Ended March 30, 2013 and March 31, 2012

The following table presents our results of operations for the periods indicated as a percentage of net sales:

                                                       Percentage of Net Sales
                                                      For the Three Months Ended
                                                      March 30,        March 31,
                                                         2013            2012
Net sales                                                   100.0  %        100.0 %
Cost of sales                                                58.4            56.7
Gross profit                                                 41.6            43.3

Selling, general and administrative expenses                 28.4            28.0
Research and development expense                              9.9             8.8
Operating income                                              3.3             6.5

Interest and other expense, net                             (1.6)           (1.4)
Income before income taxes                                    1.7             5.1

Income tax provision (benefit)                              (0.3)             0.9
Net income                                                    2.0             4.2
Net loss attributable to non-controlling interests          (0.0)           (0.0)
Net income attributable to Newport Corporation                2.0  %          4.2 %

In the following discussion regarding our results of operations, certain prior period amounts have been restated to conform to our current operating groups. In addition, in the following discussion regarding our net sales, due to changes in our market classifications for certain of our customers and product applications, certain prior period amounts have been reclassified among our end markets to conform to the current period presentation.

Net Sales

Net sales for the three months ended March 30, 2013 decreased by $24.6 million, or 15.6%, compared with the corresponding period in 2012. For the three months ended March 30, 2013, net sales by our Photonics Group decreased $1.8 million, or 2.9%; net sales by our Lasers Group decreased $10.3 million, or 21.0%; and net sales by our Optics Group decreased $12.5 million, or 26.0%, compared with the corresponding prior year period. For the three months ended March 30, 2013, we experienced decreases in net sales to all of our end markets compared with the corresponding period in 2012.


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Net sales to the scientific research market for the three months ended March 30, 2013 decreased $5.1 million, or 14.2%, compared with the same period in 2012, due primarily to decreased sales of laser products. Net sales to the defense and security markets for the three months ended March 30, 2013 decreased by $2.0 million, or 11.3%, compared with the same period in 2012, due primarily to decreased sales of optics products. Net sales to these markets were impacted by adverse macroeconomic conditions as a result of budget constraints and uncertainty in future global research and defense spending levels. Generally, our net sales to these markets by each of our operating groups may fluctuate from period to period due to changes in overall research and defense spending levels and the timing of large sales relating to major research and defense programs and, in some cases, these fluctuations may be offsetting between our operating groups or between such periods.

Net sales to the microelectronics market for the three months ended March 30, 2013 decreased $8.4 million, or 23.3%, compared with the same period in 2012. The decrease in sales to this market was due primarily to decreased sales of optics and precision motion products resulting from the continued cyclical downturn in the semiconductor equipment industry.

Net sales to the life and health sciences market for the three months ended March 30, 2013 decreased $5.9 million, or 16.0%, compared with the same period in 2012. The decrease in sales to this market was due primarily to lower sales of lasers for bioimaging and surgical applications, and lower sales of optics products for analytical instrumentation applications.

Net sales to our industrial manufacturing and other end markets for the three months ended March 30, 2013 decreased $3.1 million, or 10.2%, compared with the same period in 2012. The decrease in sales to these markets was due primarily to lower sales of products used for graphics, automotive safety and fiber optic communications applications due to weak macroeconomic conditions.


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The table below reflects our net sales by geographic region. Sales are attributed to each location based on the customer address to which the product is shipped.

                                Three Months Ended
                              March 30,    March 31,                  Percentage
(In thousands)                   2013         2012       Decrease      Decrease
United States                  $  50,069    $  61,195    $ (11,126)       (18.2) %
Germany                           16,421       20,546       (4,125)       (20.1)
Other European countries          19,373       20,647       (1,274)        (6.2)
Japan                             14,095       18,043       (3,948)       (21.9)
Other Pacific Rim countries       22,572       24,500       (1,928)        (7.9)
Rest of world                     10,077       12,236       (2,159)       (17.6)
                               $ 132,607    $ 157,167    $ (24,560)       (15.6) %

The decreases in sales to customers in the United States and Germany for the three months ended March 30, 2013 compared with the corresponding period in 2012 were attributable primarily to lower sales to our life and health sciences and our microelectronics end markets. To a lesser extent, sales in the United States decreased due to lower sales to our defense and security end markets, offset in part by increased sales to our scientific research end market.

The decreases in sales to customers in other parts of Europe and in Japan for the three months ended March 30, 2013 compared with the corresponding prior year period were due to lower sales to our scientific research end market and our industrial manufacturing and other end markets. In other parts of Europe, such decreases were offset in part by increased sales to our life and health sciences end market.

The decreases in sales to customers in other parts of the Pacific Rim and to customers in the rest of the world for the three months ended March 30, 2013 compared with the corresponding prior year period were attributable primarily to lower sales to our scientific research and microelectronics end markets, offset in part by increased sales to customers in our life and health sciences end market.

Gross Margin

Gross margin was 41.6% and 43.3% for the three months ended March 30, 2013 and March 31, 2012, respectively. Gross margin decreased in all of our operating groups, which was due to decreased absorption of manufacturing overhead resulting from our lower overall sales and production levels, and a lower proportion of sales of higher margin products. In addition, gross margin for the three months ended March 31, 2012 was positively impacted by higher sales of lasers inventory that had previously been written down.

In general, we expect that our gross margin will vary in any given period depending upon factors such as our mix of sales, product pricing variations, manufacturing absorption levels, and changes in levels of inventory and warranty reserves.

Selling, General and Administrative (SG&A) Expenses

SG&A expenses totaled $37.6 million, or 28.4% of net sales, and $44.1 million, or 28.0% of net sales, for the three months ended March 30, 2013 and March 31, 2012, respectively. The decrease in SG&A expenses in absolute dollars in the current year period compared with the prior year period was due primarily to a $3.3 million reduction in amortization expense resulting from the write off of certain intangible assets of our Ophir subsidiaries during the fourth quarter of 2012 and a $3.2 million decrease in personnel costs resulting primarily from lower incentive compensation accruals and headcount reductions as part of our 2012 cost reduction initiative.

In general, we expect that SG&A expenses will vary as a percentage of net sales in the future based on our sales level in any given period. Because the majority of our SG&A expenses is fixed in the short term, changes in SG&A expenses will likely not be in proportion to changes in net sales. In addition, any acquisitions would increase our SG&A expenses, and such increases may not be in proportion to the changes in net sales.


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Research and Development (R&D) Expense

R&D expense totaled $13.1 million, or 9.9% of net sales, and $13.8 million, or 8.8% of net sales, for the three months ended March 30, 2013 and March 31, 2012, respectively. The decrease in R&D expense in absolute dollars in the current year period compared with the prior year period was due to headcount reductions as part of our 2012 cost reduction initiative and delayed spending on new projects and materials.

We believe that the continued development and advancement of our products and technologies is critical to our success, and we intend to continue to invest in R&D initiatives, while working to ensure that our efforts are focused and the resources are deployed efficiently. In general, we expect that R&D expense as a percentage of net sales will vary in the future based on our sales level in any given period. Because of our commitment to continued product development, and because the majority of our R&D expense is fixed in the short term, changes in R&D expense will likely not be in proportion to changes in net sales. In addition, any acquisitions would increase our R&D expenses, and such increases may not be in proportion to the changes in net sales.

Interest and Other Expense, Net

Interest and other expense, net totaled $2.1 million and $2.2 million for the three months ended March 30, 2013 and March 31, 2012, respectively. The decrease in interest and other expense, net for the three months ended March 30, 2013 compared with the same period in 2012 was due primarily to lower interest expense as a result of the repayment of our convertible notes in February 2012 and lower interest expense on our term loan, resulting from the lower loan balance in the current year period. This decrease was offset in part by lower gains on derivative instruments in the 2013 period compared with the 2012 period.

Income Taxes

Our effective tax rate reflects a tax benefit on income of 19.6% and a tax expense of 17.9% for the three months ended March 30, 2013 and March 31, 2012, respectively. Our effective tax rate for the three months ended March 30, 2013 was favorably impacted by the retroactive extension of the federal research credit for 2012, which was signed into law on January 2, 2013 and the reversal of an uncertain foreign tax position related to a Japanese subsidiary, due to the expiration of the applicable audit statute of limitations.

Liquidity and Capital Resources

Our cash and cash equivalents, restricted cash and marketable securities balances decreased to a total of $96.2 million as of March 30, 2013 from $100.4 million as of December 29, 2012. This decrease was attributable primarily to cash used for net repayments of debt, purchases of property and equipment and annual incentive compensation payouts, offset in part by cash provided by other operating activities and proceeds from the issuance of common stock under employee stock plans.

Net cash provided by our operating activities of $7.5 million for the three months ended March 30, 2013 was attributable primarily to cash provided by our results of operations, offset in part by a decrease in accrued payroll and related expenses of $2.4 million due primarily to annual incentive compensation payouts, an increase in gross inventory of $2.4 million and a decrease in accounts receivable of $1.8 million due to lower sales and the timing of collections.

Net cash used in investing activities of $4.9 million for the three months ended March 30, 2013 was attributable to purchases of property and equipment of $4.0 million and net purchases of marketable securities of $0.9 million.

Net cash used in financing activities of $7.2 million for the three months ended March 30, 2013 was attributable to net repayments of borrowings of $11.2 million, which consisted primarily of principal payments on the term loan under our secured credit facility, offset in part by proceeds of $4.0 million from the sale of stock under employee plans.


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In October 2011, we entered into a credit agreement with certain lenders (Credit Agreement). The Credit Agreement and the related security agreement provide for a senior secured credit facility consisting of a $185 million term loan and a $65 million revolving line of credit, each with a term of five years. The credit facility is secured by substantially all of our domestic assets as well as a pledge of certain shares of our subsidiaries. At March 30, 2013, we had a remaining balance of $159.6 million outstanding on the term loan, with an effective interest rate of 2.95%. At March 30, 2013, there was no balance outstanding under the revolving line of credit, with $63.6 million available for borrowing after considering outstanding letters of credit totaling $1.4 million. Our ability to borrow funds under the revolving line of credit is subject to certain conditions, including compliance with certain covenants and making certain representations and warranties.

During 2011, we issued 200 million yen ($2.1 million at March 30, 2013) in private placement bonds through a Japanese bank. These bonds bear interest at a rate of 0.62% per year, payable in cash semiannually in arrears on June 30 and December 31 of each year, and mature on June 30, 2014. The bonds are included in long-term debt in the accompanying consolidated balance sheets.

At March 30, 2013, we had (i) four revolving lines of credit with Japanese banks; (ii) two agreements with Japanese banks under which we sell trade notes receivable with recourse; (iii) six loans with Japanese banks; and (iv) three loans with Israeli banks, as follows:

                               Principal          Amount
                                 Amount        Available for
                              Outstanding        Borrowing
       Description           (in millions)     (in millions)    Interest Rate(s)      Expiration
                                                                                       Date(s)
Japanese lines of credit      $         5.3    $          5.8   1.18% to 2.475%    Various dates
                                                                                   through
                                                                                   July 2013
Japanese agreements for       $         0.6    $          5.3   1.48%              No expiration
sale of receivables                                                                dates

Japanese loans                $         0.9     $           -   1.25% to 1.45%     Various dates
                                                                                   through
                                                                                   November 2016
Israeli loans                 $         3.2    $            -   2.97% to 3.75%     Various dates
                                                                                   through
                                                                                   October 2015

In May 2008, our Board of Directors approved a share repurchase program, authorizing the purchase of up to 4.0 million shares of our common stock. No purchases were made under this program during the three months ended March 30, 2013. As of March 30, 2013, 3.9 million shares remained available for purchase under the program. However, the terms of the Credit Agreement restrict our ability to purchase additional shares under this program during the term of the Credit Agreement.

During the remainder of 2013, we expect to use $10 million to $12 million of cash for capital expenditures.

We believe that our current working capital position, together with our expected future cash flows from operations and the borrowing availability under our lines of credit, will be adequate to fund our operations in the ordinary course of business, our anticipated capital expenditures, our debt payment requirements and other contractual obligations for at least the next twelve months. However, this belief is based upon many assumptions and is subject to numerous risks, including those discussed in Item 1A (Risk Factors) of Part I of our Annual Report on Form 10-K for the year ended December 29, 2012.

Except for the aforementioned capital expenditures, we have no present agreements or commitments with respect to any material acquisitions of businesses, products, product rights or technologies or any other material capital expenditures. We will continue to evaluate acquisitions of and/or investments in products, technologies, capital equipment or improvements or companies that complement our business and may make such acquisitions and/or investments in the future. However, the Credit Agreement only permits us to make investments and acquisitions under certain circumstances, and restricts our ability to incur additional indebtedness, which limits our ability to make such acquisitions and investments.


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Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires companies to disclose significant amounts that have been reclassified out of accumulated other comprehensive income. Amounts that are required to be reclassified in their entirety to net income must be disclosed either on the face of the income statement or in the notes to the financial statements. Amounts that are not required to be reclassified in their entirety to net income in the same reporting period must be disclosed by a cross reference to other disclosures that provide additional information regarding such amounts. ASU No. 2013-02 is effective for fiscal years and interim periods beginning after December 15, 2012. The adoption of ASU No. 2013-02 has not had a material impact on our financial position or results of operations.

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters:
Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, which clarifies the guidance in Topics 810 and
830. Topic 810 requires companies to deconsolidate a subsidiary or derecognize a group of assets if the parent ceases to hold a controlling financial interest in that subsidiary or group of assets. Upon the loss of a controlling financial interest, the parent would release the cumulative translation adjustment into net income. The guidance in Topic 810 does not distinguish between a sale or transfer of an investment in a foreign entity and a sale or transfer of a subsidiary or group of assets within a foreign entity. Topic 830 requires the release of the cumulative translation adjustment into net income if a sale or transfer represented a complete or substantially complete liquidation of an investment in a foreign entity. ASU No. 2013-05 clarifies that companies that cease to have a controlling financial interest in a subsidiary or group of assets within a foreign subsidiary should release the cumulative translation adjustment into net income if the sale or transfer results in a complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. ASU No. 2013-05 will be effective for fiscal years beginning after December 15, 2013, and early adoption is permitted but has not been elected. The adoption of ASU No. 2013-05 will not have a material impact on our financial position or results of operations.

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