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NEWP > SEC Filings for NEWP > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for NEWPORT CORP


8-Aug-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 in Item 1A (Risk Factors) of Part II and 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

During the six months ended June 29, 2013, we granted 0.7 million restricted stock units and 0.6 million stock-settled stock appreciation rights with weighted average grant date fair values of $13.74 and $6.59, respectively.

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

                                                    Three Months Ended            Six Months Ended
                                                 June 29,       June 30,       June 29,      June 30,
(In thousands)                                     2013           2012           2013          2012
Cost of sales                                   $       244    $       184    $      453    $      301
Selling, general and administrative expenses          1,373          1,469         3,193         3,308
Research and development expense                        259            225           499           483
                                                $     1,876    $     1,878    $    4,145    $    4,092

Results of Operations for the Three and Six Months Ended June 29, 2013 and
June 30, 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        For the Six Months Ended
                                            June 29,         June 30,         June 29,        June 30,
                                              2013             2012             2013            2012
Net sales                                         100.0 %          100.0 %         100.0 %         100.0 %
Cost of sales                                      57.4             56.5            57.9            56.6
Gross profit                                       42.6             43.5            42.1            43.4

Selling, general and administrative                28.4             27.2            28.4            27.7
expenses
Research and development expense                   10.1              8.9            10.0             8.8
Operating income                                    4.1              7.4             3.7             6.9

Gain on sale of investment                            -              3.4               -             1.7
Interest and other expense, net                   (1.5)            (1.8)           (1.5)           (1.6)
Income before income taxes                          2.6              9.0             2.2             7.0

Income tax provision                                0.7              3.1             0.2             2.0
Net income                                          1.9              5.9             2.0             5.0
Net loss attributable to                          (0.0)            (0.1)           (0.0)           (0.0)
non-controlling interests
Net income attributable to Newport                  1.9              6.0             2.0             5.0 %
Corporation                                             %                %               %

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.


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Net Sales

Net sales for the three months ended June 29, 2013 decreased by $19.4 million, or 12.6%, compared with the corresponding period in 2012. For the three months ended June 29, 2013, net sales by our Photonics Group decreased $5.0 million, or 8.3%; net sales by our Lasers Group decreased $5.3 million, or 11.9%; and net sales by our Optics Group decreased $9.1 million, or 18.7%, compared with the corresponding prior year period. Net sales for the six months ended June 29, 2013 decreased by $44.0 million, or 14.1%, compared with the corresponding period in 2012. For the six months ended June 29, 2013, net sales by our Photonics Group decreased $6.8 million, or 5.6%; net sales by our Lasers Group decreased $15.7 million, or 16.7%; and net sales by our Optics Group decreased $21.5 million, or 22.4%, compared with the corresponding prior year period. For the three and six months ended June 29, 2013, we experienced decreases in net sales to all of our end markets compared with the corresponding periods in 2012.

Net sales to the scientific research market for the three months ended June 29, 2013 decreased $0.7 million, or 2.3%, compared with the same period in 2012. Net sales to this market for the six months ended June 29, 2013 decreased $5.8 million, or 8.7%, compared with the same period in 2012. The decrease in sales to this market for the three month period was due primarily to decreased sales of photonics products, and the decrease in sales for the six month period was due primarily to decreased sales of lasers and photonics products. Net sales to the scientific research end market were negatively impacted in both periods in 2013 by adverse macroeconomic conditions, particularly in Europe and the Pacific Rim, as a result of budget constraints and uncertainty in future research spending levels. This negative impact was offset in part by stronger macroeconomic conditions in this market in the United States in the 2013 periods compared with the 2012 periods, as such conditions were significantly depressed in the 2012 periods due to the initial reaction to the anticipated "fiscal cliff" and budget sequestration in the United States, and the resulting extreme budget constraints and uncertainty at that time. Generally, our net sales to this market by each of our operating groups may fluctuate from period to period due to changes in overall research spending levels and the timing of large sales relating to major research programs and, in some cases, these fluctuations may be offsetting between our operating groups or between such periods.

Net sales to the defense and security markets for the three months ended June 29, 2013 decreased by $3.4 million, or 19.8%, compared with the same period in 2012. Net sales to these markets for the six months ended June 29, 2013 decreased by $5.4 million, or 15.5%, compared with the same period in 2012. The decreases in sales to these markets for both periods in 2013 were due primarily to decreased sales of optics products. Net sales to the defense and security end markets were negatively impacted in both periods in 2013 by adverse macroeconomic conditions, primarily in the United States, as a result of budget constraints and uncertainty in future 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 defense spending levels and the timing of large sales relating to major 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 June 29, 2013 decreased $12.2 million, or 29.6%, compared with the same period in 2012. Net sales to this market for the six months ended June 29, 2013 decreased $20.6 million, or 26.6%, compared with the same period in 2012. The decreases in sales for both periods in 2013 were 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 June 29, 2013 decreased $2.1 million, or 6.5%, compared with the same period in 2012. Net sales to this market for the six months ended June 29, 2013 decreased $8.1 million, or 11.5%, compared with the same period in 2012. The decreased sales in both periods were 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 June 29, 2013 decreased $1.0 million, or 3.2%, compared with the same period in 2012. Net sales to these markets for the six months ended June 29, 2013 decreased $4.1 million, or 6.6%, compared with the same period in 2012. The decreases in sales for both periods in 2013 were due primarily to lower sales of products used for graphics and fiber optic communications applications due to weak macroeconomic conditions. The decreased sales for the six month period was also due to lower sales of products used for automotive safety.


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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                    Percentage
                               June 29,     June 30,    Increase /    Increase /
(In thousands)                   2013         2012      (Decrease)    (Decrease)
United States                 $   53,279   $   66,061   $  (12,782)       (19.3) %
Germany                           15,682       19,457       (3,775)       (19.4)
Other European countries          20,145       16,828         3,317         19.7
Japan                             11,788       13,072       (1,284)        (9.8)
Other Pacific Rim countries       21,823       28,689       (6,866)       (23.9)
Rest of world                     11,517        9,548         1,969         20.6
                              $  134,234   $  153,655   $  (19,421)       (12.6) %

                                 Six Months Ended                     Percentage
                               June 29,     June 30,    Increase /    Increase /
(In thousands)                   2013         2012      (Decrease)    (Decrease)
United States                 $  103,348   $  127,256   $  (23,908)       (18.8) %
Germany                           32,103       40,003       (7,900)       (19.7)
Other European countries          39,518       37,475         2,043          5.5
Japan                             25,883       31,115       (5,232)       (16.8)
Other Pacific Rim countries       44,395       53,189       (8,794)       (16.5)
Rest of world                     21,594       21,784         (190)        (0.9)
                              $  266,841   $  310,822   $  (43,981)       (14.1) %

The decreases in sales to customers in the United States for the three and six months ended June 29, 2013 compared with the corresponding periods in 2012 were attributable primarily to lower sales to our life and health sciences, microelectronics and defense and security end markets, offset in part by increased sales to our scientific research end market.

The decreases in sales to customers in Germany and in Pacific Rim countries other than Japan for the three and six months ended June 29, 2013 compared with the corresponding periods in 2012 were attributable primarily to lower sales to our scientific research and microelectronics end markets. In Germany, the decreases in sales for both periods in 2013 were also due to decreased sales to our life and health sciences end market, however in Pacific Rim countries other than Japan, sales to our life and health sciences end market increased in both periods in 2013.

The increases in sales to customers in other countries in Europe for the three and six months ended June 29, 2013 compared with the corresponding periods in 2012 were attributable primarily to higher sales to our life and health sciences end market, offset in part by decreased sales to our scientific research end market. For the three month period, the increase in sales was also due to higher sales to our industrial manufacturing and other end markets.

The decrease in sales to customers in Japan for the three and six months ended June 29, 2013 compared with the corresponding periods in 2012 were due primarily to lower sales to our industrial manufacturing and other end markets. For the six month period, the decrease in sales was also due to lower sales in our scientific research end market.

The increase in sales to customers in the rest of the world for the three months ended June 29, 2013 compared with the corresponding period in 2012 was due primarily to higher sales to customers in our scientific research and life and health sciences end markets, offset in part by decreased sales to customers in our microelectronics end market.


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Gross Margin

Gross margin was 42.6% and 43.5% for the three months ended June 29, 2013 and June 30, 2012, respectively, and gross margin was 42.1% and 43.4% for the six months ended June 29, 2013 and June 30, 2012, respectively. The decreases in gross margin in the current year periods compared with the prior year periods were due primarily to decreased absorption of manufacturing overhead in our Photonics and Optics Groups resulting from our lower overall sales and production levels, as well as a lower proportion of sales of higher margin products, offset in part by improved absorption of manufacturing overhead and a higher proportion of sales of higher margin products by our Lasers Group.

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 $38.1 million, or 28.4% of net sales, and $41.9 million, or 27.2% of net sales, for the three months ended June 29, 2013 and June 30, 2012, respectively. SG&A expenses totaled $75.7 million, or 28.4% of net sales, and $85.9 million, or 27.7% of net sales, for the six months ended June 29, 2013 and June 30, 2012, respectively. The decreases in SG&A expenses in absolute dollars for the three and six months ended June 29, 2013 compared with the prior year periods were due primarily to two factors: reductions in depreciation and amortization expense of $3.6 million and $7.2 million, respectively, resulting primarily from the write off of certain intangible assets of our Ophir subsidiaries during the fourth quarter of 2012; and decreases in personnel costs of $2.7 million and $5.6 million, respectively, resulting primarily from lower incentive compensation accruals, as well as headcount reductions as part of our 2012 cost reduction initiative. The decreases for both periods were offset in part by an increase in selling expenses due to a non-recurring charge associated with a change in our sales channel, and an increase in our allowance for doubtful accounts.

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.

Research and Development (R&D) Expense

R&D expense totaled $13.6 million, or 10.1% of net sales, and $13.7 million, or 8.9% of net sales, for the three months ended June 29, 2013 and June 30, 2012, respectively. R&D expense totaled $26.7 million, or 10.0% of net sales, and $27.5 million, or 8.8% of net sales, for the six months ended June 29, 2013 and June 30, 2012, respectively. The decreases in R&D expense in absolute dollars in the current year periods compared with the prior year periods were due primarily to headcount reductions in our Lasers Group, offset in part by increased headcount in our Optics Group to provide support for new projects.

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 $2.0 million and $2.8 million for the three months ended June 29, 2013 and June 30, 2012, respectively, and $4.2 million and $5.0 million for the six months ended June 29, 2013 and June 30, 2012, respectively. The decreases in interest and other expense, net for the three and six months ended June 29, 2013 compared with the same periods in 2012 were due primarily to increased gains on derivative instruments and lower interest expense on our term loan, resulting from the declining loan balance.


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Income Taxes

Our effective tax rate was 26.6% and 34.4% for the three months ended June 29, 2013 and June 30, 2012, respectively, and 8.5% and 28.3% for the six months ended June 29, 2013 and June 30, 2012, respectively. Our effective tax rate for the three months ended June 29, 2013 was favorably impacted by the utilization of the federal research credit, which was signed into law on January 2, 2013, and a greater percentage of our earnings being reported in jurisdictions with lower statutory rates. Our effective tax rate for the six months ended June 29, 2013 was also favorably impacted by the retroactive extension of the federal research credit for 2012 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.

Under ASC 740-270, Income Taxes - Interim Reporting, we are required to evaluate and make any necessary adjustments to our effective tax rate each quarter as new information is obtained that may affect the assumptions used to estimate our annual effective tax rate. On July 30, 2013 the Israeli Parliament adopted Budget Law 2013-2014 and the Economic Arrangements Law, which will impact the corporate tax rate applicable to our Israeli based operations effective January 1, 2014. These new laws will have a direct impact on valuing our deferred tax assets and liabilities, and we will be required to record an adjustment to our deferred tax assets and liabilities as a discrete item during our quarter ending September 28, 2013.

Liquidity and Capital Resources

Our cash and cash equivalents, restricted cash and marketable securities balances increased to a total of $102.0 million as of June 29, 2013 from $100.4 million as of December 29, 2012. This increase was attributable primarily to cash provided by our operating activities and proceeds from the issuance of common stock under employee stock plans, offset in part by cash used for net repayments of debt and purchases of property and equipment and annual incentive compensation payouts.

Net cash provided by our operating activities of $29.3 million for the six months ended June 29, 2013 was attributable primarily to cash provided by our results of operations, a decrease in accounts receivable of $1.6 million due to lower sales and the timing of collections and an increase in accounts payable of $1.0 million due to the timing of payments, offset in part by an increase in gross inventory of $3.6 million.

Net cash used in investing activities of $8.6 million for the six months ended June 29, 2013 was attributable primarily to purchases of property and equipment of $8.3 million.

Net cash used in financing activities of $19.0 million for the six months ended June 29, 2013 was attributable to net repayments of borrowings of $21.2 million, which consisted primarily of principal payments on the term loan under our secured credit facility, and payments of $2.0 million in connection with the cancellation of restricted stock units for taxes owed by employees upon the vesting of restricted stock units issued under our stock incentive plans, offset in part by proceeds of $4.3 million from the sale of stock under employee plans.

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 June 29, 2013, we had a remaining balance of $152.6 million outstanding on the term loan, with an effective interest rate of 5.00%. At June 29, 2013, there was no balance outstanding under the revolving line of credit, with $63.4 million available for borrowing after considering outstanding letters of credit totaling $1.6 million.

On July 18, 2013, we entered into a new credit agreement with certain lenders (New Credit Agreement). The New Credit Agreement replaced the prior Credit Agreement. The New Credit Agreement consists of a senior secured revolving credit facility of $275 million with a term of five years (New Credit Facility). The New Credit Agreement also provides us with the option to increase the aggregate principal


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