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NEWP > SEC Filings for NEWP > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for NEWPORT CORP


7-Nov-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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Assets Held For Sale

During the third quarter of 2013, we developed a plan to sell our advanced packaging systems business and are currently negotiating the sale of these operations with a potential purchaser. As such, we now consider the assets and liabilities of this business as held for sale. Based on the terms of the proposed transaction, we expect to sell this business for $6.0 million, consisting of $5.35 million in cash, and an unsecured note receivable of $0.65 million, with a term of seven years and an interest rate of 5%. We expect to incur approximately $0.4 million in transaction costs. The net book value of this business was $9.5 million as of September 28, 2013; however, because these assets are held for sale, the assets have been written down to their net realizable value of $5.0 million, resulting in a loss of $4.5 million in the third quarter of 2013. The net sales, operating income and cash flows of this business are not significant to our operations.

Stock-Based Compensation

During the nine months ended September 28, 2013, we granted 0.7 million restricted stock units and 0.7 million stock-settled stock appreciation rights with weighted average grant date fair values of $13.77 and $6.61, respectively.

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

                                           Three Months Ended                    Nine Months Ended
                                    September 28,       September 29,     September 28,      September 29,
(In thousands)                           2013               2012               2013              2012
Cost of sales                       $           233     $          189    $           686    $          490
Selling, general and
administrative expenses                       1,921              1,767              5,114             5,075
Research and development
expense                                         291                217                790               700
                                    $         2,445     $        2,173    $         6,590    $        6,265


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Results of Operations for the Three and Nine Months Ended September 28, 2013 and
September 29, 2012



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



                                                      Percentage of Net Sales
                                        Three Months Ended                Nine Months Ended
                                  September 28,    September 29,    September 28,    September 29,
                                      2013             2012             2013             2012
Net sales                                 100.0 %          100.0 %          100.0 %          100.0 %
Cost of sales                              57.0             56.0             57.6             56.4
Gross profit                               43.0             44.0             42.4             43.6

Selling, general and
administrative expenses                    25.6             26.1             27.4             27.2
Research and development
expense                                     9.5              9.0              9.8              8.9
Loss on sale of assets                      3.3               -               1.1               -
Operating income                            4.6              8.9              4.1              7.5

Gain on sale of investment                   -               0.6               -               1.4
Loss on extinguishment of debt            (2.4)               -             (0.8)               -
Interest and other expense,
net                                       (0.9)            (1.5)            (1.4)            (1.6)
Income before income taxes                  1.3              8.0              1.9              7.3

Income tax provision                        0.9              2.8              0.4              2.2
Net income                                  0.4              5.2              1.5              5.1
Net income (loss) attributable
to non-controlling interests                0.1            (0.1)              0.0            (0.0)
Net income attributable to
Newport Corporation                         0.3 %            5.3 %            1.5 %            5.1 %

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 September 28, 2013 decreased by $3.8 million, or 2.7%, compared with the corresponding period in 2012. For the three months ended September 28, 2013, net sales by our Photonics Group decreased $1.5 million, or 2.6%; net sales by our Lasers Group decreased $3.6 million, or 8.5%; and net sales by our Optics Group increased $1.3 million, or 3.2%, compared with the corresponding prior year period. Net sales for the nine months ended September 28, 2013 decreased by $47.8 million, or 10.5%, compared with the corresponding period in 2012. For the nine months ended September 28, 2013, net sales by our Photonics Group decreased $8.3 million, or 4.6%; net sales by our Lasers Group decreased $19.3 million, or 14.1%; and net sales by our Optics Group decreased $20.2 million, or 14.7%, compared with the corresponding prior year period. For the third quarter of 2013, we experienced decreases in net sales to our scientific research and defense and security end markets, offset in part by increases in our other end markets, compared with the third quarter of 2012. For the nine months ended September 28, 2013, we experienced decreases in net sales to all of our end markets compared with the corresponding period in 2012.

Net sales to the scientific research market for the three months ended September 28, 2013 decreased $2.0 million, or 6.4%, compared with the same period in 2012. Net sales to this market for the nine months ended September 28, 2013 decreased $7.8 million, or 8.0%, 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 lasers and optics products, and the decrease in sales for the nine 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 lower research budgets and uncertainty in future research spending levels, particularly in Europe for both periods and in the Pacific Rim for the nine month period. For the nine month period in 2013, the negative impact to this market when compared with 2012 was offset in part by stronger conditions in this market in the United States, as such conditions were significantly depressed in the first half of 2012 due to the initial reaction to the anticipated "fiscal cliff" and budget sequestration in the United States, and the resulting


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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 September 28, 2013 decreased by $3.1 million, or 16.7%, compared with the same period in 2012. Net sales to these markets for the nine months ended September 28, 2013 decreased by $8.5 million, or 15.9%, compared with the same period in 2012. Net sales to the defense and security end markets were negatively impacted in both periods in 2013 by lower defense budgets and uncertainty in future defense spending levels, primarily in the United States, which lead to decreased sales of optics and photonics products. 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 September 28, 2013 increased $1.9 million, or 5.8%, compared with the same period in 2012. Net sales to this market for the nine months ended September 28, 2013 decreased $18.7 million, or 17.0%, compared with the same period in 2012. Sales of products used in semiconductor equipment decreased in both periods in 2013 compared with the prior year periods, resulting from the cyclical downturn in the semiconductor equipment industry. For the nine month period in 2013, this decline was particularly pronounced in the first six months of the year. For the three month period, sales to semiconductor equipment manufacturing customers decreased slightly, but such decrease was more than offset by increased sales to other microelectronics customers.

Net sales to the life and health sciences market for the three months ended September 28, 2013 decreased $0.2 million, or 0.6%, compared with the same period in 2012. Net sales to this market for the nine months ended September 28, 2013 decreased $8.3 million, or 8.3%, compared with the same period in 2012. Sales to customers in this market in the third quarter of 2013 compared with the third quarter of 2012 were negatively impacted by decreased sales of products for analytical instrumentation, microscopy and bioimaging applications, offset in large part by increased sales of products for surgical applications. For the nine month period of 2013 compared with the same period of 2012, we experienced decreased sales of products for analytical instrumentation, microscopy and surgical applications, offset in part by increased sales of products for bioimaging applications.

Net sales to our industrial manufacturing and other end markets for the three months ended September 28, 2013 decreased $0.4 million, or 1.5%, compared with the same period in 2012. Net sales to these markets for the nine months ended September 28, 2013 decreased $4.5 million, or 4.9%, compared with the same period in 2012. The decrease in sales to these markets for both periods in 2013 as compared to 2012 were due primarily to decreased sales of products used for graphics applications, offset in part by increased sales of advanced packaging systems.


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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
                                September 28,      September 29,     Increase /     Increase /
(In thousands)                      2013               2012          (Decrease)     (Decrease)
United States                   $       59,023     $       61,741     $  (2,718)         (4.4)  %
Germany                                 17,189             16,225            964           5.9
Other European countries                18,410             18,913          (503)         (2.7)
Japan                                   11,877             15,913        (4,036)        (25.4)
Other Pacific Rim countries             23,352             20,157          3,195          15.9
Rest of world                            9,186              9,932          (746)         (7.5)
                                $      139,037     $      142,881     $  (3,844)         (2.7)  %




                                       Nine Months Ended                             Percentage
                                September 28,      September 29,      Increase /     Increase /
(In thousands)                      2013               2012           (Decrease)     (Decrease)
United States                   $      162,371     $      188,997     $  (26,626)        (14.1)  %
Germany                                 49,292             56,228         (6,936)        (12.3)
Other European countries                57,928             56,388           1,540           2.7
Japan                                   37,760             47,028         (9,268)        (19.7)
Other Pacific Rim countries             67,747             73,346         (5,599)         (7.6)
Rest of world                           30,780             31,716           (936)         (3.0)
                                $      405,878     $      453,703     $  (47,825)        (10.5)  %

The decreases in sales to customers in the United States for the three and nine months ended September 28, 2013 compared with the corresponding periods in 2012 were attributable primarily to lower sales to our life and health sciences and defense and security end markets. For the three month period, sales to customers in the United States also decreased slightly in our scientific research end market, but increased in our microelectronics end market. For the nine month period, sales to customers in the United States decreased in our microelectronics end market, but increased in our scientific research end market.

The increase in sales to customers in Germany for the three months ended September 28, 2013 compared with the corresponding period in 2012 was attributable primarily to higher sales to our life and health sciences and industrial manufacturing and other end markets, offset in part by lower sales to our scientific research and microelectronics end markets. The decrease in sales to customers in Germany for the nine months ended September 28, 2013 compared with the corresponding period in 2012 was attributable primarily to lower sales to our microelectronics, life and health sciences and scientific research end markets.

The slight decrease in sales to customers in other countries in Europe for the three months ended September 28, 2013 compared with the corresponding period in 2012 was attributable primarily to lower sales to our scientific research and defense and security end markets, offset in part by higher sales to our life and health sciences end market. For the nine months ended September 28, 2013 compared with the corresponding period in 2012, sales increased as a result of higher sales to the life and health sciences end market, which more than offset the lower sales to the scientific research and defense and security end markets.

The decreases in sales to customers in Japan for the three and nine months ended September 28, 2013 compared with the corresponding periods in 2012 were due primarily to lower sales to our industrial manufacturing and other end markets and our scientific research end market.


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The increase in sales to customers in Pacific Rim countries other than Japan for the three months ended September 28, 2013 compared with the corresponding period in 2012 was attributable to higher sales to all of our end markets, except our defense and security end markets. Sales to the scientific research end market were particularly strong in this area of the world for this period. The decrease in sales to customers in Pacific Rim countries other than Japan for the nine months ended September 28, 2013 compared with the corresponding period in 2012 was attributable primarily to lower sales to our microelectronics and scientific research end markets, offset in part by higher sales to our life and health sciences end market.

The decrease in sales to customers in the rest of the world for the three months ended September 28, 2013 compared with the corresponding period in 2012 was due to lower sales to customers in all of our end markets. The decrease in sales to customers in the rest of the world for the nine months ended September 28, 2013 compared with the corresponding period in 2012 was due primarily to lower sales to customers in our microelectronics and industrial manufacturing and other end markets, offset in part by higher sales to customers in our scientific research end market.

Gross Margin

Gross margin was 43.0% and 44.0% for the three months ended September 28, 2013 and September 29, 2012, respectively, and gross margin was 42.4% and 43.6% for the nine months ended September 28, 2013 and September 29, 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, resulting from lower sales and production levels, and a lower proportion of sales of higher margin products in our Optics Group. For the three month period, the decrease was offset in part by a higher proportion of sales of higher margin products by our Photonics Group. For the nine month period, the decrease was offset in part by 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 $35.6 million, or 25.6% of net sales, and $37.3 million, or 26.1% of net sales, for the three months ended September 28, 2013 and September 29, 2012, respectively. SG&A expenses totaled $111.3 million, or 27.4% of net sales, and $123.3 million, or 27.2% of net sales, for the nine months ended September 28, 2013 and September 29, 2012, respectively. The decreases in SG&A expenses in absolute dollars for the three and nine months ended September 28, 2013 compared with the prior year periods were due in large part to reductions in depreciation and amortization expense of $2.3 million and $9.5 million, respectively, resulting primarily from the write-off of certain intangible assets of our Ophir subsidiaries during the fourth quarter of 2012. For the three month period, such reductions were offset in part by higher legal and accounting fees. SG&A expenses for the nine month period of 2013 were also favorably impacted by a decrease of $5.2 million in personnel costs, resulting primarily from lower incentive compensation accruals, as well as from headcount reductions implemented as part of our 2012 cost reduction initiative. The decreases for the nine month period 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 legal and accounting fees.

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 $13.1 million, or 9.5% of net sales, and $12.9 million, or 9.0% of net sales, for the three months ended September 28, 2013 and September 29, 2012, respectively. R&D expense totaled $39.8 million, or 9.8% of net sales, and $40.3 million, or 8.9% of net sales, for the nine months ended September 28, 2013 and September 29, 2012, respectively. The increase in R&D expense for the three month period compared with the prior year period was due primarily to increased new product development costs in our Photonics Group. The decrease in R&D expense in absolute dollars for the nine month period compared with the prior year period was due to headcount reductions in our Lasers Group, offset in part by increased headcount in our Optics Group to provide support for new projects.


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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.

Loss on Sale of Assets

During the third quarter of 2013, we developed a plan to sell our advanced packaging systems business, as discussed in more detail under the heading "Assets Held for Sale" on page 20. As a result, we recorded a loss on sale of assets of $4.5 million in the third quarter of 2013, to write down the assets held for sale to their net realizable value.

Loss on Extinguishment of Debt

On July 18, 2013, we entered into a new credit agreement and terminated our prior credit agreement, as discussed in more detail under "Liquidity and Capital Resources" on page 26. As a result of terminating our prior credit agreement, we recorded a loss on extinguishment of debt of $3.4 million in the third quarter of 2013, to write off the remaining deferred debt issuance costs relating to such prior credit agreement.

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