Table of Contents

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

 

 

 

FORM 10-Q

 

(Mark One)

þ           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 27, 2014

 

OR

 

¨           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from  _______________  to  ______________

 

Commission File Number:  000-01649

 

 

 

 

NEWPORT CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada

 

94-0849175

(State or other jurisdiction of

 

(IRS Employer Identification No.)

incorporation or organization)

 

 

 

1791 Deere Avenue, Irvine, California 92606

(Address of principal executive offices)   (Zip Code)

 

(949) 863-3144

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ý  No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ý  No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

¨

Accelerated filer ý

 

Non-accelerated filer

¨

(Do not check if a smaller reporting company)

Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ¨  No ý

 

As of October 31, 2014, 39,847,342 shares of the registrant’s sole class of common stock were outstanding.

 

 

 



Table of Contents

 

NEWPORT CORPORATION

 

FORM 10-Q

 

INDEX

 

 

Page
Number

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements (unaudited):

 

 

 

 

 

Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 27, 2014 and September 28, 2013

3

 

 

 

 

Consolidated Balance Sheets as of September 27, 2014 and December 28, 2013

4

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 27, 2014 and September 28, 2013

5

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1A.

Risk Factors

27

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

Item 6.

Exhibits

28

 

 

SIGNATURES

29

 

2



Table of Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

NEWPORT CORPORATION

Consolidated Statements of Income and Comprehensive Income

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 $

146,299

 

 $

139,037

 

 $

446,421

 

 $

405,878

 

Cost of sales

 

80,334

 

79,306

 

245,109

 

233,778

 

Gross profit

 

65,965

 

59,731

 

201,312

 

172,100

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

39,122

 

35,649

 

120,413

 

111,324

 

Research and development expense

 

14,082

 

13,129

 

42,538

 

39,807

 

Loss (gain) on sale of assets

 

 

4,517

 

(411)

 

4,517

 

Operating income

 

12,761

 

6,436

 

38,772

 

16,452

 

 

 

 

 

 

 

 

 

 

 

Loss on extinguishment of debt

 

 

(3,355)

 

 

(3,355)

 

Interest and other expense, net

 

(958)

 

(1,293)

 

(2,592)

 

(5,472)

 

Income before income taxes

 

11,803

 

1,788

 

36,180

 

7,625

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

2,330

 

1,199

 

9,769

 

1,697

 

Net income

 

9,473

 

589

 

26,411

 

5,928

 

Net income attributable to non-controlling interests

 

3

 

152

 

103

 

83

 

Net income attributable to Newport Corporation

 

 $

9,470

 

 $

437

 

 $

26,308

 

 $

5,845

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 $

9,473

 

 $

589

 

 $

26,411

 

 $

5,928

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation gains (losses)

 

(7,203)

 

2,995

 

(7,567)

 

1,320

 

Unrecognized net pension gains (losses), net of tax

 

204

 

(67)

 

306

 

161

 

Unrealized gains (losses) on marketable securities, net of tax

 

(155)

 

22

 

(177)

 

(126)

 

Comprehensive income

 

 $

2,319

 

 $

3,539

 

 $

18,973

 

 $

7,283

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to non-controlling interests

 

 $

(5)

 

 $

154

 

 $

110

 

 $

8

 

Comprehensive income attributable to Newport Corporation

 

2,324

 

3,385

 

18,863

 

7,275

 

Comprehensive income

 

 $

2,319

 

 $

3,539

 

 $

18,973

 

 $

7,283

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to Newport Corporation:

 

 

 

 

 

 

 

 

 

Basic

 

 $

0.24

 

 $

0.01

 

 $

0.66

 

 $

0.15

 

Diluted

 

 $

0.23

 

 $

0.01

 

 $

0.65

 

 $

0.15

 

 

 

 

 

 

 

 

 

 

 

Shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Basic

 

39,921

 

39,121

 

39,776

 

38,935

 

Diluted

 

40,612

 

39,657

 

40,546

 

39,426

 

 

See accompanying notes.

 

3



Table of Contents

 

NEWPORT CORPORATION

Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

 

 

September 27,

 

December 28,

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

 $

68,980

 

 $

53,710

 

Restricted cash

 

1,622

 

2,305

 

Marketable securities

 

300

 

8,219

 

Accounts receivable, net of allowance for doubtful accounts of $1,602 and $1,441 as of September 27, 2014 and December 28, 2013, respectively

 

98,722

 

96,388

 

Inventories

 

112,653

 

103,383

 

Deferred income taxes

 

22,381

 

22,437

 

Prepaid expenses and other current assets

 

16,228

 

14,769

 

Total current assets

 

320,886

 

301,211

 

 

 

 

 

 

 

Property and equipment, net

 

82,836

 

80,516

 

Goodwill

 

78,303

 

78,801

 

Deferred income taxes

 

4,236

 

4,474

 

Intangible assets, net

 

60,077

 

67,342

 

Investments and other assets

 

29,664

 

32,885

 

 

 

 $

576,002

 

 $

565,229

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings

 

 $

2,180

 

 $

4,861

 

Accounts payable

 

33,957

 

31,714

 

Accrued payroll and related expenses

 

33,371

 

31,015

 

Accrued expenses and other current liabilities

 

34,038

 

35,341

 

Total current liabilities

 

103,546

 

102,931

 

 

 

 

 

 

 

Long-term debt

 

71,148

 

83,646

 

Pension liabilities

 

26,509

 

27,093

 

Deferred income taxes and other liabilities

 

20,366

 

23,182

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $0.1167 per share, 200,000,000 shares authorized; 39,819,550 and 39,394,196 shares issued and outstanding as of September 27, 2014 and December 28, 2013, respectively

 

4,650

 

4,598

 

Capital in excess of par value

 

467,891

 

459,562

 

Accumulated other comprehensive loss

 

(11,064)

 

(3,619)

 

Accumulated deficit

 

(107,265)

 

(133,573)

 

Total stockholders’ equity of Newport Corporation

 

354,212

 

326,968

 

Non-controlling interests

 

221

 

1,409

 

Total stockholders’ equity

 

354,433

 

328,377

 

 

 

 $

576,002

 

 $

565,229

 

 

See accompanying notes.

 

4



Table of Contents

 

NEWPORT CORPORATION

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

 $

26,411

 

 $

5,928

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

22,271

 

23,079

 

Loss (gain) on sale of assets

 

(411)

 

4,517

 

Provision for losses on inventories

 

4,429

 

5,610

 

Stock-based compensation expense

 

8,588

 

6,590

 

Provision for doubtful accounts

 

585

 

198

 

Loss on disposal of property and equipment

 

370

 

516

 

Loss on extinguishment of debt

 

 

3,355

 

Deferred income taxes

 

(929)

 

16

 

Excess tax benefits from stock-based compensation

 

(4,403)

 

 

Increase (decrease) in cash, net of divestiture, due to changes in:

 

 

 

 

 

Accounts receivable

 

(7,576)

 

(6,987)

 

Inventories

 

(20,183)

 

(3,897)

 

Prepaid expenses and other assets

 

27

 

(3,938)

 

Accounts payable

 

3,763

 

329

 

Accrued payroll and related expenses

 

2,569

 

(1,123)

 

Accrued expenses and other liabilities

 

4,447

 

5,760

 

Other long-term liabilities

 

(977)

 

119

 

Net cash provided by operating activities

 

38,981

 

40,072

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of property and equipment

 

(17,993)

 

(10,972)

 

Restricted cash

 

600

 

(278)

 

Proceeds from divestiture of business

 

5,030

 

 

Purchase of marketable securities

 

(1,414)

 

(2,485)

 

Proceeds from the sale or maturity of marketable securities

 

8,509

 

5,784

 

Net cash used in investing activities

 

(5,268)

 

(7,951)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from long-term debt

 

4,000

 

120,000

 

Debt issuance costs

 

 

(1,484)

 

Repayment of long-term debt and obligations under capital leases

 

(20,200)

 

(191,936)

 

Proceeds from short-term borrowings

 

5,766

 

4,510

 

Repayment of short-term borrowings

 

(5,635)

 

(7,642)

 

Purchases of non-controlling interests

 

(1,863)

 

 

Proceeds from the issuance of common stock under employee plans

 

4,156

 

4,482

 

Tax withholding payments related to net share settlement of equity awards

 

(2,940)

 

(1,994)

 

Purchases of the Company’s common stock

 

(4,480)

 

 

Excess tax benefits from stock-based compensation

 

4,403

 

 

Net cash used in financing activities

 

(16,793)

 

(74,064)

 

Impact of foreign exchange rate changes on cash balances

 

(1,650)

 

504

 

Net increase in cash and cash equivalents

 

15,270

 

(41,439)

 

Cash and cash equivalents at beginning of period

 

53,710

 

88,767

 

Cash and cash equivalents at end of period

 

 $

68,980

 

 $

47,328

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for interest

 

 $

1,490

 

 $

4,171

 

Cash paid during the period for income taxes, net

 

 $

4,065

 

 $

2,637

 

Property and equipment accrued in accounts payable

 

 $

123

 

 $

173

 

 

See accompanying notes.

 

5



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

September 27, 2014

 

NOTE 1                         BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements include the accounts of Newport Corporation and its subsidiaries (collectively referred to as the Company) and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Form 10-Q and Rule 10-01 of Regulation S-X.  In the opinion of management, all adjustments (consisting of normal and recurring accruals) considered necessary for a fair presentation have been included.  All intercompany transactions and balances have been eliminated in consolidation.

 

The accompanying unaudited consolidated financial statements do not include certain footnotes and financial presentations normally required under generally accepted accounting principles (GAAP) and, therefore, should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 28, 2013.  The results for the interim periods are not necessarily indicative of the results the Company will have for the full year ending January 3, 2015.  The December 28, 2013 balances reported herein are derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 28, 2013.

 

Non-Controlling Interests

 

During the first quarter of 2014, the Company purchased all shares owned by the holders of the non-controlling interests in its Optical Metrology Ltd. subsidiary for $0.9 million.

 

During the second quarter of 2014, the Company purchased all shares owned by the holder of the non-controlling interest in its Ophir Japan Ltd. subsidiary for $0.9 million.

 

NOTE 2                         RECENT ACCOUNTING PRONOUNCEMENTS

 

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, Presentation of Financial Statements and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosures of Disposal of Components of an Entity, which updates the guidance in Topics 205 and 360.  ASU No. 2014-08 requires that the disposal of a component of an entity or a group of components of an entity be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on the entity’s operations and financial results.  ASU No. 2014-08 also requires additional disclosures regarding discontinued operations.  ASU No. 2014-08 is required to be applied prospectively for fiscal years and interim periods beginning after December 15, 2014.  The adoption of ASU No. 2014-08 is not expected to have a material impact on the Company’s financial position or results of operations.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which created Topic 606.  ASU No. 2014-09 establishes a core principle that a company should recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.  In order to achieve that core principle, companies are required to apply the following steps: (1) identify the contract with the customer; (2) identify performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the company satisfies a performance obligation.  ASU No. 2014-09 will become effective for interim and annual periods beginning after December 15, 2016 and can be applied either (i) retrospectively to each prior reporting period, or (ii) retrospectively with the cumulative effect of initial application recognized on the date of adoption.  Early adoption is not permitted.  The Company is currently evaluating the expected impact of ASU No. 2014-09 on its financial position and results of operations.

 

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures.  ASU No. 2014-15 will become effective for annual periods beginning after December 15, 2016 and early adoption is permitted.  The adoption of ASU No. 2014-15 will not have an impact on the Company’s financial position or results of operations.

 

6



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

September 27, 2014

 

NOTE 3                         ACQUISITION AND DIVESTITURE

 

During the third quarter of 2013, the Company developed a plan to sell its advanced packaging systems business and, based on negotiations for the sale of this business that occurred during the second half of 2013, the Company considered the assets and liabilities of this business as held for sale as of December 28, 2013.  The Company completed the sale of this business in January 2014 for $5.7 million, consisting of an initial purchase price of $6.0 million, less an adjustment of $0.3 million based on the net assets of the business at closing.  The initial purchase price consisted of $5.35 million in cash and an unsecured note receivable of $0.65 million, and the net asset adjustment was repaid to the purchaser in cash.  The Company incurred $0.4 million in transaction costs.  The net book value of this business was $9.5 million as of December 28, 2013; however, because these assets were held for sale at such time, the Company wrote them down to their net realizable value as of December 28, 2013 based on the terms that had been negotiated with the purchaser and expected transaction costs, resulting in a loss of $4.7 million during 2013.  During the first quarter of 2014, the Company recognized a gain of $0.4 million to reduce the loss on the sale to $4.3 million, based on the final terms of the transaction and the net assets of the business on the closing date.  The net sales, operating income and cash flows of this business were not significant to the operations of the Company.

 

In July 2014, the Company entered into an agreement to acquire all of the capital stock of V-Gen Ltd. (V-Gen), and the transaction subsequently closed in the Company’s fourth quarter, on September 29, 2014.   The final purchase price of $36.6 million was paid in cash and consisted of an initial purchase price of $34.0 million, plus an adjustment of $2.6 million based on a calculation of V-Gen’s net working capital and cash balances at the closing date.  The Company incurred $0.3 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 and comprehensive income.  V-Gen enhances the Company’s fiber laser products and technology and is included in the Company’s Lasers Group as of September 29, 2014.  The Company has not disclosed the fair value of assets and liabilities acquired or supplemental pro forma financial information for this acquisition, as the initial accounting for this transaction has not been completed.

 

NOTE 4                         MARKETABLE SECURITIES

 

All marketable securities of the Company were classified as available for sale and were recorded at market value using the specific identification method, and unrealized gains and losses are reflected in accumulated other comprehensive loss in the accompanying consolidated balance sheets.  The aggregate fair value of available for sale securities and the aggregate amount of unrealized gains and losses in available for sale securities at September 27, 2014 were as follows:

 

(In thousands)

 

Aggregate

 

Aggregate Amount of
Unrealized

 

 

Fair Value

 

Gains

 

Losses

Money market funds

 

 $

7

 

 $

-

 

 $

-

 

Certificates of deposit

 

293

 

-

 

-

 

 

 

 $

300

 

 $

-

 

 $

-

 

 

The aggregate fair value of available for sale securities and the aggregate amount of unrealized gains and losses in available for sale securities at December 28, 2013 were as follows:

 

(In thousands)

 

Aggregate

 

Aggregate Amount of
Unrealized

 

 

Fair Value

 

Gains

 

Losses

Money market funds

 

 $

8,052

 

 $

85

 

 $

-

 

Certificates of deposit

 

167

 

-

 

-

 

 

 

 $

8,219

 

 $

85

 

 $

-

 

 

The Company’s certificates of deposit mature within one year.  Money market funds do not have a maturity date.

 

7



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

September 27, 2014

 

The gross realized gains and losses were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In thousands)

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

2014

 

2013

 

Gross realized gains

 

 $

134

 

 $

-

 

 $

134

 

 $

-

 

Gross realized losses

 

-

 

-

 

-

 

-

 

 

 

 $

134

 

 $

-

 

 $

134

 

 $

-

 

 

NOTE 5                         FAIR VALUE MEASUREMENTS

 

Accounting Standards Codification (ASC) 820-10, Fair Value Measurements and Disclosures, requires that for any assets and liabilities stated at fair value on a recurring basis in the Company’s financial statements, the fair value of such assets and liabilities be measured based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Level 1 asset and liability values are derived from quoted prices in active markets for identical assets and liabilities and Level 2 asset and liability values are derived from quoted prices in inactive markets or based on other observable inputs.

 

The Company’s assets and liabilities measured at fair value on a recurring basis are categorized in the table below based upon their level within the fair value hierarchy as of September 27, 2014.

 

(In thousands)

 

 

 

Fair Value Measurements at Reporting Date Using

 

Description

 

September 27, 2014

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Restricted Cash

 

 $

1,622

 

 $

1,622

 

 $

-

 

 $

-

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Money market funds

 

7

 

7

 

-

 

-

 

Certificates of deposit

 

293

 

-

 

293

 

-

 

 

 

300

 

7

 

293

 

-

 

Derivative assets:

 

 

 

 

 

 

 

 

 

Option contracts

 

38

 

-

 

38

 

-

 

 

 

 

 

 

 

 

 

 

 

Funds in investments and other assets:

 

 

 

 

 

 

 

 

 

Israeli pension funds

 

11,430

 

-

 

11,430

 

-

 

Group insurance contracts

 

6,509

 

-

 

6,509

 

-

 

 

 

17,939

 

-

 

17,939

 

-

 

 

 

 $

19,899

 

 $

1,629

 

 $

18,270

 

 $

-

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

Option contracts

 

(14)

 

-

 

(14)

 

-

 

Forward contracts

 

(298)

 

-

 

(298)

 

-

 

 

 

 $

(312)

 

 $

-

 

 $

(312)

 

 $

-

 

 

8



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

September 27, 2014

 

The Company’s assets and liabilities measured at fair value on a recurring basis are categorized in the table below based upon their level within the fair value hierarchy as of December 28, 2013.

 

(In thousands)

 

 

 

Fair Value Measurements at Reporting Date Using

 

Description

 

December 28, 2013

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Restricted Cash

 

 $

2,305

 

 $

2,305

 

 $

-

 

 $

-

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Money market funds

 

8,052

 

8,052

 

-

 

-

 

Certificates of deposit

 

167

 

-

 

167

 

-

 

 

 

8,219

 

8,052

 

167

 

-

 

Derivative assets:

 

 

 

 

 

 

 

 

 

Option contracts

 

269

 

-

 

269

 

-

 

 

 

 

 

 

 

 

 

 

 

Funds in investments and other assets:

 

 

 

 

 

 

 

 

 

Israeli pension funds

 

11,489

 

-

 

11,489

 

 

 

Group insurance contracts

 

6,895

 

-

 

6,895

 

-

 

 

 

18,384

 

-

 

18,384

 

-

 

 

 

 $

29,177

 

 $

10,357

 

 $

18,820

 

 $

-

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

Option contracts

 

 $

10

 

 $

-

 

 $

10

 

 $

-

 

 

The Company’s other financial instruments include short-term borrowings and long-term debt.  The fair value of these financial instruments was estimated based on current rates for similar issues or on the current rates offered to the Company for debt of similar remaining maturities.  The estimated fair values of these financial instruments were as follows:

 

 

 

September 27, 2014

 

December 28, 2013

 

(In thousands)

 

Carrying

 

 

 

Carrying

 

 

 

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

Short-term borrowings

 

 $

2,180

 

 $

2,176

 

 $

4,861

 

 $

4,851

 

Long-term debt

 

 $

71,148

 

 $

69,536

 

 $

83,646

 

 $

82,658

 

 

NOTE 6                         SUPPLEMENTAL BALANCE SHEET INFORMATION

 

Inventories

 

Inventories that are expected to be sold within one year are classified as current inventories and are included in inventories in the accompanying consolidated balance sheets.  Such inventories were as follows:

 

(In thousands)

 

September 27,

 

December 28,

 

 

 

2014

 

2013

 

Raw materials and purchased parts

 

 $

66,635

 

 $

61,819

 

Work in process

 

19,176

 

19,577

 

Finished goods

 

26,842

 

21,987

 

Short-term inventories

 

 $

112,653

 

 $

103,383

 

 

9



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

September 27, 2014

 

Inventories that are not expected to be sold within one year are classified as long-term inventories and are included in investments and other assets in the accompanying consolidated balance sheets.  Such inventories were as follows:

 

(In thousands)

 

September 27,

 

December 28,

 

 

 

2014

 

2013

 

Raw materials and purchased parts

 

$

2,057

 

$

1,850

 

Finished goods

 

3,198

 

4,489

 

Long-term inventories

 

$

5,255

 

$

6,339

 

 

Accrued Warranty Obligations

 

Unless otherwise stated in the Company’s product literature or in its agreements with customers, products sold by the Company’s Photonics and Optics Groups 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, and laser beam profilers and dental CAD/CAM scanners, which generally carry a two-year warranty.  Products sold by the Photonics and Optics Groups to original equipment manufacturer (OEM) customers carry warranties generally ranging from 15 to 19 months.  Products sold by the Company’s Lasers Group carry warranties that vary by product and product component, but generally range from 90 days to two years.  In certain cases, such warranties for Lasers Group products are limited by either a set time period or a maximum amount of hourly usage of the product, whichever occurs first.  Defective products will be either repaired or replaced, generally at the Company’s option, upon meeting certain criteria.  The Company accrues 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.  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.

 

The activity in accrued warranty obligations was as follows:

 

 

 

Nine Months Ended

 

(In thousands)

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

Balance at beginning of year

 

$

3,285

 

$

3,528

 

Additions charged to cost of sales

 

2,134

 

1,817

 

Warranty claims

 

(2,487)

 

(2,112)

 

Balance at end of period

 

$

2,932

 

$

3,233

 

 

Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities were as follows:

 

(In thousands)

 

September 27,

 

December 28,

 

 

 

2014

 

2013

 

Deferred revenue

 

$

13,059

 

$

13,609

 

Deferred lease liability

 

5,165

 

5,448

 

Accrued and deferred taxes

 

4,144

 

3,130

 

Short-term accrued warranty obligations

 

2,760

 

3,093

 

Other

 

8,910

 

10,061

 

 

 

$

34,038

 

$

35,341

 

 

10



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

September 27, 2014

 

Accumulated Other Comprehensive Loss

 

Accumulated other comprehensive loss consisted of the following:

 

(In thousands)

 

September 27,

 

December 28,

 

 

 

2014

 

2013

 

Cumulative foreign currency translation losses

 

$

(9,870)

 

$

(2,296)

 

Unrecognized net pension losses, net of tax

 

(2,093)

 

(2,399)

 

Unrealized gains on marketable securities, net of tax

 

899

 

1,076

 

 

 

$

(11,064)

 

$

(3,619)

 

 

NOTE 7                         INTANGIBLE ASSETS

 

Intangible assets were as follows:

 

(In thousands)

 

September 27,

 

December 28,

 

 

 

2014

 

2013

 

Intangible assets subject to amortization:

 

 

 

 

 

Developed technology, net of accumulated amortization of $16,143 and $14,079 as of September 27, 2014 and December 28, 2013, respectively

 

$

24,227

 

$

26,805

 

Customer relationships, net of accumulated amortization of $36,327 and $32,614 as of September 27, 2014 and December 28, 2013, respectively

 

9,971

 

13,795

 

In-process research and development, net of accumulated amortization of $1,310 and $759 as of September 27, 2014 and December 28, 2013, respectively

 

6,576

 

7,162

 

Other, net of accumulated amortization of $6,334 and $6,324 as of September 27, 2014 and December 28, 2013, respectively

 

998

 

1,275

 

 

 

41,772

 

49,037

 

Intangible assets not subject to amortization:

 

 

 

 

 

Trademarks and trade names

 

18,305

 

18,305

 

Intangible assets, net

 

$

60,077

 

$

67,342

 

 

Developed technology is amortized on a straight line basis over 10 to 20 years, depending on the life of the product technology.  Intangible assets related to customer relationships are generally amortized over a period of up to 10 years on an accelerated basis.  In-process research and development is amortized on a straight line basis over the product’s estimated useful life upon completion of the technology.  Other intangible assets include acquired backlog, product trademarks and trade names, non-competition agreements and defensible assets.  With the exception of product trademarks and trade names, such assets are amortized on a straight line basis over a period of three months to 10 years, depending on the asset.  Trademarks and trade names associated with products are amortized on a straight line basis over the estimated remaining life of the product technology, which ranges from 10 to 20 years.  Trademarks and trade names associated with a business have indefinite lives and are not amortized.

 

Amortization expense related to intangible assets totaled $1.9 million and $6.8 million for the three and nine months ended September 27, 2014, respectively, and $2.6 million and $7.7 million for the three and nine months ended September 28, 2013, respectively.

 

11



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

September 27, 2014

 

Estimated aggregate amortization expense for future fiscal years is as follows:

 

(In thousands)

 

 

Estimated
Aggregate
Amortization
Expense

 

2014 (remaining)

 

$

1,755

 

2015

 

6,857

 

2016

 

6,484

 

2017

 

5,521

 

2018

 

3,396

 

Thereafter

 

17,355

 

 

 

$

41,368

 

 

The Company has excluded $0.4 million of estimated amortization expense related to certain in-process research and development from the table above, as it was uncertain as of September 27, 2014 when the technology will be completed and when the amortization will begin.

 

NOTE 8                         INTEREST AND OTHER EXPENSE, NET

 

Interest and other expense, net, was as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

(In thousands)

 

2014

 

2013

 

2014

 

2013

 

Interest expense

 

$

(522)

 

$

(1,087)

 

$

(1,779)

 

$

(4,670)

 

Interest and dividend income

 

129

 

46

 

252

 

151

 

Derivative gain (loss)

 

(372)

 

167

 

(248)

 

541

 

Bank and portfolio asset management fees

 

(293)

 

(245)

 

(819)

 

(631)

 

Other income (expense), net

 

100

 

(174)

 

2

 

(863)

 

 

 

$

(958)

 

$

(1,293)

 

$

(2,592)

 

$

(5,472)

 

 

NOTE 9                         STOCK-BASED COMPENSATION

 

During the nine months ended September 27, 2014, the Company granted 0.6 million restricted stock units and 0.6 million stock-settled stock appreciation rights with weighted average grant date fair values of $18.31 and $7.85, respectively.

 

The total stock-based compensation expense included in the Company’s consolidated statements of income and comprehensive income was as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

(In thousands)

 

2014

 

2013

 

2014

 

2013

 

Cost of sales

 

$

271

 

$

233

 

$

762

 

$

686

 

Selling, general and administrative expenses

 

2,508

 

1,921

 

6,809

 

5,114

 

Research and development expense

 

362

 

291

 

1,017

 

790

 

 

 

$

3,141

 

$

2,445

 

$

8,588

 

$

6,590

 

 

12



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

September 27, 2014

 

At September 27, 2014, the total compensation cost related to unvested stock-based awards granted to employees, officers and directors under the Company’s stock-based benefit plans that had not yet been recognized was $22.4 million, net of estimated forfeitures.  This future compensation expense will be amortized over a weighted-average period of 2.1 years using the straight-line attribution method.  The actual compensation expense that the Company will recognize in the future related to unvested stock-based awards outstanding at September 27, 2014 will be adjusted for actual forfeitures and will be adjusted based on the Company’s determination as to the extent to which performance conditions applicable to any stock-based awards have been or will be achieved.

 

At September 27, 2014, 0.2 million stock options with a weighted-average exercise price of $13.64 per share, intrinsic value of $0.6 million and remaining contractual term of 0.6 years were outstanding and were exercisable.  At September 27, 2014, 2.3 million stock-settled stock appreciation rights with a weighted-average base value of $13.94 per share, intrinsic value of $8.6 million and remaining contractual term of 4.6 years were outstanding, of which 1.2 million stock-settled stock appreciation rights with a weighted-average base value of $11.54 per share, intrinsic value of $7.0 million and remaining contractual term of 3.2 years were exercisable.

 

NOTE 10                  DEBT AND LINES OF CREDIT

 

Total short-term debt was as follows:

 

(In thousands)

 

September 27,

 

December 28,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Japanese revolving lines of credit

 

$

640

 

$

666

 

Japanese receivables financing facilities

 

715

 

615

 

Current portion of long-term debt

 

825

 

3,580

 

Total short-term borrowings

 

$

2,180

 

$

4,861

 

 

 

Total long-term debt was as follows:

 

(In thousands)

 

September 27,

 

December 28,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

U.S. revolving line of credit expiring July 2018

 

$

71,000

 

$

83,000

 

Israeli loans due through October 2015

 

973

 

2,110

 

Japanese private placement bonds

 

-

 

1,902

 

Japanese loans

 

-

 

214

 

Total long-term debt

 

71,973

 

87,226

 

Current portion of long-term debt

 

825

 

3,580

 

Total long-term debt, less current portion

 

$

71,148

 

$

83,646

 

 

13



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

September 27, 2014

 

NOTE 11      NET INCOME PER SHARE

 

The following table sets forth the computation of basic and diluted net income per share:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

(In thousands, except per share data)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Newport Corporation

 

$

9,470

 

$

437

 

$

26,308

 

$

5,845

 

 

 

 

 

 

 

 

 

 

 

Shares:

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

39,921

 

39,121

 

39,776

 

38,935

 

Dilutive potential common shares, using treasury stock method

 

691

 

536

 

770

 

491

 

Weighted average shares outstanding - diluted

 

40,612

 

39,657

 

40,546

 

39,426

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to Newport Corporation:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.24

 

$

0.01

 

$

0.66

 

$

0.15

 

Diluted

 

$

0.23

 

$

0.01

 

$

0.65

 

$

0.15

 

 

For the three and nine months ended September 27, 2014, 0.7 million stock appreciation rights, and for the three and nine months ended September 28, 2013, an aggregate of 1.5 million stock options and stock appreciation rights, were excluded from the computations of diluted net income per share, as their inclusion would have been antidilutive.  For the three and nine months ended September 28, 2013, eight thousand restricted stock units were excluded from the computations of diluted net income per share, as the amount of unrecognized future compensation expense associated with these restricted stock units would have resulted in assumed proceeds in excess of the amount required to repurchase the underlying shares under the treasury stock method and, therefore, their inclusion would have been antidilutive.  For the three and nine months ended September 27, 2014, 0.6 million performance-based restricted stock units, and for the three and nine months ended September 28, 2013, an additional 0.7 million performance-based restricted stock units, were excluded from the computations of diluted net income per share, as the performance criteria for their vesting had not been met as of the end of such periods.

 

NOTE 12      INCOME TAXES

 

Income tax expense for the three and nine months ended September 27, 2014 and September 28, 2013 consisted of a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to the Company, adjusted for items which are considered discrete to a particular period.  The effective tax rates for the three and nine months ended September 27, 2014 were 19.7% and 27.0%, respectively, and the effective tax rates for the three and nine months ended September 28, 2013 were 67.1% and 22.3%, respectively.

 

The effective tax rates for the current year periods are lower than the U.S. statutory rate of 35% due primarily to the favorable impact of an Extraterritorial Income exclusion benefit and a reduction of the corresponding uncertain tax position, which were recorded as discrete items during the third quarter of 2014, as well as the benefit of income recorded in foreign jurisdictions that have tax rates that are lower than U.S. tax rates.

 

NOTE 13      STOCKHOLDERS’ EQUITY TRANSACTIONS

 

In May 2008, the Board of Directors of the Company approved a share repurchase program, authorizing the purchase of up to 4.0 million shares of the Company’s common stock.  During the nine months ended September 27, 2014, the Company repurchased 0.2 million shares for a total of $4.5 million under this program.  As of September 27, 2014, 3.6 million shares remained available for purchase under the program.

 

During the nine months ended September 27, 2014, the Company cancelled 0.1 million restricted stock units in payment by employees of taxes owed upon the vesting of restricted stock units issued to them under the Company’s stock incentive plans.  The value of these restricted stock units totaled $2.9 million at the time they were cancelled.

 

14



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

September 27, 2014

 

NOTE 14              DEFINED BENEFIT PENSION PLANS

 

The Company has defined benefit pension plans covering substantially all full-time employees in France, Germany, Israel and Japan. In addition, the Company has certain pension liabilities relating to former employees of the Company in the United Kingdom.  The German plan is unfunded, as permitted under the plan 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 management’s 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 the Company’s pension plans.

 

Net periodic benefit costs for the plans in aggregate included the following components:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

(In thousands)

 

2014

 

2013

 

2014

 

2013

 

Service cost

 

$

482

 

$

687

 

$

1,740

 

$

2,108

 

Interest cost on benefit obligations

 

198

 

162

 

514

 

486

 

Expected return on plan assets

 

(70)

 

(51)

 

(211)

 

(154)

 

Amortization of net loss

 

44

 

62

 

134

 

187

 

 

 

$

654

 

$

860

 

$

2,177

 

$

2,627

 

 

NOTE 15      BUSINESS SEGMENT INFORMATION

 

The operating segments reported below are the segments of the Company for which separate financial information is available and for which operating results are evaluated regularly by the Chief Executive Officer, who is the chief operating decision maker, in deciding how to allocate resources and in assessing performance.  The Company develops, manufactures and markets its products within three distinct business segments: its Photonics Group, its Lasers Group and its Optics Group.

 

The Company measured income reported for each operating segment, which included only those costs that were directly attributable to the operations of that segment, and excluded unallocated operating expenses, such as corporate overhead and intangible asset amortization, certain gains and losses, interest and other expense, net, and income taxes.

 

(In thousands)

 

Photonics

 

Lasers

 

Optics

 

Total

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 27, 2014:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

59,757

 

$

44,228

 

$

42,314

 

$

146,299

 

Segment income

 

$

12,255

 

$

6,423

 

$

4,949

 

$

23,627

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 28, 2013:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

57,508

 

$

38,923

 

$

42,606

 

$

139,037

 

Segment income

 

$

13,213

 

$

3,432

 

$

4,421

 

$

21,066

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 27, 2014:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

182,693

 

$

137,815

 

$

125,913

 

$

446,421

 

Segment income

 

$

40,201

 

$

18,151

 

$

14,494

 

$

72,846

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 28, 2013:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

171,324

 

$

117,231

 

$

117,323

 

$

405,878

 

Segment income

 

$

36,546

 

$

10,790

 

$

6,996

 

$

54,332

 

 

15



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

September 27, 2014

 

The following table reconciles segment income to consolidated income before income taxes:

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

(In thousands)

 

2014

 

2013

 

2014

 

2013

 

Segment income

 

$

23,627

 

$

21,066

 

$

72,846

 

$

54,332

 

Unallocated operating expenses

 

(10,866)

 

(10,113)

 

(34,485)

 

(33,363)

 

(Loss) gain on sale of assets

 

-

 

(4,517)

 

411

 

(4,517)

 

Loss on extinguishment of debt

 

-

 

(3,355)

 

 

 

(3,355)

 

Interest and other expense, net

 

(958)

 

(1,293)

 

(2,592)

 

(5,472)

 

 

 

$

11,803

 

$

1,788

 

$

36,180

 

$

7,625

 

 

16



Table of Contents

 

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 28, 2013 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 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 28, 2013.  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, and three-dimensional non-contact measurement equipment.  Our products are used worldwide in a variety of industries, including scientific research, defense and security, microelectronics, life and health sciences and industrial markets.  We operate within three distinct business segments: 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 unaudited consolidated financial statements.

 

Critical Accounting Policies and Estimates

 

The preparation of our consolidated 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 28, 2013.  There have been no material changes to the critical accounting policies disclosed in such Annual Report on Form 10-K.

 

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Acquisition and Divestiture

 

During the third quarter of 2013, we developed a plan to sell our advanced packaging systems business and, based on negotiations for the sale of this business that occurred during the second half of 2013, we considered the assets and liabilities of this business as held for sale as of December 28, 2013.  We completed the sale of this business in January 2014 for $5.7 million, consisting of an initial purchase price of $6.0 million, less an adjustment of $0.3 million based on the net assets of the business at closing.  The initial purchase price consisted of $5.35 million in cash and an unsecured note receivable of $0.65 million, and the net asset adjustment was repaid to the purchaser in cash.  We incurred $0.4 million in transaction costs.  The net book value of this business was $9.5 million as of December 28, 2013; however, because these assets were held for sale at such time, we wrote them down to their net realizable value as of December 28, 2013 based on the terms that had been negotiated with the purchaser and expected transaction costs, resulting in a loss of $4.7 million during 2013.  During the first quarter of 2014, we recognized a gain of $0.4 million to reduce the loss on the sale to $4.3 million, based on the final terms of the transaction and the net assets of the business on the closing date.  The net sales, operating income and cash flows of this business were not significant to our operations.

 

In July 2014, we entered into an agreement to acquire all of the capital stock of V-Gen, Ltd. (V-Gen), and the transaction subsequently closed in our fourth quarter, on September 29, 2014. The final purchase price of $36.6 million was paid in cash and consisted of an initial purchase price of $34.0 million, plus an adjustment of $2.6 million based on a calculation of V-Gen’s net working capital and cash balances at the closing date. The Company incurred $0.3 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 and comprehensive income.  V-Gen enhances our fiber laser products and technology and is included in our Lasers Group as of September 29, 2014.

 

Stock-Based Compensation

 

During the nine months ended September 27, 2014, we granted 0.6 million restricted stock units and 0.6 million stock-settled stock appreciation rights with weighted average grant date fair values of $18.31 and $7.85, 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 27,

 

September 28,

 

September 27,

 

September 28,

 

(In thousands)

 

2014

 

2013

 

2014

 

2013

 

Cost of sales

 

 $

271

 

 $

233

 

 $

762

 

 $

686

 

Selling, general and administrative expenses

 

2,508

 

1,921

 

6,809

 

5,114

 

Research and development expense

 

362

 

291

 

1,017

 

790

 

 

 

 $

3,141

 

 $

2,445

 

 $

8,588

 

 $

6,590

 

 

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Results of Operations for the Three and Nine Months Ended September 27, 2014 and September 28, 2013

 

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 27,

 

September 28,

 

September 27,

 

September 28,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of sales

 

54.9

 

57.0

 

54.9

 

57.6

 

Gross profit

 

45.1

 

43.0

 

45.1

 

42.4

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

26.8

 

25.6

 

27.0

 

27.4

 

Research and development expense

 

9.6

 

9.5

 

9.5

 

9.8

 

Loss (gain) on sale of assets

 

-

 

3.3

 

(0.1)

 

1.1

 

Operating income

 

8.7

 

4.6

 

8.7

 

4.1

 

 

 

 

 

 

 

 

 

 

 

Loss on extinguishment of debt

 

-

 

(2.4)

 

-

 

(0.8)

 

Interest and other expense, net

 

(0.6)

 

(0.9)

 

(0.6)

 

(1.4)

 

Income before income taxes

 

8.1

 

1.3

 

8.1

 

1.9

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

1.6

 

0.9

 

2.2

 

0.4

 

Net income

 

6.5

 

0.4

 

5.9

 

1.5

 

Net income attributable to non-controlling interests

 

0.0

 

0.1

 

0.0

 

0.0

 

Net income attributable to Newport Corporation

 

6.5

%

0.3

%

5.9

%

1.5

%

 

Net Sales

 

Net sales for the three months ended September 27, 2014 increased by $7.3 million, or 5.2%, compared with the corresponding period in 2013.  For the three months ended September 27, 2014, net sales by our Photonics Group increased $2.2 million, or 3.9%; net sales by our Lasers Group increased $5.3 million, or 13.6%; and net sales by our Optics Group decreased $0.3 million, or 0.7%, compared with the corresponding prior year period.  Net sales for the nine months ended September 27, 2014 increased by $40.5 million, or 10.0%, compared with the corresponding period in 2013.  For the nine months ended September 27, 2014, net sales by our Photonics Group increased $11.4 million, or 6.6%; net sales by our Lasers Group increased $20.6 million, or 17.6%; and net sales by our Optics Group increased $8.6 million, or 7.3%, compared with the corresponding prior year period.  During the three and nine months ended September 27, 2014, we experienced modest to significant increases in net sales in all of our end markets compared with the same periods in 2013, except for our defense and security end market.  These increases were offset in part by reductions in sales resulting from the divestiture of our advanced packaging systems business in January 2014.  Our net sales for the three and nine months ended September 28, 2013 included sales by this business of $3.9 million and $8.5 million, respectively.  We had no corresponding sales by this business in the three months ended September 27, 2014 and only $0.1 million in sales by this business in the nine months ended September 27, 2014.

 

Net sales to the scientific research market for the three months ended September 27, 2014 increased $3.1 million, or 10.6%, compared with the same period in 2013.  Net sales to the scientific research market for the nine months ended September 27, 2014 increased $4.6 million, or 5.1%, compared with the same period in 2013.  The increases in sales to this market during the current year periods compared with the same periods in 2013 were due primarily to a modest improvement in overall conditions in this market during the first nine months of 2014 compared with the depressed sales levels in the first nine months of 2013, which were caused by uncertainty in governmental research funding levels 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 27, 2014 decreased by $2.5 million, or 15.9%, compared with the same period in 2013.  Net sales to the defense and security markets for the nine months ended September 27, 2014 decreased by $5.6 million, or 12.5%, compared with the same period in 2013.  The decreases in sales to the defense and security markets for the three and nine month periods in 2014 compared with the corresponding prior year periods were due primarily to continued uncertainty in future defense spending levels, primarily in the United States and Israel, which led to decreased sales of optics products to OEM customers for existing programs.  The decreases were also due to the divestiture of our advanced packaging systems business, which contributed net sales to these markets of $1.1 million and $1.8 million in the three and nine months ended September 28, 2013, respectively, for which there were no corresponding sales in the 2014 periods.  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.

 

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Net sales to the microelectronics market for the three months ended September 27, 2014 increased $2.4 million, or 7.0%, compared with the same period in 2013.  Net sales to the microelectronics market for the nine months ended September 27, 2014 increased $20.5 million, or 22.4%, compared with the same period in 2013.  The increases in sales to this market in the current year periods compared with the corresponding 2013 periods were due primarily to increased sales to semiconductor equipment manufacturing customers relating to new development programs and to increased sales of laser products used for materials processing applications related to the manufacture of electronic products.  These increases were offset in part by a reduction in sales of advanced packaging systems due to our divesture of that business in January 2014.  Our advanced packaging systems business contributed net sales to this market of $1.1 million and $2.4 million in the three and nine months ended September 28, 2013, respectively, for which there were no significant corresponding sales in the 2014 periods.

 

Net sales to the life and health sciences market for the three months ended September 27, 2014 increased $1.9 million, or 6.5%, compared with the same period in 2013.  Net sales to the life and health sciences market for the nine months ended September 27, 2014 increased $6.2 million, or 6.7%, compared with the same period in 2013.  The increases in sales to this market in the current year periods compared with the same periods in 2013 were due primarily to increased sales of products used for surgical and dental applications.

 

Net sales to our industrial manufacturing and other end markets for the three months ended September 27, 2014 increased $2.3 million, or 7.7%, compared with the same period in 2013.  Net sales to our industrial manufacturing and other end markets for the nine months ended September 27, 2014 increased $14.8 million, or 16.8%, compared with the same period in 2013.  The increases in sales to these markets in the current year periods compared with the same periods in 2013 were due primarily to increased sales of products used for fiber optic device manufacturing, graphics and thermal imaging applications.  These increases were offset in part by a reduction in sales of advanced packaging systems due to our divesture of that business in January 2014.  Our advanced packaging systems business contributed net sales to these markets of $1.6 million and $4.0 million in the three and nine months ended September 28, 2013, respectively, for which there were no corresponding sales in the 2014 periods.

 

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

 

 

 

 

 

 

 

September 27,

 

September 28,

 

Increase /

 

Percentage

 

(In thousands)

 

2014

 

2013

 

(Decrease)

 

Increase

 

United States

 

 $

58,556

 

 $

59,023

 

 $

(467)

 

(0.8)

%

Germany

 

19,408

 

17,189

 

2,219

 

12.9

 

Other European countries

 

20,344

 

18,410

 

1,934

 

10.5

 

Japan

 

10,754

 

11,877

 

(1,123)

 

(9.5)

 

Other Pacific Rim countries

 

27,741

 

23,352

 

4,389

 

18.8

 

Rest of world

 

9,496

 

9,186

 

310

 

3.4

 

 

 

 $

146,299

 

 $

139,037

 

 $

7,262

 

5.2

%

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 27,

 

September 28,

 

 

 

Percentage

 

(In thousands)

 

2014

 

2013

 

Increase

 

Increase

 

United States

 

 $

169,079

 

 $

162,371

 

 $

6,708

 

4.1

%

Germany

 

60,702

 

49,292

 

11,410

 

23.1

 

Other European countries

 

63,278

 

57,928

 

5,350

 

9.2

 

Japan

 

40,486

 

37,760

 

2,726

 

7.2

 

Other Pacific Rim countries

 

81,217

 

67,747

 

13,470

 

19.9

 

Rest of world

 

31,659

 

30,780

 

879

 

2.9

 

 

 

 $

446,421

 

 $

405,878

 

 $

40,543

 

10.0

%

 

Sales to customers in the United States for the three and nine months ended September 27, 2014 increased in our microelectronics and industrial manufacturing and other end markets compared with the corresponding periods in 2013, particularly in the nine-month period.  However, these increases were more than offset in the three-month period by lower sales to customers in our defense and security end market, and lower sales to these markets also partially offset these increases in the nine-month period.

 

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The increases in sales to customers in Germany for the three and nine months ended September 27, 2014 compared with the corresponding periods in 2013 were attributable to higher sales to customers in our life and health sciences, scientific research and microelectronics end markets.  The increase in sales to customers in other countries in Europe for the three months ended September 27, 2014 compared with the same period in 2013 was attributable primarily to higher sales to customers in our scientific research end market.  The increase in sales to customers in other countries in Europe for the nine months ended September 27, 2014 compared with the same period in 2013 was attributable primarily to higher sales to customers in our industrial manufacturing and microelectronics end markets.

 

Sales to customers in Japan increased in our industrial manufacturing and other end markets for the three and nine months ended September 27, 2014 compared with the corresponding periods in 2013, particularly for the nine-month period.  However, these increases were more than offset in the three-month period by lower sales to customers in our scientific research and microelectronics end markets, and lower sales to these markets also partially offset these increases in the nine-month period.  The increases in sales to customers in Pacific Rim countries other than Japan for the three and nine months ended September 27, 2014 compared with the corresponding periods in 2013 were attributable to higher sales to most of our end markets, particularly our scientific research and microelectronics end markets.  Sales to customers in such countries in our defense and security end markets were slightly lower for the nine-month period.

 

The increases in sales to customers in the rest of the world for the three and nine months ended September 27, 2014 compared with the corresponding periods in 2013 were due primarily to higher sales to customers in our life and health sciences and scientific research end markets, offset in part by lower sales to customers in our defense and security end markets.

 

Gross Margin

 

Gross margin was 45.1% and 43.0% for the three months ended September 27, 2014 and September 28, 2013, respectively, and gross margin was 45.1% and 42.4% for the nine months ended September 27, 2014 and September 28, 2013, respectively.  The increases in gross margin for the three and nine months ended September 27, 2014 compared with the corresponding prior year periods were due primarily to increased absorption of manufacturing overhead, resulting from higher sales and production levels, and a higher proportion of sales of higher margin products by our Optics and Photonics Groups.

 

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 $39.1 million, or 26.8% of net sales, and $35.6 million, or 25.6% of net sales, for the three months ended September 27, 2014 and September 28, 2013, respectively.  SG&A expenses totaled $120.4 million, or 27.0% of net sales, and $111.3 million, or 27.4% of net sales, for the nine months ended September 27, 2014 and September 28, 2013, respectively.  The increases in SG&A expenses in absolute dollars for the three and nine months ended September 27, 2014 compared with the corresponding prior year periods were due primarily to increases of $2.2 million and $7.9 million, respectively, in personnel costs, resulting primarily from higher incentive compensation and stock-based compensation expenses.  We recorded minimal cash incentive compensation expenses during the 2013 periods due to the lack of expected payouts under our 2013 incentive plans.

 

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 $14.1 million, or 9.6% of net sales, and $13.1 million, or 9.5% of net sales, for the three months ended September 27, 2014 and September 28, 2013, respectively.  R&D expense totaled $42.5 million, or 9.5% of net sales, and $39.8 million, or 9.8% of net sales, for the nine months ended September 27, 2014 and September 28, 2013, respectively.  The increases in R&D expense for the three and nine months ended September 27, 2014 compared with the corresponding prior year periods were due primarily to higher incentive compensation expenses and higher headcount related to new product development.

 

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 (Gain) on Sale of Assets

 

As discussed in more detail under the heading “Acquisition and Divestiture” on page 18, we completed the sale of our advanced packaging systems business in January 2014.  Such assets were held for sale as of September 28, 2013, and in the third quarter of 2013, we recorded a loss of $4.5 million relating to the anticipated sale of this business based on the terms that were being negotiated with the purchaser at that time.  We recorded an additional loss of $0.2 million in the fourth quarter of 2013 relating to the anticipated sale and, during the first quarter of 2014, we recognized a gain of $0.4 million to reduce such loss based on the final terms of the transaction and the net assets of the business on the closing date.

 

Interest and Other Expense, Net

 

Interest and other expense, net totaled $1.0 million and $1.3 million for the three months ended September 27, 2014 and September 28, 2013, respectively, and $2.6 million and $5.5 million for the nine months ended September 27, 2014 and September 28, 2013, respectively.  The decreases in interest and other expense, net for the three and nine months ended September 27, 2014 compared with the same periods in 2013 were due primarily to lower interest expense as a result of a lower average interest rate and a lower average outstanding balance on our Credit Facility (as defined on page 23) during the three and nine months ended September 27, 2014 compared with the average interest rate and average outstanding balance of the term loan under our previous credit facility during the corresponding periods in 2013.  These decreases were offset in part by losses from derivative instruments recorded in the three and nine months ended September 27, 2014.

 

Income Taxes

 

Our effective tax rate was 19.7% and 67.1% for the three months ended September 27, 2014 and September 28, 2013, respectively, and 27.0% and 22.3% for the nine months ended September 27, 2014 and September 28, 2013, respectively.  Our effective tax rates for the three and nine months ended September 27, 2014 were favorably impacted by an Extraterritorial Income exclusion benefit and a reduction of the corresponding uncertain tax position, which were recorded as discrete items during the third quarter of 2014.

 

Liquidity and Capital Resources

 

Our cash and cash equivalents, restricted cash and marketable securities balances increased to a total of $70.9 million as of September 27, 2014 from $64.2 million as of December 28, 2013.  This increase was attributable primarily to net cash provided by our operating activities, proceeds from the sale of our advanced packaging systems business and proceeds from the issuance of common stock through our employee stock plans, offset in part by cash used for net repayments of debt, purchases of property and equipment and repurchases of our common stock.

 

Net cash provided by our operating activities of $39.0 million for the nine months ended September 27, 2014 was attributable primarily to cash provided by our results of operations and to increases in accrued expenses and other liabilities of $4.4 million, accounts payable of $3.8 million and accrued payroll and other expenses of $2.6 million, due to the timing of payments, offset in part by an increase in gross inventory of $20.2 million, and an increase in accounts receivable of $7.6 million due to the timing of collections.

 

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Net cash used in investing activities of $5.3 million for the nine months ended September 27, 2014 was attributable primarily to purchases of property and equipment of $18.0 million, offset by net sales of marketable securities of $7.1 million and proceeds from the sale of our advanced packaging systems business of $5.0 million.

 

Net cash used in financing activities of $16.8 million for the nine months ended September 27, 2014 was attributable to net repayments of borrowings of $16.1 million, which consisted primarily of payments under our Credit Facility and repayment of our Japanese private placement bonds; payments of $4.5 million to repurchase our common stock; payments of $2.9 million in connection with the cancellation of restricted stock units for taxes owed by employees upon vesting of restricted stock units issued under our stock incentive plans; and the purchase of the non-controlling interests in our Optical Metrology Ltd. and Ophir Japan Ltd. subsidiaries for a total of $1.9 million.  These cash payments were offset in part by proceeds of $4.2 million received from the issuance of common stock under employee stock plans and an excess tax benefit of $4.4 million related to these plans.

 

On July 18, 2013, we entered into a credit agreement with certain lenders (Credit Agreement).  The Credit Agreement consists of a senior secured revolving credit facility of $275 million with a term of five years (Credit Facility).  The Credit Agreement also provides us with the option to increase the aggregate principal amount of loans in the form of additional revolving loans or a separate tranche of term loans, in an aggregate amount that does not exceed $50 million, in each case subject to certain terms and conditions contained in the Credit Agreement.  At September 27, 2014, the outstanding balance under the Credit Facility was $71.0 million, with an effective interest rate of 1.69%.

 

Our obligations under the Credit Agreement are secured by a lien on substantially all of the assets of Newport Corporation and certain of our domestic subsidiaries, which are guarantors under the Credit Agreement, as well as by a pledge of certain shares of our foreign subsidiaries.  Our ability to borrow funds under the Credit Facility is subject to certain conditions, including compliance with certain covenants and making certain representations and warranties.  In particular, our borrowing capacity under the Credit Facility is limited by our Consolidated Adjusted EBITDA (as defined in the Credit Agreement) for the preceding four fiscal quarters.  At September 27, 2014, based on our Consolidated Adjusted EBITDA, the $71.0 million borrowed under the Credit Facility, additional indebtedness of $2.3 million and outstanding letters of credit of $2.2 million, we had approximately $163.0 million available for additional borrowing under the Credit Facility.

 

At September 27, 2014, we had (i) revolving lines of credit with Japanese banks; (ii) agreements with Japanese banks under which we sell trade notes receivable with recourse; and (iii) loans with Israeli banks, as follows:

 

 

 

Principal
Amount
Outstanding

 

Amount
Available for
Borrowing

 

 

 

 

Description

 

(in millions)

 

(in millions)

 

Interest Rate(s)

 

Expiration Date(s)

Japanese lines of credit

 

 $

0.6

 

 $

1.0

 

1.15% to 1.48%

 

No expiration dates

Japanese agreements for sale of receivables

 

 $

0.7

 

 $

4.5

 

1.48%

 

No expiration dates

Israeli loans

 

 $

1.0

 

     $

-

 

2.97% to 3.28%

 

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.  The terms of the Credit Agreement permit us to purchase shares under the repurchase program, subject to certain conditions and limitations.  During the nine months ended September 27, 2014, we repurchased 0.2 million shares for a total of $4.5 million under this program.  As of September 27, 2014, 3.6 million shares remained available for purchase under the program.

 

During the remainder of 2014, we expect to use approximately $3 million to $5 million of cash for capital expenditures.

 

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We expect that our current working capital position, together with our expected future cash flows from operations and the borrowing availability under our Credit Facility and other lines of credit, will be adequate to fund our operations in the ordinary course of business, anticipated capital expenditures, our debt payment requirements and other contractual obligations for at least the next twelve months.  While a substantial portion of our cash and cash equivalents, restricted cash and marketable securities is held outside of the United States, we currently do not intend or anticipate a need to repatriate such funds, as we expect that the cash and cash equivalents, restricted cash and/or marketable securities held in the United States, together with our cash flows from U.S. operations and the borrowing capacity under our Credit Facility, will be sufficient to fund our U.S. operations and cash commitments for investing and financing activities, including debt repayment and capital expenditures for at least the next twelve months and thereafter for the foreseeable future.  However, these expectations are based upon many assumptions and are 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 28, 2013.  In addition, under current tax laws and regulations, if cash and cash equivalents and investments held outside of the United States, which relate to undistributed earnings of certain of our foreign subsidiaries and are considered to be indefinitely reinvested, were to be distributed to the United States in the form of dividends or otherwise, we would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.  The potential tax liability related to any repatriation would depend on the tax laws of the United States and the respective foreign jurisdictions and on the facts and circumstances that exist at the time such repatriation is made.

 

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 and companies that complement our business and may make such acquisitions and/or investments in the future.  However, our Credit Agreement only permits us to make investments and acquisitions under certain circumstances, and restricts our ability to incur additional indebtedness, which limits to some extent our ability to make such acquisitions and investments.

 

Recent Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, Presentation of Financial Statements and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosures of Disposal of Components of an Entity, which updates the guidance in Topics 205 and 360.  ASU No. 2014-08 requires that the disposal of a component of an entity or a group of components of an entity be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on the entity’s operations and financial results.  ASU No. 2014-08 also requires additional disclosures regarding discontinued operations.  ASU No. 2014-08 is required to be applied prospectively for fiscal years and interim periods beginning after December 15, 2014.  The adoption of ASU No. 2014-08 is not expected to have a material impact on our financial position or results of operations.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which created Topic 606.  ASU No. 2014-09 establishes a core principle that a company should recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.  In order to achieve that core principle, companies are required to apply the following steps: (1) identify the contract with the customer; (2) identify performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognized revenue when (or as) the company satisfies a performance obligation.  ASU No. 2014-09 will become effective for interim and annual periods beginning after December 15, 2016 and can be applied either (i) retrospectively to each prior reporting period or (ii) retrospectively with the cumulative effect of initial application recognized on the date of adoption.  Early adoption is not permitted.  We are currently evaluating the expected impact of ASU No. 2014-09 on our financial position and results of operations.

 

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures.  ASU No. 2014-15 will become effective for annual periods beginning after December 15, 2016 and early adoption is permitted.  The adoption of ASU No. 2014-15 will not have an impact on our financial position or results of operations.

 

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which we are exposed are changes in foreign exchange rates, which may generate translation and transaction gains and losses, and changes in interest rates.

 

Foreign Currency Risk

 

Operating in international markets sometimes involves exposure to volatile movements in currency exchange rates.  The economic impact of currency exchange rate movements on our operating results is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors.  These changes, if material, may cause us to adjust our financing and operating strategies.  Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors.

 

We use foreign currency option and forward exchange contracts to mitigate the risks associated with certain foreign currency transactions entered into in the ordinary course of business, primarily foreign currency denominated receivables, payables and other expenses.  These derivative instruments are used as an economic hedge.  However, we have not elected hedge accounting treatment and therefore, all changes in value of these derivative instruments are reflected in interest and other expense, net in our consolidated statements of income.  We do not engage in currency speculation.  All of our foreign currency option and forward exchange contracts are entered into to reduce the volatility of earnings, primarily related to Israeli shekel-based expenses.  If the counterparties to these contracts (typically highly rated banks) do not fulfill their obligations to deliver the contracted currencies, we could be at risk for any currency related fluctuations.

 

As currency exchange rates change, translation of the statements of income of international operations into U.S. dollars affects the year-over-year comparability of operating results.  We do not generally hedge translation risks because cash flows from international operations are generally reinvested locally.  Changes in currency exchange rates that would have the largest impact on translating our future international operating income include changes to the exchange rates of the U.S. dollar to the euro and Japanese yen.

 

The following table provides information about our foreign currency derivative financial instruments outstanding as of September 27, 2014.  The information is presented in U.S. dollars, as presented in our consolidated financial statements:

 

 

 

September 27, 2014

 

 

Notional

 

Average

(In thousands)

 

Amount

 

Strike Price

Foreign currency forward contracts

 

 

 

 

(Pay U.S. dollar/receive foreign currency)

 

 

 

 

Israeli Shekel

 

$

561

 

3.57

Fair value

 

$

(14)

 

 

 

 

 

 

 

Foreign currency options

 

 

 

 

Israeli Shekel - call options

 

$

13,087

 

3.54

Israeli Shekel - put options

 

(13,516)

 

3.54

 

 

$

(429)

 

 

Fair value

 

$

(260)

 

 

 

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Interest Rate Risk

 

Our investments in cash, cash equivalents, restricted cash and marketable securities, which totaled $70.9 million at September 27, 2014, are sensitive to changes in the general level of interest rates.  In addition, certain assets related to our pension plans are sensitive to interest rates and economic conditions in Europe and Asia.

 

We have a $275 million revolving line of credit in the United States.  We also have various lines of credit and other loans throughout the world, primarily in Israel and Japan.  Our revolving line of credit in the United States, and many of our other borrowings, carry variable interest rates and therefore are subject to interest rate risk.

 

The table below presents information about our debt obligations as of September 27, 2014:

 

 

 

Expected Maturity Date

 

 

 

(US$ equivalent in thousands)

 

2014

 

2015

 

2016

 

2017

 

2018

 

Thereafter

 

Total

 

Fair Value

 

Debt obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate (US$)

 

$

375

 

$

598

 

$

-

 

$

-

 

$

-

 

$

-

 

$

973

 

$

995

 

Weighted average interest rate

 

3.38%

 

2.98%

 

0.00%

 

0.00%

 

0.00%

 

0.00%

 

3.13%

 

 

 

Variable rate (US$)

 

$

-

 

$

-

 

$

-

 

$

-

 

$

71,000

 

$

-

 

$

71,000

 

$

69,389

 

Weighted average interest rate

 

0.00%

 

0.00%

 

0.00%

 

0.00%

 

1.69%

 

0.00%

 

1.69%

 

 

 

Fixed rate (non-US$)

 

$

640

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

640