Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 


 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended July 4, 2015

 

OR

 

o         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 x  No o

 

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 x  No o

 

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

x

Accelerated filer o

 

Non-accelerated filer

o

(Do not check if a smaller reporting company)

Smaller reporting company o

 

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

 

Yes o  No x

 

As of July 31, 2015, 39,580,534 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 Six Months Ended July 4, 2015 and June 28, 2014

3

 

 

 

 

Consolidated Balance Sheets as of July 4, 2015 and January 3, 2015

4

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended July 4, 2015 and June 28, 2014

5

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

Item 2.

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

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.

Controls and Procedures

27

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1A.

Risk Factors

28

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

 

Item 6.

Exhibits

29

 

 

SIGNATURES

30

 

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

 

Six Months Ended

 

 

 

July 4,

 

June 28,

 

July 4,

 

June 28,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

147,977

 

$

153,232

 

$

304,632

 

$

300,122

 

Cost of sales

 

84,058

 

83,344

 

170,432

 

164,775

 

Gross profit

 

63,919

 

69,888

 

134,200

 

135,347

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

38,690

 

42,085

 

79,299

 

81,291

 

Research and development expense

 

15,158

 

14,318

 

30,113

 

28,456

 

Loss (gain) on sale or other disposal of assets, net

 

 

 

1,088

 

(411

)

Operating income

 

10,071

 

13,485

 

23,700

 

26,011

 

 

 

 

 

 

 

 

 

 

 

Interest and other expense, net

 

(1,064

)

(658

)

(1,967

)

(1,634

)

Income before income taxes

 

9,007

 

12,827

 

21,733

 

24,377

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

3,237

 

3,830

 

7,299

 

7,439

 

Net income

 

5,770

 

8,997

 

14,434

 

16,938

 

Net income attributable to non-controlling interests

 

 

45

 

 

100

 

Net income attributable to Newport Corporation

 

$

5,770

 

$

8,952

 

$

14,434

 

$

16,838

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,770

 

$

8,997

 

$

14,434

 

$

16,938

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation gains (losses)

 

248

 

(825

)

(5,963

)

(364

)

Unrecognized net pension (losses) gains, net of tax

 

(41

)

59

 

429

 

102

 

Unrealized losses on investments and marketable securities, net of tax

 

(1

)

(42

)

(109

)

(22

)

Other comprehensive income (loss)

 

206

 

(808

)

(5,643

)

(284

)

Comprehensive income

 

$

5,976

 

$

8,189

 

$

8,791

 

$

16,654

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to non-controlling interests

 

$

 

$

46

 

$

 

$

115

 

Comprehensive income attributable to Newport Corporation

 

5,976

 

8,143

 

8,791

 

16,539

 

Comprehensive income

 

$

5,976

 

$

8,189

 

$

8,791

 

$

16,654

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to Newport Corporation:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.15

 

$

0.22

 

$

0.36

 

$

0.42

 

Diluted

 

$

0.14

 

$

0.22

 

$

0.36

 

$

0.42

 

 

 

 

 

 

 

 

 

 

 

Shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Basic

 

39,717

 

39,881

 

39,659

 

39,703

 

Diluted

 

40,265

 

40,528

 

40,412

 

40,513

 

 

The accompanying notes are an integral part of these financial statements.

 

3



Table of Contents

 

NEWPORT CORPORATION

Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

 

 

July 4,

 

January 3,

 

 

 

2015

 

2015

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

39,717

 

$

46,883

 

Restricted cash

 

1,259

 

1,704

 

Marketable securities

 

6

 

57

 

Accounts receivable, net of allowance for doubtful accounts of $1,199 and $1,242 as of July 4, 2015 and January 3, 2015, respectively

 

93,638

 

96,512

 

Inventories

 

125,208

 

112,440

 

Current deferred tax assets

 

20,764

 

20,734

 

Prepaid expenses and other current assets

 

20,087

 

14,948

 

Total current assets

 

300,679

 

293,278

 

 

 

 

 

 

 

Property and equipment, net

 

83,211

 

82,793

 

Goodwill

 

103,749

 

97,524

 

Long-term deferred tax assets

 

5,679

 

5,005

 

Intangible assets, net

 

70,271

 

70,811

 

Investments and other assets

 

28,956

 

30,516

 

Total assets

 

$

592,545

 

$

579,927

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings

 

$

4,084

 

$

3,772

 

Accounts payable

 

36,574

 

31,448

 

Accrued payroll and related expenses

 

33,227

 

34,607

 

Accrued expenses and other current liabilities

 

32,140

 

31,797

 

Total current liabilities

 

106,025

 

101,624

 

 

 

 

 

 

 

Long-term debt

 

76,256

 

71,000

 

Pension liabilities

 

29,351

 

28,554

 

Long-term deferred tax liabilities

 

14,274

 

14,272

 

Other long-term liabilities

 

7,369

 

7,773

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $0.1167 per share, 200,000,000 shares authorized; 39,580,190 and 39,603,662 shares issued and outstanding as of July 4, 2015 and January 3, 2015, respectively

 

4,623

 

4,626

 

Capital in excess of par value

 

462,353

 

468,575

 

Accumulated other comprehensive loss

 

(23,625

)

(17,982

)

Accumulated deficit

 

(84,081

)

(98,515

)

Total stockholders’ equity

 

359,270

 

356,704

 

Total liabilities and stockholders’ equity

 

$

592,545

 

$

579,927

 

 

The accompanying notes are an integral part of these financial statements.

 

4



Table of Contents

 

NEWPORT CORPORATION

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

July 4,

 

June 28,

 

 

 

2015

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

14,434

 

$

16,938

 

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

 

 

 

 

 

Depreciation and amortization

 

14,166

 

14,312

 

Gain on sale of assets

 

 

(411

)

Provision for losses on inventories

 

3,706

 

2,439

 

Stock-based compensation expense

 

6,827

 

5,447

 

Provision for doubtful accounts

 

126

 

264

 

Loss on disposal of property and equipment

 

1,153

 

287

 

Deferred income taxes

 

(666

)

(577

)

Excess tax benefits from stock-based compensation

 

(1,848

)

(2,625

)

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

 

 

 

 

 

Accounts receivable

 

3,108

 

(3,985

)

Inventories

 

(15,349

)

(13,277

)

Prepaid expenses and other assets

 

(3,022

)

(2,602

)

Accounts payable

 

2,315

 

6,204

 

Accrued payroll and related expenses

 

(2,107

)

8,241

 

Accrued expenses and other liabilities

 

2,328

 

3,946

 

Other long-term liabilities

 

471

 

(999

)

Net cash provided by operating activities

 

25,642

 

33,602

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of property and equipment

 

(10,135

)

(11,895

)

Restricted cash

 

384

 

582

 

Proceeds from divestiture of business

 

 

5,030

 

Acquisition of business, net of cash acquired

 

(7,865

)

 

Refundable amounts related to acquisition of a business

 

(2,319

)

 

Purchase of investments and marketable securities

 

(824

)

(661

)

Proceeds from the sale or maturity of investments and marketable securities

 

123

 

392

 

Net cash used in investing activities

 

(20,636

)

(6,552

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from long-term debt

 

11,000

 

 

Repayment of long-term debt and obligations under capital leases

 

(6,008

)

(15,496

)

Proceeds from short-term borrowings

 

1,358

 

5,430

 

Repayment of short-term borrowings

 

(4,971

)

(3,613

)

Purchases of non-controlling interests

 

 

(1,863

)

Proceeds from the issuance of common stock under employee plans

 

1,075

 

2,642

 

Tax withholding payments related to net share settlement of equity awards

 

(3,419

)

(2,922

)

Purchases of the Company’s common stock

 

(12,149

)

 

Excess tax benefits from stock-based compensation

 

1,848

 

2,625

 

Net cash used in financing activities

 

(11,266

)

(13,197

)

Impact of foreign exchange rate changes on cash balances

 

(906

)

333

 

Net (decrease) increase in cash and cash equivalents

 

(7,166

)

14,186

 

Cash and cash equivalents at beginning of period

 

46,883

 

53,710

 

Cash and cash equivalents at end of period

 

$

39,717

 

$

67,896

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for interest

 

$

969

 

$

1,032

 

Cash paid during the period for income taxes, net

 

$

6,310

 

$

3,935

 

Property and equipment accrued in accounts payable

 

$

198

 

$

708

 

 

The accompanying notes are an integral part of these financial statements.

 

5



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

July 4, 2015

 

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 January 3, 2015.  The results for the interim periods are not necessarily indicative of the results the Company will have for the full year ending January 2, 2016.  The January 3, 2015 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 January 3, 2015.

 

NOTE 2        RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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.  Upon adoption, ASU No. 2014-09 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.  At the time of issuance, ASU No. 2014-09 was to become effective for interim and annual periods beginning after December 15, 2016, and early adoption was not permitted.  However, in July 2015, the FASB deferred the effective date of ASU No. 2014-09 by one year to annual reporting periods beginning after December 15, 2017.  In addition, early adoption of the standard will be permitted, but not before the original effective date of December 15, 2016.  The Company is currently evaluating the expected impact of ASU No. 2014-09 on its financial position and results of operations.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory.  ASU No. 2015-11 clarifies that inventory should be held at the lower of cost or net realizable value.  Net realizable value is defined as the estimated selling price, less the estimated costs to complete, dispose and transport such inventory.  ASU No. 2015-11 will be effective for fiscal years and interim periods beginning after December 15, 2016.  ASU No. 2015-11 is required to be applied prospectively and early adoption is permitted.  The Company’s adoption of ASU No. 2015-11 is not expected to have a material impact on the Company’s financial position or results of operations.

 

NOTE 3        ACQUISITION OF FEMTOLASERS

 

On February 11, 2015, the Company acquired all of the capital stock of FEMTOLASERS Produktions GmbH (FEMTOLASERS).  The initial purchase price of €9.1 million was paid in cash at closing and is subject to a net asset adjustment.  Based on the preliminary financial information provided by FEMTOLASERS, the Company estimated an initial net asset adjustment to the purchase price of approximately €1.6 million during the first quarter of 2015.  Based on additional information obtained during the second quarter, the Company estimated a revised net asset adjustment of €2.1 million, resulting in a purchase price of €7.0 million (approximately $7.9 million).  The final amount of this net asset adjustment is subject to agreement between the Company and the FEMTOLASERS selling shareholders, which the Company expects to finalize during the second half of 2015.  Of the initial purchase price, €2.3 million was deposited at closing into escrow until thirty months after closing, to secure certain obligations of the FEMTOLASERS selling shareholders under the share purchase agreement, including the net asset adjustment.  The Company incurred $0.4 million in transaction costs, which have been expensed as incurred and are included in selling, general and administrative expenses in the statements of income and comprehensive income.  FEMTOLASERS expands the Company’s offering of ultrafast laser products and enhances its technology base in this area.  The results of FEMTOLASERS have been included in the results of the Company’s Lasers Group as of the acquisition date.

 

6



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

July 4, 2015

 

Immediately following the closing of the acquisition, the Company repaid €3.6 million (approximately $4.0 million) of FEMTOLASERS’ outstanding loans that were assumed as part of the acquisition.

 

The consideration paid by the Company for the acquisition of FEMTOLASERS is allocated to the assets acquired, net of the liabilities assumed, based upon their estimated fair values as of the date of the acquisition.  The excess of the purchase price over the estimated fair value of the assets acquired, net of the estimated fair value of the liabilities assumed, is recorded as goodwill.   The Company had made an estimated allocation of the purchase price in the first quarter of 2015.  Based on additional information obtained during the second quarter of 2015, the Company refined the values assigned to assets, liabilities and the amount of goodwill.  The second quarter adjustments in the table below were not material and therefore, they were recorded in the second quarter rather than retroactively.  As discussed above, the Company has not yet finalized the purchase price.  Any changes during the measurement period may have a further impact on goodwill.

 

(In thousands)

 

Estimated
Allocation at
April 4, 2015

 

Second
Quarter
Adjustments

 

Current
Purchase
Price
Allocation

 

Assets acquired and liabilities assumed:

 

 

 

 

 

 

 

Cash

 

$

78

 

$

 

$

78

 

Accounts receivable

 

2,007

 

(39

)

1,968

 

Inventories

 

2,315

 

444

 

2,759

 

Deferred tax assets

 

596

 

423

 

1,019

 

Other assets

 

2,057

 

(42

)

2,015

 

Goodwill

 

7,841

 

(1,160

)

6,681

 

Developed technology

 

1,811

 

 

1,811

 

In-process research and development

 

1,664

 

57

 

1,721

 

Other intangible assets

 

543

 

 

543

 

Accounts payable

 

(3,417

)

 

(3,417

)

Debt

 

(4,021

)

 

(4,021

)

Deferred tax liabilities

 

(1,005

)

(14

)

(1,019

)

Other liabilities

 

(1,974

)

(221

)

(2,195

)

 

 

$

8,495

 

$

(552

)

$

7,943

 

 

The goodwill related to the acquisition of FEMTOLASERS has been allocated to the Company’s Lasers Group and will not be deductible for tax purposes.

 

The actual net sales and net loss of FEMTOLASERS from February 11, 2015, the closing date of the acquisition, that were included in the Company’s consolidated statements of income and comprehensive income for the three and six months ended July 4, 2015, are set forth in the table below.  Also set forth in the table below are the pro forma net sales and net income of the Company during the three and six months ended July 4, 2015 and June 28, 2014, including the results of FEMTOLASERS as though the acquisition had occurred at the beginning of 2014.  This supplemental pro forma financial information is presented for information purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had occurred as of the beginning of 2014.

 

7



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

July 4, 2015

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 4,

 

June 28,

 

July 4,

 

June 28,

 

(Unaudited, in thousands)

 

2015

 

2014

 

2015

 

2014

 

Actual:

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,973

 

$

 

$

2,323

 

$

 

Net loss attributable to Newport Corporation

 

$

(1,359

)

$

 

$

(1,819

)

$

 

Supplemental pro forma information:

 

 

 

 

 

 

 

 

 

Net sales

 

$

147,977

 

$

156,571

 

$

304,901

 

$

305,678

 

Net income attributable to Newport Corporation

 

$

6,146

 

$

8,865

 

$

14,806

 

$

16,599

 

 

For the purposes of determining pro forma net income, adjustments were made to actual net income of the Company for all periods presented in the table above.  The pro forma net income assumes that amortization of acquired intangible assets began at the beginning of 2014 rather than on February 11, 2015.  The result is a net increase in amortization expense of $0.1 million and $0.2 million for the three and six months ended June 28, 2014, respectively.  Transaction costs totaling $0.4 million, which were incurred prior to the closing of the acquisition, are excluded from pro forma net income.

 

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 July 4, 2015 were as follows:

 

 

 

Aggregate

 

Aggregate Amount of
Unrealized

 

(In thousands)

 

Fair Value

 

Gains

 

Losses

 

Money market funds

 

$

6

 

$

 

$

 

 

The aggregate fair value of available for sale securities and the aggregate amount of unrealized gains and losses in available for sale securities at January 3, 2015 were as follows:

 

 

 

Aggregate

 

Aggregate Amount of
Unrealized

 

(In thousands)

 

Fair Value

 

Gains

 

Losses

 

Money market funds

 

$

7

 

$

 

$

 

Certificates of deposit

 

50

 

 

 

 

 

$

57

 

$

 

$

 

 

Money market funds do not have a maturity date.

 

There were no gross realized gains and losses for the three and six months ended July 4, 2015 or June 28, 2014.

 

NOTE 5        FAIR VALUE MEASUREMENTS

 

Accounting Standards Codification (ASC) 820-10, Fair Value Measurements, 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.

 

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Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

July 4, 2015

 

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 July 4, 2015.

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

(In thousands)

 

 

 

Quoted Prices in
Active Markets for
Identical Assets

 

Significant Other
Observable Inputs

 

Significant
Unobservable
Inputs

 

Description

 

July 4, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Restricted Cash

 

$

1,259

 

$

1,259

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Money market funds

 

6

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets:

 

 

 

 

 

 

 

 

 

Option contracts

 

413

 

 

413

 

 

 

 

 

 

 

 

 

 

 

 

Funds in investments and other assets:

 

 

 

 

 

 

 

 

 

Israeli pension funds

 

12,183

 

 

12,183

 

 

Group insurance contracts

 

5,879

 

 

5,879

 

 

 

 

18,062

 

 

18,062

 

 

 

 

$

19,740

 

$

1,265

 

$

18,475

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

Option contracts

 

83

 

 

83

 

 

 

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 January 3, 2015.

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

(In thousands)

 

 

 

Quoted Prices in
Active Markets for
Identical Assets

 

Significant Other
Observable Inputs

 

Significant
Unobservable
Inputs

 

Description

 

January 3, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Restricted Cash

 

$

1,704

 

$

1,704

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Money market funds

 

7

 

7

 

 

 

Certificates of deposit

 

50

 

 

50

 

 

 

 

57

 

7

 

50

 

 

Derivative assets:

 

 

 

 

 

 

 

 

 

Option contracts

 

103

 

 

103

 

 

 

 

 

 

 

 

 

 

 

 

Funds in investments and other assets:

 

 

 

 

 

 

 

 

 

Israeli pension funds

 

11,090

 

 

11,090

 

 

 

Group insurance contracts

 

6,140

 

 

6,140

 

 

 

 

17,230

 

 

17,230

 

 

 

 

$

19,094

 

$

1,711

 

$

17,383

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

Option contracts

 

$

921

 

$

 

$

921

 

$

 

 

9



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

July 4, 2015

 

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:

 

 

 

July 4, 2015

 

January 3, 2015

 

 

 

Carrying

 

 

 

Carrying

 

 

 

(In thousands)

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

Short-term borrowings

 

$

4,084

 

$

4,085

 

$

3,772

 

$

3,772

 

Long-term debt

 

$

76,256

 

$

74,707

 

$

71,000

 

$

69,761

 

 

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:

 

 

 

July 4,

 

January 3,

 

(In thousands)

 

2015

 

2015

 

Raw materials and purchased parts

 

$

75,796

 

$

68,989

 

Work in process

 

19,360

 

16,564

 

Finished goods

 

30,052

 

26,887

 

Short-term inventories

 

$

125,208

 

$

112,440

 

 

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:

 

 

 

July 4,

 

January 3,

 

(In thousands)

 

2015

 

2015

 

Raw materials and purchased parts

 

$

2,271

 

$

3,208

 

Finished goods

 

2,971

 

3,856

 

Long-term inventories

 

$

5,242

 

$

7,064

 

 

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 other long-term liabilities in the accompanying consolidated balance sheets.

 

10



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

July 4, 2015

 

 

The activity in accrued warranty obligations was as follows:

 

 

 

Six Months Ended

 

 

 

July 4,

 

June 28,

 

(In thousands)

 

2015

 

2014

 

Balance at beginning of year

 

$

3,556

 

$

3,285

 

Additions charged to cost of sales

 

1,591

 

1,496

 

Warranty claims

 

(1,692

)

(1,587

)

Balance at end of period

 

$

3,455

 

$

3,194

 

 

Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities were as follows:

 

 

 

July 4,

 

January 3,

 

(In thousands)

 

2015

 

2015

 

Deferred revenue

 

$

13,681

 

$

13,032

 

Deferred lease liability

 

4,852

 

5,094

 

Accrued income taxes

 

996

 

2,219

 

Short-term accrued warranty obligations

 

3,253

 

3,324

 

Other

 

9,358

 

8,128

 

 

 

$

32,140

 

$

31,797

 

 

Accumulated Other Comprehensive Loss

 

Accumulated other comprehensive loss consisted of the following:

 

 

 

July 4,

 

January 3,

 

(In thousands)

 

2015

 

2015

 

Cumulative foreign currency translation losses

 

$

(20,519

)

$

(14,556

)

Unrecognized net pension losses, net of tax

 

(4,426

)

(4,855

)

Unrealized gains on investments and marketable securities, net of tax

 

1,320

 

1,429

 

 

 

$

(23,625

)

$

(17,982

)

 

11



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

July 4, 2015

 

NOTE 7                         GOODWILL AND INTANGIBLE ASSETS

 

The changes in the carrying amounts of goodwill were as follows:

 

 

 

Photonics

 

Lasers

 

Optics

 

 

 

(In thousands)

 

Group

 

Group

 

Group

 

Total

 

Balance at January 3, 2015:

 

 

 

 

 

 

 

 

 

Goodwill

 

98,808

 

129,761

 

41,314

 

269,883

 

Accumulated impairment losses

 

(47,458

)

(104,562

)

(20,339

)

(172,359

)

 

 

51,350

 

25,199

 

20,975

 

97,524

 

Goodwill allocated to acquisition

 

 

6,681

 

 

6,681

 

Foreign currency impact

 

 

(456

)

 

(456

)

Balance at July 4, 2015:

 

 

 

 

 

 

 

 

 

Goodwill

 

98,808

 

135,986

 

41,314

 

276,108

 

Accumulated impairment losses

 

(47,458

)

(104,562

)

(20,339

)

(172,359

)

 

 

$

51,350

 

$

31,424

 

$

20,975

 

$

103,749

 

 

As of July 4, 2015, acquisition related intangible assets were as follows:

 

 

 

Amortization

 

Gross

 

Accumulated

 

Carrying

 

(In thousands)

 

Period

 

Value

 

Amortization

 

Value

 

Intangible assets subject to amortization:

 

 

 

 

 

 

 

 

 

Developed technology

 

10-20 years

 

$

39,815

 

$

(10,974

)

$

28,841

 

Customer relationships

 

up to 10 years

 

28,677

 

(19,806

)

8,871

 

In-process research and development

 

10 years

 

15,135

 

(1,879

)

13,256

 

Other

 

3 months-10 years

 

2,202

 

(1,204

)

998

 

 

 

 

 

85,829

 

(33,863

)

51,966

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

 

18,305

 

 

18,305

 

Intangible assets

 

 

 

$

104,134

 

$

(33,863

)

$

70,271

 

 

As of July 4, 2015, the gross values and accumulated amortization shown in the table above for intangible assets subject to amortization exclude amounts related to the Company’s acquisition of Spectra-Physics, Inc. (and certain related entities), as the purchased intangible assets related to that acquisition have been fully amortized.

 

As of January 3, 2015, acquisition related intangible assets were as follows:

 

 

 

Amortization

 

Gross

 

Accumulated

 

Carrying

 

(In thousands)

 

Period

 

Value

 

Amortization

 

Value

 

Intangible assets subject to amortization:

 

 

 

 

 

 

 

 

 

Developed technology

 

10-20 years

 

$

45,646

 

$

(16,782

)

$

28,864

 

Customer relationships

 

up to 10 years

 

47,827

 

(37,312

)

10,515

 

In-process research and development

 

10 years

 

13,461

 

(1,496

)

11,965

 

Other

 

3 months-10 years

 

7,461

 

(6,299

)

1,162

 

 

 

 

 

114,395

 

(61,889

)

52,506

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

 

18,305

 

 

18,305

 

Intangible assets

 

 

 

$

132,700

 

$

(61,889

)

$

70,811

 

 

Amortization expense related to intangible assets totaled $2.1 million and $2.4 million for the three months ended July 4, 2015 and June 28, 2014, respectively, and $4.2 million and $4.9 million for the six months ended July 4, 2015 and June 28, 2014, respectively.

 

12



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

July 4, 2015

 

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

 

(In thousands)

 

Estimated
Aggregate
Amortization
Expense

 

2015 (remaining)

 

$

4,178

 

2016

 

7,837

 

2017

 

6,689

 

2018

 

4,525

 

2019

 

3,934

 

Thereafter

 

17,500

 

 

 

$

44,663

 

 

The Company has excluded $7.3 million of estimated amortization expense related to certain in-process research and development from the table above, as it was uncertain as of July 4, 2015 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

 

Six Months Ended

 

(In thousands)

 

July 4,
2015

 

June 28,
2014

 

July 4,
2015

 

June 28,
2014

 

Interest expense

 

$

(573

)

$

(595

)

$

(1,138

)

$

(1,256

)

Interest and dividend income

 

27

 

69

 

68

 

123

 

Derivative gain, net

 

658

 

137

 

533

 

125

 

Bank and portfolio asset management fees

 

(339

)

(266

)

(693

)

(526

)

Other expense, net

 

(837

)

(3

)

(737

)

(100

)

 

 

$

(1,064

)

$

(658

)

$

(1,967

)

$

(1,634

)

 

NOTE 9                         STOCK-BASED COMPENSATION

 

During the six months ended July 4, 2015, the Company granted 0.5 million restricted stock units and 0.5 million stock-settled stock appreciation rights with weighted average grant date fair values of $19.11 and $7.62, 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

 

Six Months Ended

 

(In thousands)

 

July 4,
2015

 

June 28,
2014

 

July 4,
2015

 

June 28,
2014

 

Cost of sales

 

$

285

 

$

279

 

$

681

 

$

491

 

Selling, general and administrative expenses

 

2,126

 

2,465

 

5,322

 

4,301

 

Research and development expense

 

332

 

366

 

824

 

655

 

 

 

$

2,743

 

$

3,110

 

$

6,827

 

$

5,447

 

 

13



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

July 4, 2015

 

At July 4, 2015, 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 $20.7 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 July 4, 2015 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 July 4, 2015, the Company’s outstanding and exercisable stock options and stock appreciation rights, and the weighted average exercise price or base value, the weighted average remaining contractual life and the aggregate intrinsic value thereof, were as follows:

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

Weighted

 

 

 

 

 

 

 

Exercise

 

Average

 

Aggregate

 

 

 

Number of

 

Price or

 

Remaining

 

Intrinsic

 

 

 

Shares

 

Base

 

Contractual

 

Value

 

 

 

(In thousands)

 

Value

 

Life (Years)

 

(In thousands)

 

Stock options outstanding and exercisable

 

34

 

$

13.78

 

0.5

 

$

170

 

Stock appreciation rights outstanding

 

2,370

 

$

15.62

 

4.7

 

$

7,661

 

Stock appreciation rights exercisable

 

1,336

 

$

13.89

 

3.5

 

$

6,532

 

 

NOTE 10                  DEBT AND LINES OF CREDIT

 

Total short-term borrowings were as follows:

 

 

 

July 4,

 

January 3,

 

(In thousands)

 

2015

 

2015

 

Japanese revolving lines of credit

 

$

3,081

 

$

3,163

 

Japanese receivables financing facilities

 

706

 

25

 

Israeli loans due October 2015

 

297

 

584

 

Total short-term borrowings

 

$

4,084

 

$

3,772

 

 

Total long-term debt was as follows:

 

 

 

July 4,

 

January 3,

 

(In thousands)

 

2015

 

2015

 

U.S. revolving line of credit expiring July 2018

 

$

76,000

 

$

71,000

 

Austrian loans due through March 2019

 

256

 

 

 

 

$

76,256

 

$

71,000

 

 

14



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

July 4, 2015

 

NOTE 11                                          NET INCOME PER SHARE

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

(In thousands, except per share data)

 

July 4,
2015

 

June 28,
2014

 

July 4,
2015

 

June 28,
2014

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Newport Corporation

 

$

5,770

 

$

8,952

 

$

14,434

 

$

16,838

 

 

 

 

 

 

 

 

 

 

 

Shares:

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

39,717

 

39,881

 

39,659

 

39,703

 

Dilutive potential common shares, using treasury stock method

 

548

 

647

 

753

 

810

 

Weighted average shares outstanding - diluted

 

40,265

 

40,528

 

40,412

 

40,513

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to Newport Corporation:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.15

 

$

0.22

 

$

0.36

 

$

0.42

 

Diluted

 

$

0.14

 

$

0.22

 

$

0.36

 

$

0.42

 

 

For the three and six months ended July 4, 2015, 1.0 million stock appreciation rights, and for the three and six months ended June 28, 2014, an aggregate of 0.7 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 six months ended July 4, 2015, 0.5 million performance-based restricted stock units, and for the three and six months ended June 28, 2014, 0.6 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 each of the three and six months ended July 4, 2015 and June 28, 2014 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 six months ended July 4, 2015 were 35.9% and 33.6%, respectively, and the effective tax rates for the three and six months ended June 28, 2014 were 29.9% and 30.5%, respectively.

 

The effective tax rates for the three and six months ended July 4, 2015 were unfavorably impacted by increased losses in jurisdictions in which the Company has recorded a full valuation allowance and, therefore, no current tax benefit may be realized.  The effective tax rate for the six months ended July 4, 2015 was also unfavorably impacted by the passage of Japanese Tax Reform on March 31, 2015, which lowered long-term corporate tax rates.  This necessitated a corresponding write down of deferred tax assets applicable to the Company’s Japanese locations.

 

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 six months ended July 4, 2015, the Company repurchased 0.6 million shares for a total of $12.1 million under this program.  As of July 4, 2015, 2.7 million shares remained available for purchase under the program.

 

During the six months ended July 4, 2015, the Company cancelled 0.2 million shares of common stock underlying 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 $3.4 million at the time they were cancelled.

 

15



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

July 4, 2015

 

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 Company’s 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

 

Six Months Ended

 

(In thousands)

 

July 4,
2015

 

June 28,
2014

 

July 4,
2015

 

June 28,
2014

 

Service cost

 

$

803

 

$

1,047

 

$

1,302

 

$

1,260

 

Interest cost on benefit obligations

 

120

 

114

 

241

 

316

 

Expected return on plan assets

 

(44

)

(71

)

(87

)

(141

)

Amortization of net loss

 

91

 

45

 

182

 

90

 

 

 

$

970

 

$

1,135

 

$

1,638

 

$

1,525

 

 

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 July 4, 2015:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

61,701

 

$

44,496

 

$

41,780

 

$

147,977

 

Segment income

 

$

15,277

 

$

1,041

 

$

4,975

 

$

21,293

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 28, 2014:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

63,466

 

$

47,113

 

$

42,653

 

$

153,232

 

Segment income

 

$

14,400

 

$

6,148

 

$

4,989

 

$

25,537

 

 

 

 

 

 

 

 

 

 

 

Six months ended July 4, 2015:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

125,939

 

$

94,355

 

$

84,338

 

$

304,632

 

Segment income

 

$

32,429

 

$

6,665

 

$

9,635

 

$

48,729

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 28, 2014:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

122,936

 

$

93,587

 

$

83,599

 

$

300,122

 

Segment income

 

$

27,946

 

$

11,728

 

$

9,545

 

$

49,219

 

 

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Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

July 4, 2015

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

(In thousands)

 

July 4,
2015

 

June 28,
2014

 

July 4,
2015

 

June 28,
2014

 

Segment income

 

$

21,293

 

$

25,537

 

$

48,729

 

$

49,219

 

Unallocated operating expenses

 

(11,222

)

(12,052

)

(23,941

)

(23,619

)

(Loss) gain on disposal of assets

 

 

 

(1,088

)

411

 

Interest and other expense, net

 

(1,064

)

(658

)

(1,967

)

(1,634

)

 

 

$

9,007

 

$

12,827

 

$

21,733

 

$

24,377

 

 

17



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 January 3, 2015 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 January 3, 2015.  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.

 

Acquisition of FEMTOLASERS

 

On February 11, 2015, we acquired all of the capital stock of FEMTOLASERS Produktions GmbH (FEMTOLASERS).  The initial purchase price of €9.1 million was paid in cash at closing and is subject to a net asset adjustment.  Based on the preliminary financial information provided by FEMTOLASERS, we estimated an initial net asset adjustment to the purchase price of approximately €1.6 million during the first quarter of 2015.  Based on additional information obtained during the second quarter, we estimated a revised net asset adjustment of €2.1 million, resulting in a purchase price of €7.0 million (approximately $7.9 million).  The final amount of this net asset adjustment is subject to agreement between us and the FEMTOLASERS selling shareholders, which we expect to finalize during the second half of 2015.  Of the initial purchase price, €2.3 million was deposited at closing into escrow until thirty months after closing, to secure certain obligations of the FEMTOLASERS selling shareholders under the share purchase agreement, including the net asset adjustment.  We incurred $0.4 million in transaction costs, which have been expensed as incurred and are included in selling, general and administrative expenses in the statements of income and comprehensive income.  FEMTOLASERS expands our offering of ultrafast laser products and enhances our technology base in this area.  The results of FEMTOLASERS have been included in the results of our Lasers Group as of the acquisition date.

 

Immediately following the closing of the acquisition, we repaid €3.6 million (approximately $4.0 million) of FEMTOLASERS’ outstanding loans that were assumed as part of the acquisition.

 

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Table of Contents

 

Results of Operations for the Three and Six Months Ended July 4, 2015 and June 28, 2014

 

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

 

Six Months Ended

 

 

 

July 4,

 

June 28,

 

July 4,

 

June 28,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of sales

 

56.8

 

54.4

 

55.9

 

54.9

 

Gross profit

 

43.2

 

45.6

 

44.1

 

45.1

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

26.2

 

27.5

 

26.0

 

27.1

 

Research and development expense

 

10.2

 

9.3

 

9.9

 

9.5

 

Loss (gain) on sale of assets

 

 

 

0.4

 

(0.1

)

Operating income

 

6.8

 

8.8

 

7.8

 

8.6

 

 

 

 

 

 

 

 

 

 

 

Interest and other expense, net

 

(0.7

)

(0.4

)

(0.7

)

(0.5

)

Income before income taxes

 

6.1

 

8.4

 

7.1

 

8.1

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

2.2

 

2.5

 

2.4

 

2.5

 

Net income

 

3.9

 

5.9

 

4.7

 

5.6

 

Net income attributable to non-controlling interests

 

 

0.0

 

 

0.0

 

Net income attributable to Newport Corporation

 

3.9

%

5.9

%

4.7

%

5.6

%

 

Net Sales

 

Each of our operating groups sells products to customers in a wide range of industries, which we categorize into five key end markets: scientific research market; defense and security markets; microelectronics market; life and health sciences market; and industrial manufacturing and other end markets.  The tables below reflect our net sales for the three and six months ended July 4, 2015 and June 28, 2014, by operating group and by key end market.

 

Sales by Operating Group

 

 

 

Three Months Ended

 

 

 

 

 

(In thousands)

 

July 4,
2015

 

June 28,
2014

 

Decrease

 

Percentage
Decrease

 

Photonics Group

 

$

61,701

 

$

63,466

 

$

(1,765

)

(2.8

)%

Lasers Group

 

44,496

 

47,113

 

(2,617

)

(5.6

)

Optics Group

 

41,780

 

42,653

 

(873

)

(2.0

)

Total sales

 

$

147,977

 

$

153,232

 

$

(5,255

)

(3.4

)%

 

 

 

Six Months Ended

 

 

 

 

 

(In thousands)

 

July 4,
2015

 

June 28,
2014

 

Increase

 

Percentage
Increase

 

Photonics Group

 

$

125,939

 

$

122,936

 

$

3,003

 

2.4

%

Lasers Group

 

94,355

 

93,587

 

768

 

0.8

 

Optics Group

 

84,338

 

83,599

 

739

 

0.9

 

Total sales

 

$

304,632

 

$

300,122

 

$

4,510

 

1.5

%

 

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Table of Contents

 

Sales by End Market

 

 

 

Three Months Ended

 

 

 

Percentage

 

(In thousands)

 

July 4,
2015

 

June 28,
2014

 

Increase /
(Decrease)

 

Increase /
(Decrease)

 

Scientific research

 

$

33,421

 

$

30,544

 

$

2,877

 

9.4

%

Microelectronics

 

38,948

 

40,869

 

(1,921

)

(4.7

)

Life and health sciences

 

26,341

 

32,393

 

(6,052

)

(18.7

)

Defense and security

 

15,073

 

14,481

 

592

 

4.1

 

Industrial manufacturing and other

 

34,194

 

34,945

 

(751

)

(2.1

)

Total sales

 

$

147,977

 

$

153,232

 

$

(5,255

)

(3.4

)%

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

Percentage

 

(In thousands)

 

July 4,
2015

 

June 28,
2014

 

Increase /
(Decrease)

 

Increase /
(Decrease)

 

Scientific research

 

$

68,786

 

$

62,425

 

$

6,361

 

10.2

%

Microelectronics

 

78,825

 

74,822

 

4,003

 

5.4

 

Life and health sciences

 

58,927

 

66,655

 

(7,728

)

(11.6

)

Defense and security

 

29,471

 

26,058

 

3,413

 

13.1

 

Industrial manufacturing and other

 

68,623

 

70,162

 

(1,539

)

(2.2

)

Total sales

 

$

304,632

 

$

300,122

 

$

4,510

 

1.5

%

 

For the three months ended July 4, 2015, our sales decreased by $5.3 million, and for the six months ended July 4, 2015, our sales increased by $4.5 million, compared with the corresponding periods in 2014.  For the three and six months ended July 4, 2015, our total net sales included sales contributed by V-Gen Ltd. (V-Gen), which we acquired in the fourth quarter of 2014, and by FEMTOLASERS, which we acquired in the first quarter of 2015.  The aggregate sales of these acquired businesses of $4.3 million and $7.2 million for the three and six months ended July 4, 2015, respectively, were included in our Lasers Group’s net sales for those periods, and there were no corresponding sales in the three and six months ended June 28, 2014.  Our sales for both periods were negatively impacted by the stronger U.S. dollar, which resulted in the translation of foreign currency denominated sales into fewer U.S. dollars, compared with the corresponding periods in 2014.

 

The increases in sales to the scientific research market for the three and six months ended July 4, 2015 compared with the corresponding periods in 2014 were due primarily to increased demand for products sold by our Lasers Group for research applications and our acquisition of FEMTOLASERS, which contributed net sales to this market of $1.9 million and $2.3 million for the three and six months ended July 4, 2015, for which there were no corresponding sales in the 2014 periods.  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.

 

The decrease in sales to the microelectronics market for the three months ended July 4, 2015 compared with the corresponding period in 2014 was due primarily to lower sales by both our Lasers and Optics Groups to semiconductor equipment manufacturing customers related to existing programs, and lower sales by our Lasers Group to other microelectronics customers.  The increase in sales to this market in the first half of 2015 compared with the first half of 2014 was due primarily to higher sales by our Photonics Group to semiconductor equipment and mobile device manufacturing customers related to new programs, offset in part by the lower sales by our Lasers and Optics Groups in the second quarter discussed above.  Our microelectronics market is comprised primarily of original equipment manufacturer customers in the semiconductor capital equipment industry, which has historically been characterized by sudden and severe cyclical variations in product supply and demand.  In addition, certain of our programs with these customers often comprise a significant portion of our sales to this market in any period.  As such, our net sales to this market may fluctuate significantly from period to period depending on the timing and severity of industry upturns and downturns, as well as the timing and success of new design wins and associated customer programs.

 

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Table of Contents

 

The decreases in sales to the life and health sciences market for the three and six months ended July 4, 2015 compared with the corresponding periods in 2014 were due primarily to decreased sales of products used for surgical and bioimaging applications, resulting in large part from rescheduling of shipments by OEM customers.  Generally, our net sales to this market may fluctuate from period to period due to the timing of shipments to our OEM customers and, in some cases, these fluctuations may be offsetting between our operating groups or between such periods.

 

The increases in sales to the defense and security markets for the three and six months ended July 4, 2015 compared with the corresponding periods in 2014 were due primarily to increased sales of optics products for defense programs that had been previously delayed due to government funding constraints.  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.

 

The decreases in sales to the industrial manufacturing and other end markets for the three and six months ended July 4, 2015 compared with the corresponding periods in 2014 were due primarily to lower sales of test systems for diode laser manufacturing applications.  These decreases were offset in part by our acquisition of V-Gen, which contributed net sales to these markets of $1.6 million and $3.3 million for the three and six months ended July 4, 2015, 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

 

 

 

Percentage

 

(In thousands)

 

July 4,
2015

 

June 28,
2014

 

Increase /
(Decrease)

 

Increase /
(Decrease)

 

United States

 

$

58,081

 

$

59,125

 

$

(1,044

)

(1.8

)%

Germany

 

17,500

 

20,079

 

(2,579

)

(12.8

)

Other European countries

 

20,372

 

22,662

 

(2,290

)

(10.1

)

Japan

 

12,026

 

12,486

 

(460

)

(3.7

)

Other Pacific Rim countries

 

30,251

 

27,222

 

3,029

 

11.1

 

Rest of world

 

9,747

 

11,658

 

(1,911

)

(16.4

)

 

 

$

147,977

 

$

153,232

 

$

(5,255

)

(3.4

)%

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

Percentage

 

(In thousands)

 

July 4,
2015

 

June 28,
2014

 

Increase /
(Decrease)

 

Increase /
(Decrease)

 

United States

 

$

119,227

 

$

110,523

 

$

8,704

 

7.9

%

Germany

 

34,856

 

41,294

 

(6,438

)

(15.6

)

Other European countries

 

43,496

 

42,934

 

562

 

1.3

 

Japan

 

27,556

 

29,732

 

(2,176

)

(7.3

)

Other Pacific Rim countries

 

57,540

 

53,476

 

4,064

 

7.6

 

Rest of world

 

21,957

 

22,163

 

(206

)

(0.9

)

 

 

$

304,632

 

$

300,122

 

$

4,510

 

1.5

%

 

The decrease in sales to customers in the United States for the three months ended July 4, 2015 compared with the corresponding period in 2014 was due to lower sales to customers in all of our end markets, except our scientific research end market.  The increase in sales to customers in the United States for the six months ended July 4, 2015 compared with the corresponding period in 2014 was due primarily to increased sales to customers in our scientific research and microelectronics end markets.

 

The decreases in sales to customers in Germany for the three and six months ended July 4, 2015 compared with the corresponding periods in 2014 were due to lower sales in all of our end markets.

 

The decrease in sales to customers in other European countries for the three months ended July 4, 2015 compared with the same period in 2014 was due primarily to lower sales to customers in our life and health sciences end market, offset in part by higher sales to customers in our defense and security end markets.  The increase in sales to customers in other European countries for the six months ended July 4, 2015 compared with the same period in 2014 was due primarily to higher sales to customers in our defense and security, scientific research and microelectronics end markets, offset in part by lower sales to customers in our life and health sciences end market.

 

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Table of Contents

 

The decrease in sales to customers in Japan for the three months ended July 4, 2015 compared with the corresponding period in 2014 was due primarily to lower sales to customers in our microelectronics end market and industrial manufacturing and other end markets, offset in part by higher sales to customers in our scientific research end market.  The decrease in sales to customers in Japan for the six months ended July 4, 2015 compared with the corresponding period in 2014 was due primarily to lower sales to customers in our scientific research and life and health sciences end markets.

 

The increases in sales to customers in other Pacific Rim countries for the three and six months ended July 4, 2015 compared with the corresponding periods in 2014 were due primarily to higher sales to customers in our scientific research and microelectronics end markets, offset in part by lower sales to customers in our life and health sciences end market.

 

The decreases in sales to customers in the rest of the world for the three and six months ended July 4, 2015 compared with the corresponding periods in 2014 were due primarily to lower sales to customers in our scientific research and life and health sciences end markets, offset in part by higher sales to customers in our industrial manufacturing and other end markets.

 

Our sales in the second quarter and first half of 2015 in certain geographic locations, particularly in Europe and Japan, were negatively impacted by the stronger U.S. dollar, which resulted in the translation of such sales into fewer U.S. dollars, compared with the corresponding periods in 2014.

 

Gross Margin

 

Gross margin was 43.2% and 45.6% for the three months ended July 4, 2015 and June 28, 2014, respectively, and gross margin was 44.1% and 45.1% for the six months ended July 4, 2015 and June 28, 2014, respectively.  The gross margins of our Lasers Group were negatively impacted in the three and six months ended July 4, 2015 due to low gross margins on products sold by recently acquired businesses, as we work to improve operational efficiencies and reduce costs in these businesses; lower absorption of manufacturing overhead, resulting from lower sales and production levels; and increased inventory charges.  Our gross margins were also negatively impacted by the stronger U.S. dollar, which resulted in the translation of our foreign currency denominated sales into fewer U.S. dollars.  This negative impact was offset in part by lower manufacturing costs in certain locations due to the stronger U.S. dollar.

 

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

 

Selling, General and Administrative (SG&A) Expenses

 

SG&A expenses totaled $38.7 million, or 26.2% of net sales, and $42.1 million, or 27.5% of net sales, for the three months ended July 4, 2015 and June 28, 2014, respectively.  SG&A expenses totaled $79.3 million, or 26.0% of net sales, and $81.3 million, or 27.1% of net sales, for the six months ended July 4, 2015 and June 28, 2014, respectively.  The decreases in SG&A expenses for the three and six months ended July 4, 2015 compared with the corresponding prior year periods were due primarily to decreases of $2.3 million and $1.8 million in incentive compensation, respectively, as well as the impact of the stronger U.S. dollar in certain locations.  These decreases were offset in part by the addition of SG&A expenses for V-Gen and FEMTOLASERS, for which there were no corresponding expenses in the prior year periods.

 

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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Table of Contents

 

Research and Development (R&D) Expense

 

R&D expense totaled $15.2 million, or 10.2% of net sales, and $14.3 million, or 9.3% of net sales, for the three months ended July 4, 2015 and June 28, 2014, respectively.  R&D expense totaled $30.1 million, or 9.9% of net sales, and $28.5 million, or 9.5% of net sales, for the six months ended July 4, 2015 and June 28, 2014, respectively. The increases in R&D expense for the three and six months ended July 4, 2015 compared with the corresponding prior year periods were due primarily to the addition of R&D expenses of V-Gen and FEMTOLASERS, for which there were no corresponding expenses in the prior year periods, offset in part by the impact of the stronger U.S. dollar in certain locations.

 

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 Disposal of Assets

 

During the first quarter of 2015, we entered into a plan to transfer the operations of our North Andover, Massachusetts facility to certain of our other facilities and to close that facility.  In connection with this plan, we determined that the carrying value of leasehold improvements for this facility was not recoverable and recorded an impairment loss of $1.1 million.

 

Interest and Other Expense, Net

 

Interest and other expense, net totaled $1.1 million and $0.7 million for the three months ended July 4, 2015 and June 28, 2014, respectively.  Interest and other expense, net totaled $2.0 million and $1.6 million for the six months ended July 4, 2015 and June 28, 2014, respectively.  The increases in interest and other expense, net for the three and six months ended July 4, 2015 compared with the same periods in 2014 were due primarily to foreign currency transaction losses, offset in part by derivative instrument gains.

 

Income Taxes

 

Our effective tax rate was 35.9% and 29.9% for the three months ended July 4, 2015 and June 28, 2014, respectively, and 33.6% and 30.5% for the six months ended July 4, 2015 and June 28, 2014, respectively.  Our effective tax rates for the three and six months ended July 4, 2015 were unfavorably impacted by increased losses in jurisdictions in which we have recorded a full valuation allowance and, therefore, no current tax benefit may be realized.  Our effective tax rate for the six months ended July 4, 2015 was also unfavorably impacted by the passage of Japanese Tax Reform on March 31, 2015, which lowered long-term corporate tax rates.  This necessitated a corresponding write down of deferred tax assets applicable to our Japanese locations.

 

Liquidity and Capital Resources

 

Our cash and cash equivalents, restricted cash and marketable securities balances decreased to a total of $41.0 million as of July 4, 2015 from $48.6 million as of January 3, 2015.  This decrease was attributable primarily to cash used in connection with our acquisition of FEMTOLASERS, repurchases of our common stock and purchases of property and equipment, offset in part by net cash provided by our operating activities.

 

Net cash provided by our operating activities of $25.6 million for the six months ended July 4, 2015 was attributable primarily to cash provided by our results of operations and to a decrease in accounts receivables of $3.1 million due to the timing of collections, and increases in accrued expenses and other liabilities of $2.3 million and accounts payable of $2.3 million due to the timing of payments, offset in part by an increase in gross inventory of $15.3 million, an increase in prepaid expenses and other assets of $3.0 million and a decrease in accrued payroll and other expenses of $2.1 million due to the timing of payments.

 

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Net cash used in investing activities of $20.6 million for the six months ended July 4, 2015 was attributable primarily to cash used in connection with our acquisition of FEMTOLASERS of $10.2 million, including amounts that are expected to be refunded pursuant to a net asset adjustment, and purchases of property and equipment of $10.1 million.

 

Net cash used in financing activities of $11.3 million for the six months ended July 4, 2015 was attributable to payments of $12.1 million to repurchase our common stock and payments of $3.4 million in connection with the cancellation of shares of common stock underlying restricted stock units for taxes owed by employees upon vesting of restricted stock units issued under our stock incentive plans.  These cash payments were offset in part by an excess tax benefit of $1.8 million related to employee stock plans, net borrowings of $1.4 million and proceeds of $1.1 million received from the issuance of common stock under employee stock 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 July 4, 2015, the outstanding balance under the Credit Facility was $76.0 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 July 4, 2015, based on our Consolidated Adjusted EBITDA, the $76.0 million borrowed under the Credit Facility, additional indebtedness of $4.3 million and outstanding letters of credit of $4.5 million, we had approximately $156.0 million available for additional borrowing under the Credit Facility.

 

At July 4, 2015, we also had (i) revolving lines of credit with Japanese banks; (ii) an agreement with a Japanese bank under which we sell trade notes receivable with recourse; (iii) a loan with an Israeli bank; and (iv) loans from the Austrian government, as follows:

 

Description

 

Principal
Amount
Outstanding
(in millions)

 

Additional
Amount
Available for
Borrowing
(in millions)

 

Interest Rate(s)

 

Expiration Date(s)

 

Japanese lines of credit

 

$

3.1

 

$

2.7

 

1.15% to 1.29%

 

No expiration dates

 

Japanese agreements for sale of receivables

 

$

0.7

 

$

0.9

 

1.20%

 

No expiration dates

 

Israeli loan

 

$

0.3

 

$

 

2.97%

 

October 2015

 

Austrian loans

 

$

0.3

 

$

 

0.75% to 2.00%

 

Through March 2019

 

 

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 six months ended July 4, 2015, we repurchased 0.6 million shares for a total of $12.1 million under this program.  As of July 4, 2015, 2.7 million shares remained available for purchase under the program.  The amount and timing of future repurchases will be dependent upon factors such as our share price level, our other capital requirements and the terms of our Credit Agreement.

 

During the remainder of 2015, we expect to use approximately $10 million to $15 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 and restricted cash 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 and restricted cash 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 January 3, 2015.  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.

 

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 January 3, 2015.  There have been no material changes to the critical accounting policies disclosed in such Annual Report on Form 10-K.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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

 

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revenue when (or as) the company satisfies a performance obligation.  Upon adoption, ASU No. 2014-09 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.  At the time of issuance, ASU No. 2014-09 was to become effective for interim and annual periods beginning after December 15, 2016, and early adoption was not permitted.  However, in July 2015, the FASB deferred the effective date of ASU No. 2014-09 by one year to annual reporting periods beginning after December 15, 2017.  In addition, early adoption of the standard will be permitted, but not before the original effective date of December 15, 2016.  We are currently evaluating the expected impact of ASU No. 2014-09 on our financial position and results of operations.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory.  ASU No. 2015-11 clarifies that inventory should be held at the lower of cost or net realizable value.  Net realizable value is defined as the estimated selling price, less the estimated costs to complete, dispose and transport such inventory.  ASU No. 2015-11 will be effective for fiscal years and interim periods beginning after December 15, 2016.  ASU No. 2015-11 is required to be applied prospectively and early adoption is permitted.  The adoption of ASU No. 2015-11 is not expected to have a material impact on our financial position or results of operations.

 

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 and comprehensive income.  We do not engage in currency speculation.  All of our foreign currency option and forward exchange contracts are established 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, particularly in translating foreign currency denominated sales into U.S. dollars.  However, because we have manufacturing facilities located globally, the impact of currency exchange rate fluctuations on our income is mitigated in part by the translation of foreign currency denominated expenses.  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 results include changes to the exchange rates of the U.S. dollar to the euro and Japanese yen.

 

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The following table provides information about our foreign currency derivative financial instruments outstanding as of July 4, 2015.  The information is presented in U.S. dollars, as presented in our consolidated financial statements:

 

 

 

July 4, 2015

 

 

 

Notional

 

Average

 

(In thousands)

 

Amount

 

Strike Price

 

Foreign currency options

 

 

 

 

 

Israeli Shekel - call options

 

$

14,498

 

4.00

 

Israeli Shekel - put options

 

(15,291

)

3.79

 

 

 

$

(793

)

 

 

Fair value

 

$

330

 

 

 

 

Interest Rate Risk

 

Our investments in cash, cash equivalents, restricted cash and marketable securities, which totaled $41.0 million at July 4, 2015, 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 lines of credit and other loans in Israel, Austria and Japan.  Our revolving line of credit in the United States and 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 July 4, 2015:

 

 

 

Expected Maturity Date

 

 

 

(US$ equivalent in thousands)

 

2015

 

2016

 

2017

 

2018

 

2019

 

Thereafter

 

Total

 

Fair Value

 

Debt obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate (US$)

 

$

297

 

$

 

$

94

 

$

12

 

$

150

 

$

 

$

553

 

$

549

 

Weighted average interest rate

 

2.97

%

0.00

%

2.00

%

2.00

%

0.75

%

0.00

%

2.18

%

 

 

Variable rate (US$)

 

$

 

$

 

$

 

$

76,000

 

$

 

$

 

$

76,000

 

$

74,456

 

Weighted average interest rate

 

0.00

%

0.00

%

0.00

%

1.69

%

0.00

%

0.00

%

1.69

%

 

 

Variable rate (non-US$)

 

$

3,787

 

$

 

$

 

$

 

$

 

$

 

$

3,787

 

$

3,787

 

Weighted average interest rate

 

1.28

%

0.00

%

0.00

%

0.00

%

0.00

%

0.00

%

1.28

%

 

 

Total debt obligations

 

$

4,084

 

$

 

$

94

 

$

76,012

 

$

150

 

$

 

$

80,340

 

$

78,792

 

Weighted average interest rate

 

1.40

%

0.00

%

0.00

%

1.69

%

0.00

%

0.00

%

1.67

%

 

 

 

ITEM 4.  CONTROLS AND PROCEDURES

 

(a)         Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer and our Chief Financial Officer, after evaluating our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer where appropriate, to allow timely decisions regarding required disclosure.

 

(b)         Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

 

ITEM 1A.  RISK FACTORS

 

Our Annual Report on Form 10-K for the year ended January 3, 2015 contains a full discussion of the risks associated with our business.  There have been no material changes to the risks described in our Annual Report on Form 10-K.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table reflects purchases made by us during the quarter ended July 4, 2015, of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:

 

Period(1)

 

Total Number of
Shares (or Units)
Purchased

 

Average Price
Paid per Share
(or Unit)

 

Total Number of
Shares (or Units)
Purchased as
Part of Publicly
Announced Plans
or Programs

 

Maximum
Number (or
Approximate
Dollar Value of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs

 

April 5, 2015 – May 2, 2015(2)

 

 

$

 

 

 

May 3, 2015 – May 30, 2015(2)

 

219,264

 

$

19.24

 

219,264

 

2,783,415

 

May 31, 2015 – July 4, 2015(2)

 

104,248

 

$

18.55

 

104,248

 

2,679,167

 

Totals

 

323,512

 

$

19.02

 

323,512

 

 

 

 


(1)         The periods reported conform to our fiscal calendar which consists of two periods of four weeks and one period of five weeks in each fiscal quarter.

 

(2)         Represents shares of our common stock repurchased in open market transactions under a share repurchase program approved by our Board of Directors in May 2008.  A total of 4.0 million shares have been authorized for repurchase under this program and this program has no fixed expiration date.  As of July 4, 2015, we had purchased a total of 1,320,833 shares and 2,679,167 shares remained available for purchase under the program.

 

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ITEM 6.  EXHIBITS

 

Exhibit
Number

 

Description of Exhibit

 

 

 

10.1

 

Amended and Restated 2011 Stock Incentive Plan (incorporated by reference to Appendix B of the Registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 8, 2015).

 

 

 

31.1

 

Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”).

 

 

 

31.2

 

Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.

 

 

 

32.1

 

Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.

 

 

 

32.2

 

Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.

 

 

 

101.INS

 

XBRL Instance Document.

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated:  August 13, 2015

NEWPORT CORPORATION

 

 

 

 

 

 

By:

/s/ Charles F. Cargile

 

 

Charles F. Cargile,

 

 

Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Duly Authorized Officer)

 

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EXHIBIT INDEX

 

Exhibit
Number

 

Description of Exhibit

 

 

 

10.1

 

Amended and Restated 2011 Stock Incentive Plan (incorporated by reference to Appendix B of the Registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 8, 2015).

 

 

 

31.1

 

Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”).

 

 

 

31.2

 

Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.

 

 

 

32.1

 

Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.

 

 

 

32.2

 

Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.

 

 

 

101.INS

 

XBRL Instance Document.

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

31