UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC
20549
__________________
FORM 10-K
(Mark
One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended January 2,
2010
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from ________
to ___________ |
Commission File Number:
000-01649
__________________
NEWPORT CORPORATION
(Exact name of registrant as specified in its charter)
Nevada |
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94-0849175 |
(State or other jurisdiction
of |
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(IRS Employer Identification
No.) |
incorporation or
organization) |
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1791 Deere Avenue, Irvine, California
92606 (Address of principal executive offices)
(Zip Code)
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Registrant’s telephone
number, including area code: (949) 863-3144
__________________
Securities registered
pursuant to Section 12(b) of the Act:
Title of Each Class |
Name of Each Exchange on Which
Registered |
Common Stock, Par Value $0.1167 per
share |
The NASDAQ Stock Market
LLC |
Securities registered pursuant to Section 12(g) of the Act: None |
Indicate by check mark
if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o No x
Indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o
No x
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 o No o
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. x
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 o |
Accelerated filer x |
Non-accelerated filer o |
Smaller reporting company o |
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(Do not check if a smaller reporting
company) |
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Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No x
As of July 4, 2009,
the aggregate market value of the common stock held by non-affiliates of the
registrant was approximately $196.2 million, calculated based upon the closing
price of the registrant’s common stock as reported by the NASDAQ Global Select
Market on such date.
As of February 28,
2010, 36,315,834 shares of the registrant’s sole class of common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
registrant’s Proxy Statement for its 2010 Annual Meeting of Stockholders, which
is expected to be held on May 18, 2010, are incorporated by reference into Part
III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I |
ITEM 1. |
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BUSINESS |
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1 |
ITEM 1A. |
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RISK FACTORS |
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16 |
ITEM 1B. |
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UNRESOLVED
STAFF COMMENTS |
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29 |
ITEM 2. |
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PROPERTIES |
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29 |
ITEM 3. |
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LEGAL PROCEEDINGS |
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29 |
ITEM 4. |
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RESERVED |
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29 |
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PART II |
ITEM 5. |
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MARKET FOR THE
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER |
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PURCHASES OF EQUITY SECURITIES |
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30 |
ITEM 6. |
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SELECTED FINANCIAL
DATA |
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33 |
ITEM 7. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
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36 |
ITEM 7A. |
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QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK |
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51 |
ITEM 8. |
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA |
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52 |
ITEM 9. |
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CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE |
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52 |
ITEM 9A. |
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CONTROLS AND
PROCEDURES |
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52 |
ITEM 9B. |
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OTHER INFORMATION |
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54 |
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PART III |
ITEM 10. |
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE |
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55 |
ITEM 11. |
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EXECUTIVE COMPENSATION |
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55 |
ITEM 12. |
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED |
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STOCKHOLDER
MATTERS |
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55 |
ITEM 13. |
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
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55 |
ITEM 14. |
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PRINCIPAL
ACCOUNTING FEES AND SERVICES |
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55 |
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PART IV |
ITEM 15. |
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EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
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56 |
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SIGNATURES |
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59 |
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INDEX TO FINANCIAL STATEMENTS AND
SCHEDULE |
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F-1 |
i
This Annual Report on Form 10-K contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
and we intend that such forward-looking statements be subject to the safe
harbors created thereby. For this purpose, any statements contained in this
Annual Report on Form 10-K except for historical information may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
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, trends in our
businesses, or other characterizations of future events or circumstances are
forward-looking statements.
The forward-looking statements included herein
are based on current expectations of our management based on available
information and involve a number of risks and uncertainties, all of which are
difficult or impossible to predict accurately and many of which are beyond our
control. As such, our actual results may differ significantly from those
expressed in any forward-looking statements. Factors that may cause or
contribute to such differences include, but are not limited to, those discussed
in more detail 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 this Annual Report on Form 10-K. Readers should
carefully review these risks, as well as the additional risks described in other
documents we file from time to time with the Securities and Exchange Commission.
In light of the significant risks and uncertainties inherent in the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that such
results will be achieved, and readers are cautioned not to place undue reliance
on such forward-looking information. We undertake no obligation to revise the
forward-looking statements contained herein to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
PART I
ITEM 1. BUSINESS
General Description of Business
We are a global supplier of advanced
technology products and systems to a wide range of industries, including
scientific research, microelectronics, aerospace and defense/security, life and
health sciences, and industrial manufacturing. We provide a broad portfolio of
products to customers in these end markets, allowing us to offer them an
end-to-end resource for photonics solutions.
The demands of scientific and commercial
applications for higher precision and miniaturization have caused photonics, the
science and technology of generating and harnessing light in productive ways, to
become an increasingly important enabling technology, permitting researchers and
commercial users to perform tasks that cannot be accomplished by existing
electrical, mechanical or chemical processes. In addition, in markets such as
microelectronics and life and health sciences, photonics technology is replacing
these current processes in a number of applications that it can accomplish
faster, better or more economically.
We provide a wide range of photonics
technology and products designed to enhance the capabilities and productivity of
our customers’ precision applications, including:
1
In addition to our individual product
offerings, we have significant expertise in integrating our products into
systems and subsystems that are engineered to meet our customers’ specific
application requirements. We believe that our ability to develop and manufacture
integrated solutions, together with our broader portfolio of products and
technologies, gives us a significant competitive advantage.
For over four decades, we have serviced the
needs of research laboratories for precision equipment. We have acquired a
number of companies, which has led to the expansion of our product offerings,
technology base and geographic presence and has allowed us to evolve from a
provider of discrete components and instruments primarily for research
applications to a company that manufactures both components and integrated
systems for both research and commercial applications.
Acquisitions
In February 2002, we acquired Micro Robotics
Systems, Inc. (MRSI), a manufacturer of high-precision, fully-automated assembly
and dispensing systems for back-end packaging applications in the semiconductor,
microwave communications and fiber optic communications industries. MRSI became
part of what is now our Photonics and Precision Technologies (PPT) Division, and
contributed significant expertise to us in the design and manufacture of
automated high-precision manufacturing systems. During the past four years, we
have focused this expertise on developing automated laser-based manufacturing
systems, particularly for disk drive and solar panel manufacturing
applications.
In July 2004, we acquired Spectra-Physics,
Inc. and certain related photonics entities (collectively, Spectra-Physics).
This acquisition significantly increased the scope of our expertise and product
offerings in our target customer end markets, adding to our product portfolio
solid-state, gas and dye lasers, high-power diode lasers, and ultrafast laser
systems, as well as photonics instruments and components, including light
sources, monochromators, spectroscopy instrumentation, optical filters, ruled
and holographic diffraction gratings and crystals. This acquisition
approximately doubled our size with respect to revenue, number of employees and
facilities. At the time of the acquisition, we established Spectra-Physics’
laser and laser-related technology business as our Lasers Division, and we
combined Spectra-Physics’ photonics businesses with the existing businesses that
comprised our former Industrial and Scientific Technologies Division to create
our PPT Division.
In July 2009, we acquired the New Focus™
business of Oclaro, Inc. (Oclaro). The New Focus business expands our product
offerings to include a number of new high-performance products, including
opto-electronics, high-resolution actuators, high-speed detectors and
modulators, opto-mechanics, tunable lasers, and custom-engineered solutions
designed for OEM customers.
Divestitures
Following the acquisition of Spectra-Physics,
we conducted a strategic review of all of our businesses and concluded that our
robotic systems operations in Richmond, California, which served the front-end
semiconductor equipment industry with product lines including wafer-handling
robots, load ports and equipment front-end modules, were no longer core to our
overall strategy. Consequently, we sold these operations in December
2005.
In 2009, in evaluating the performance and
needs of our Lasers Division, we concluded that our high-power diode laser
manufacturing operations in Tucson, Arizona were not well aligned with the focus
and business model of our Lasers Division. Therefore, in July 2009, we sold
these diode laser operations to Oclaro in conjunction with our acquisition of
the New Focus business from Oclaro. In connection with the sale, we secured a
supply arrangement with Oclaro to ensure the continued availability of diode
lasers needed in the manufacture of certain of our laser products at competitive
price levels.
2
We will continue to pursue acquisitions of
companies, technologies and complementary product lines that we believe will
further our strategic objectives. Conversely, from time to time, we review our
different businesses to ensure that they are key to our strategic plans, and
close or divest businesses that we determine are no longer of strategic
importance. See Item 7 (Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Overview) beginning on page 36, and Note 2
of the Notes to Consolidated Financial Statements beginning on page F-15, of
this Annual Report on Form 10-K for additional information.
Our Markets
We sell our products, subsystems and systems
to original equipment manufacturer (OEM) and end-user customers in markets and
for applications that are enabled or enhanced by the use of photonics
technology, including primarily:
- Scientific Research. We are one of the world’s leading
suppliers of lasers and other photonics products to scientific researchers.
For almost fifty years, we have worked closely with the research community to
pioneer new applications and technologies. Today, we continue to help
researchers break new ground in a variety of scientific research areas,
including spectroscopy, ultrafast phenomena, terahertz imaging, laser-induced
fluorescence, chemical analysis, materials science, light detection and
ranging (LIDAR) and nonlinear optics.
- Microelectronics. Photonics technology addresses a number of
vital applications in the microelectronics market. It is a key enabler of the
semiconductor industry roadmap driving smaller chip feature sizes with the
increased functionalities needed for next-generation consumer technology
products, including cellular phones, personal digital assistants and digital
cameras. It is also a key technology enabling the manufacture of solar panels
with higher efficiency and at a lower cost per watt as that industry strives
to make solar power more cost competitive. Our products are used in several
key applications in the microelectronics market, including semiconductor wafer
inspection and metrology, memory yield enhancement, lithography, wafer dicing
and scribing, wafer and component marking, resistor trimming, thin-film solar
panel scribing and edge deletion, solar cell testing and characterization, and
LED scribing, as well as in disk drive, printed circuit board and flat panel
display manufacturing applications.
- Life and Health Sciences. Photonics is increasingly becoming an
enabling technology in the life and health sciences market. We provide
products for diagnostic and analytical instrumentation and bioimaging. Our
products are used in applications such as optical coherence tomography,
multiphoton and confocal microscopy, flow cytometry, matrix-assisted laser
desorption/ionization time-of-flight mass spectrometry, laser microdissection,
DNA microarrays and blood analysis to enable advancements in the fields of
molecular biology, proteomics and drug discovery.
- Aerospace and
Defense/Security. The
drive for more technologically advanced weapons and sensors is producing
increased investment in photonics-based technologies that can remotely,
rapidly and non-invasively detect threats, improve intelligence gathering,
provide secure communications systems and improve the performance of weapons
and countermeasures. In addition, innovative optical sensors are augmenting
human vision on the battlefield, providing remote sensing, ranging and
observation capabilities that offer high-resolution imaging and night vision.
Our high-precision products are used by aerospace and defense engineers to
develop, assemble, test and calibrate equipment for a wide range of
applications, including target recognition and acquisition, LIDAR, range
finding, missile guidance and advanced weapons development.
- Industrial Manufacturing. Our lasers and other photonics products
are used in a wide range of precision industrial manufacturing applications,
including rapid prototyping, micromachining, heat-treating, welding and
soldering, cutting, illumination, drilling and high-precision marking and
engraving. We also offer laser solutions for image recording
applications.
3
Our Operating Divisions
We operate our business in two divisions, our
PPT Division and our Lasers Division, which are organized to support our primary
product categories.
Photonics and Precision Technologies Division
Our PPT Division’s products and systems are
sold to end users in all of our target end markets. We also sell products and
subassemblies to OEM customers that integrate them into their systems,
particularly for microelectronics and life and health sciences applications. The
products sold by this division include photonics instruments and systems,
precision positioning systems and subsystems, vibration isolation systems and
subsystems, optics, optical hardware, opto-mechanical subassemblies and
crystals. The PPT Division also offers automated systems for advanced
applications in the manufacturing of solar panels, disk drive media, and
communications and electronic devices, including microwave, optical, radio
frequency (RF) and multi-chip modules.
Our PPT Division also designs, develops and
manufactures systems and subsystems that integrate our broad portfolio of
products and technologies into solutions that meet the specific application
requirements of our OEM and select end-user customers. With our expertise in the
design, development and manufacture of these integrated solutions, we help our
customers accelerate the time to market and enhance the performance of their
equipment or instrumentation products. We have established a business team
comprised of technical and operations specialists, which collaborates across our
divisions to develop and provide these integrated solutions to our customers. We
have used our capabilities in this area for customers in a number of industries
and applications, most notably in microelectronics applications such as
semiconductor manufacturing, solar cell manufacturing and disk drive
manufacturing, and in life and health sciences applications such as flow
cytometry, DNA sequencing and optical coherence tomography.
Products
The following table summarizes our PPT
Division’s primary product offerings by product category, and includes
representative applications for each category:
Category |
Products |
Representative
Applications |
Photonics Instruments and
Systems |
- Electro-optic
modulators
- Laser diode
controllers
- Light
sources
- Monochromators and
spectrographs
- Optical power/energy
detectors
- Optical power/energy
meters
- Photonics test
systems
- Solar
simulators
- Solar cell test
instruments
- Spectrometers
- Tunable external cavity
diode lasers
- Ultrafast laser pulse
measurement systems
|
- Atom trapping and
cooling, including
Bose-Einstein Condensates
- Characterization of cosmetic
and pharmaceutical
products
- Characterization of light
emitted by lasers, light
emitting diodes and
broadband light sources
- Chemical composition
analysis
- Colorimetry
- Optical power and
energy measurement for
free space and fiber-directed laser light
- Solar cell characterization
and measurements
- Spectroscopy
- Testing and characterization
of optical fibers and
passive fiber optical
components
|
4
Category |
Products |
Representative
Applications |
Precision Positioning
Devices, Systems and Subsystems |
- Custom multi-axis
positioning systems
- Fast steering
mirrors
- Fiber alignment stages
and accessories
- Manual linear and rotation
stages
- Micromanipulators
- Micrometers and
adjustment screws
- Motion controllers and
drivers
- Motorized linear and
rotation stages
- Motorized actuators and
optical mounts
- Nano-positioning and
nano-focusing
stages
- Piezo motor actuators and
stages
- Precision air-bearing
motion systems
|
- High-precision positioning
for manufacturing and
in-process inspection,
metrology and final test
applications
- High-precision positioning
for thin-film solar cell
manufacturing
- High-precision positioning
of semiconductor wafers
for metrology and
fabrication
- Laser beam stabilization
and pointing
- Laser system alignment and
beam steering for
inspection, laser processing and communications
- Precision alignment in fiber
optic, telecommunication
and laser device
assembly
- Sample or sensor
manipulation for imaging
and microscopy
- Sample sorting and
sequencing for DNA
research
- Solar cell test and
characterization
- Tracking and targeting
test systems for
aerospace and defense/security applications
|
Vibration Isolation Systems
and Subsystems |
- Active and passive
isolation systems
- Active vibration damping
systems
- Elastomeric mounts
- Honeycomb, granite and
rigid structures
- Optical tables, support
systems and
accessories
- Workstations
|
- Foundation platforms for
laser systems
- Isolated platforms
for semiconductor
lithography equipment
- Reduction of impact of
external vibration
sources on high-precision
research, manufacturing test and assembly systems
- Scanning electron
microscope, atomic force
microscope, and optical
microscope base isolation
- Workstation platforms for
fiber optic device
fabrication
- Workstation platforms
for microscopy and other
advanced imaging
applications
|
5
Category |
Products |
Representative
Applications |
Optics and Optical Hardware
|
- Beam routing and
enclosing systems
- Beamsplitters and
polarization optics
- Collimators
- Filters and
attenuators
- Laser-to-fiber
couplers
- Lenses
- Mirrors
- Optical hardware including
bases, brackets, posts
and rod systems
- Optical
mounts
- Prisms and windows
- Ruled and holographic
diffraction gratings
- Thin-film filters and
coatings
- Ultrafast laser
optics
|
- Analytical instrumentation
for life and health
sciences applications
- Development and
manufacturing of laser
systems
- Electro-optic sensors and
imaging systems for
defense/security applications
- High-precision alignment
of optical
instruments
- Optical measurement
and communications
systems
- Research in physical
and biological
sciences
- Semiconductor lithography,
wafer inspection and
wafer processing
- Spectroscopy
- Ultrafast laser, terahertz
imaging and laser fusion
research
|
Crystals |
- Crystal imaging
arrays
- Electro-optics
- Optical crystals
- Scintillation
crystals
|
- Infrared spectroscopy
(FT-IR) for quality
assurance
- Optical and acoustic
applications including
frequency doubling, optical modulators and Q switches
- X-ray detection such as
steel thickness
gauging
- X-ray imaging for
security, industrial and
medical applications
|
6
Category |
Products |
Representative
Applications |
Opto-Mechanical
Subassemblies and Subsystems |
- Integrated
electro-optic-mechanical
subsystems
- Laser beam
attenuators
- Laser beam delivery and
imaging assemblies
- Objective lens
systems
- Refractive beam
shaper assemblies
|
- Analytical instrumentation
for life and health
sciences applications
- High-speed cell sorting
for genomic
research
- Laser beam delivery systems
for solar panel
manufacturing
- Laser beam stabilization
for industrial
metrology
- Light detection and
ranging
- Optical coherence tomography
for non-invasive
diagnostics
- Optical data storage
- Semiconductor mask
patterning
- Semiconductor wafer
defect inspection
- Thin-film measurement
of semiconductor
wafers
|
Advanced Manufacturing
Systems |
- Automated device
packaging systems
- Automated die bonding
and dispensing
systems
- Automated, laser-based
solar panel scribing and
edge deletion systems
- Automated, laser-based
disk texturing
systems
|
- Automated manufacturing
and assembly of
microelectronic and optoelectronic devices
- High-speed,
high-accuracy automated
dispensing applications for microwave modules, optical modules, hybrid circuits,
multi-chip modules and
semiconductor packaging
- High-speed, high-accuracy
laser texturing of disk
drive media
- Thin-film solar panel
manufacturing
|
Lasers Division
Our Lasers Division, which was formed in July
2004 in connection with our acquisition of Spectra-Physics, offers a broad
portfolio of laser technology products and services to OEM and end-user
customers across a wide range of markets and applications. Our lasers and
laser-based systems include ultrafast lasers and amplifiers, diode-pumped
solid-state lasers, high-energy pulsed lasers, tunable lasers and gas lasers. In
addition to providing a wide range of standard and configured laser products and
accessories to our end-user customers, we also work closely with our OEM
customers to develop laser and laser system designs optimized for their product
and technology roadmaps.
7
Products
The following table summarizes our primary
laser and laser-based system product offerings by product category, and includes
representative applications for each category:
Category |
Products |
Representative
Applications |
Ultrafast Lasers and
Systems |
- Mai Tai® one-box
femtosecond lasers
- Tsunami® ultrafast
lasers
- Spitfire® Pro XP
ultrafast amplifiers
- Solstice® one-box
ultrafast amplifiers
- Inspire™ femtosecond
optical parametric
oscillators (OPOs)
- TOPAS™ automated
ultrafast optical
parametric amplifiers (OPAs)
|
- Femtosecond
spectroscopy
- Micro-machining and
other high-precision
materials processing
applications
- Multiphoton
microscopy
- Supercontinuum and
high harmonic
generation
- Terahertz imaging
- Time-resolved photoluminescence
- Two-photon
polymerization
|
Diode-Pumped Solid State
Q-Switched Lasers |
- Tristar™ high repetition
rate UV
lasers
- Navigator™ lasers
- HIPPO™ high-power
lasers
- Pulseo® high
peak-power UV laser
- Explorer® low-power
UV lasers
- Empower® green/UV
lasers
|
- Diamond processing
- Disk texturing
- Laser microdissection
- LED wafer scribing
- Matrix-assisted laser
desorption/ionization
- Memory yield
enhancement systems
- Pump source for
ultrafast lasers
- Rapid prototyping
- Resistor trimming
- Semiconductor wafer and
flat panel display
marking
- Silicon
micromachining
- Solar cell
manufacturing
- Stereolithography
|
8
Category |
Products |
Representative
Applications |
Diode-Pumped Solid State
Continuous Wave (CW) and Quasi-CW Lasers |
- Millennia® Prime CW
lasers
- MG series CW solid
state green lasers
- Excelsior™ low power
CW lasers
- Vanguard™ quasi-CW
solid state UV
lasers
- 3900S and Matisse® CW tunable
lasers
- Cyan™ compact low
power CW lasers
|
- Confocal microscopy
- DNA sequencing
- Flow cytometry
- Image recording
- Laser cooling
- Materials processing
- Optical trapping
- Raman imaging
- Semiconductor wafer
inspection and metrology
- Solar cell
manufacturing
- Ti:Sapphire laser
pumping
|
High Energy Pulsed Nd:YAG
and Tunable Lasers |
- Quanta-Ray® pulsed
Nd:YAG lasers
- Scan Series High
Energy optical parametric
oscillators (OPOs)
- Cobra tunable dye
lasers
- Credo high-repetition rate
dye lasers
|
- Flat-panel display
manufacturing
- Laser ablation
- Laser cleaning
- LIDAR
- Mass spectrometry
- Particle imaging
velocimetry combustion
diagnostics
- Plastic and ceramic
component marking
- Remote sensing
- Spectroscopy
|
Gas Lasers |
- Air-cooled argon ion
lasers
- Water-cooled ion laser
systems
- Nitrogen lasers
|
- Confocal
microscopy
- DNA sequencing
- Flow cytometry
- Fluorescence
immunoassay
- Holography
- Laser doppler
anemometry
- Laser doppler
velocimetry
- Lithography
- Matrix-assisted laser
desorption/ionization
- Raman spectroscopy
- Semiconductor wafer
inspection
- Spectroscopy
|
9
Financial information regarding our business
segments and our operations by geographic area is included in Note 15 of the
Notes to Consolidated Financial Statements included in this Annual Report on
Form 10-K beginning on page F-37. A discussion of our net sales by end market
and geographic area is included in Item 7 (Management’s Discussion and Analysis
of Financial Condition and Results of Operations) beginning on page 36.
Sales and Marketing
We market and sell our products and services
through our domestic and international direct sales organizations, an
international network of independent distributors and sales representatives, our
product catalogs and our web site. Our domestic and international direct sales
organizations are comprised of teams of field sales persons, key account
managers and business development managers, who work closely with product and
applications specialists and other internal sales support personnel based
primarily at our domestic locations in California, Connecticut, Massachusetts
and New York, and at our international locations in China, France, Germany,
Japan and Taiwan. We sell our products and services to three major categories of
customers: end-users of standard or option-configured products, OEM customers
and capital equipment customers. These categories of customers require very
different selling approaches and support requirements, and we have organized our
sales teams to address these different requirements. To serve the needs of end
users of standard or option-configured products, we have organized our field
sales personnel, together with internal sales support personnel, into teams
based on their specialized knowledge and expertise relating to specific product
groups. These sales teams are closely aligned with their respective product
management and operations organizations. Our OEM and capital equipment customers
often have unique technical requirements and manufacturing processes, and may
request specific system, subsystem or component designs. Sales of our subsystem
and capital equipment products often involve complex program management and long
sales cycles, and require close cooperation between sales, operations and
engineering personnel as well as collaboration across all of our product lines
and areas of knowledge and expertise. As such, we have developed teams of key
account managers and business development managers to serve the unique
requirements of these OEM and capital equipment customers.
We also actively market and sell our products
in certain markets outside of North America through independent sales
representatives and distributors. We have written agreements with substantially
all of our representatives and distributors. In some cases we have granted
representatives and distributors exclusive authorization to sell certain of our
products in a specific geographic area. These agreements generally have terms of
one year which automatically renew on an annual basis, and are generally
terminable by either party for convenience following a specified notice period.
Most distributor agreements are structured to provide distributors with sales
discounts below the list price. Representatives are generally paid commissions
for sales of products. No single independent representative or distributor
accounted for more than 5% of our net sales in 2009.
We also market our standard products through
our product catalog and our web site. Our principal marketing tools for the
scientific research market are our comprehensive web site and our product
catalog, The Newport Resource®. Our web site features
an online catalog, providing customers with access to the latest information
regarding our products, technical/tutorial and application related materials,
sales information, a literature and information request form, and the ability to
purchase a majority of our standard products. Our web site is widely used by our
customers to review information about our technologies, products and services.
Our product catalog provides detailed product information as well as extensive
technical and applications data. We mail this catalog to approximately 40,000
existing and potential customers. The Newport Resource is published in English,
French, German and Japanese. New product supplements for each catalog are also
distributed between publications. We also publish and distribute a variety of
sales literature and product brochures which focus on specific products and end
markets.
We operate a Technology and Applications
Center (TAC) at our Irvine, California headquarters. The TAC is staffed with
experienced photonics researchers who develop innovative ways to utilize our
lasers and other photonics products together in leading-edge research
applications such as solar cell testing and characterization, multiphoton
microscopy, Coherent Anti-Stokes Raman Scattering microscopy and ultrafast
spectroscopy. The TAC produces application notes and kits for these
applications, publishes technical papers in scientific and technical journals,
and provides our research and development teams with ideas for new products and
product enhancements. We believe that the TAC reinforces our position as a
technology leader in the photonics industry, and that it serves as an important sales tool by performing
actual experiments to demonstrate how our products will perform in our
customers’ applications.
10
We also operate an Applications Laboratory at
the Santa Clara, California facility of our Lasers Division, which provides
support to our global sales and marketing team by conducting feasibility studies
with prospective customers’ material processing applications using our lasers
and photonics products. This laboratory is staffed with experienced laser
material processing engineers, and has demonstrated the performance of our
products and integrated solutions in a wide range of advanced laser
applications.
We also operate a Photovoltaic Applications
Laboratory adjacent to the Stahnsdorf, Germany facility of our Lasers Division,
which is equipped with our systems for laser-based scribing and edge deletion of
thin-film solar panels, as well as inspection and photovoltaic diagnostic tools.
This laboratory supports our sales and marketing efforts in the solar panel
manufacturing industry by conducting feasibility studies with scribing and edge
deletion of prospective customers’ thin-film solar panels using our systems.
Research and Product Development
We continually seek to improve our
technological leadership position through internal research, product development
and licensing, and acquisitions of complementary technologies. As of February
28, 2010, we had approximately 185 employees engaged in research and
development. We continually work to enhance our existing products and to develop
and introduce innovative new products to satisfy the needs of our customers. In
addition, we regularly investigate new ways to combine components manufactured
by our various operations to produce innovative technological solutions for the
markets we serve. Total research and development expenses were $36.9 million, or
10.1% of net sales, in 2009, $46.1 million, or 10.4% of net sales, in 2008, and
$42.6 million, or 9.6% of net sales, in 2007. Research and development expenses
attributable to our Lasers Division were $16.0 million, or 10.9% of net sales by
that division, in 2009, $22.2 million, or 11.9% of net sales by that division,
in 2008, and $23.3 million, or 12.6% of net sales by that division, in 2007.
Research and development expenses attributable to our PPT Division were $20.9
million, or 9.5% of net sales by that division, in 2009, $23.9 million, or 9.2%
of net sales to that segment, in 2008, and $19.3 million, or 7.4% of net sales
by that division, in 2007.
We are committed to product development and
expect to continue our investment in this area in the future. We believe that
the continual development or acquisition of innovative new products will be
critical to our future success. Failure to develop, or introduce on a timely
basis, new products or product enhancements that achieve market acceptance could
have a material effect on our business, operating results or financial
condition.
Customers
We sell our products to thousands of customers
worldwide, in a wide range of end markets, including scientific research,
microelectronics (which includes semiconductor capital equipment, disk drive
manufacturing and solar panel manufacturing customers), aerospace and
defense/security, life and health sciences and industrial manufacturing. We
believe that our customer diversification minimizes our dependence on any single
industry or group of customers. In 2009, no single customer represented 10% or
more of our consolidated net sales, or 10% or more of our net sales by either
our Lasers Division or our PPT Division. In certain of our end markets,
including the microelectronics market, a limited number of customers account for
a significant portion of our sales to those markets. We believe that our
relationships with these key customers are good. However, if our key customers
discontinue or reduce their business with us, or suffer downturns in their
businesses, it could have a significant negative impact on our financial results
on a short-term basis. For example, from the middle of 2007 to the middle of
2009, several of our key customers in the semiconductor equipment industry
suffered significant downturns in their businesses as a result of the cyclical
downturn in that industry, which had a significant impact on our financial
results in those years. If we lose business from key customers and we are unable
to sufficiently expand our customer base to replace the lost business or to
reduce our cost structure accordingly, our business and results of operations
would be harmed.
11
Competition
The markets we serve are intensely competitive
and characterized by rapidly changing technology. A small number of competitors
are dominant in certain of these markets. The products and systems developed and
manufactured by both our PPT Division and our Lasers Division serve all of our
targeted end markets. The following table summarizes our primary competitors for
our principal product categories:
Product Category |
Primary Competitors |
Lasers |
Coherent, Inc. CVI Melles Griot GSI Group/Excel Technology,
Inc. IPG Photonics, Inc. JDS Uniphase Corporation |
Jenoptik Laser Optik Systeme GmbH Rofin-Sinar Technologies,
Inc. Toptica Photonics AG Trumpf Group |
Photonics Instruments |
Agilent Technologies, Inc. Coherent, Inc. CVI Melles
Griot ILX Lightwave Corporation |
Labsphere, Inc. Ophir Optronics Ltd. Picometrix,
LLC Thorlabs, Inc. |
Light Sources and Spectroscopy Instrumentation |
Andor Technology Acton Research Corporation Horiba Jobin
Yvon Ocean Optics, Inc. Photon Technology International |
Princeton Instruments Sciencetech, Inc. Spectral
Products Thorlabs, Inc. |
Precision Positioning Devices, Systems and Subsystems |
Aerotech Inc. Danaher Corporation Parker Hannifin
Corporation Physik Instrumente |
Rockwell Automation, Inc. (Anorad) Sigma Koki Co.,
Ltd. Thorlabs, Inc. |
Vibration Isolation Systems and Subsystems |
Herzan, LLC Kinetic Systems, Inc. |
Technical Manufacturing Corp. Thorlabs, Inc. |
Optics,
Optical Hardware and Opto-Mechanical Subassemblies and
Subsystems |
CVI Melles
Griot Corning Tropel Corporation Edmund Optics, Inc. Jenoptik
Laser Optik Systeme GmbH |
Qioptiq
(formerly LINOS) Sigma Koki Co., Ltd. (OptoSigma) Thorlabs,
Inc. Zygo Corporation |
Optical Filters |
Oclaro, Inc. Barr Associates, Inc. Chroma Technology
Corp. Ferroperm EMC Filters ApS |
JDS Uniphase Corporation Omega Optical, Inc. Semrock,
Inc. |
Diffraction Gratings |
Headwall Photonics, Inc. Horiba Jobin Yvon |
Optometrics Corporation Spectrogon |
Automated Manufacturing Systems |
Asymtek Datacon Technology GmbH Jenoptik Laser Optik Systeme
GmbH |
Manz Automation AG Palomar Technologies Rofin-Sinar
Technologies, Inc. |
In certain of our product lines, particularly
our precision motion systems and opto-mechanical subassembly product lines, we
also face competition from certain of our existing and potential customers who
have developed or may develop their own systems, subsystems and
components.
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We believe that the primary
competitive factors in our markets are:
- product features and
performance;
- quality and reliability of
products;
- pricing and
availability;
- customer service and
support;
- breadth of product
portfolio;
- customer
relationships;
- ability to manufacture and deliver
products on a timely basis;
- ability to customize products to
customer specifications; and
- ability to offer complete
integrated solutions to OEM customers.
We believe that we currently compete favorably
with respect to each of these factors. However, we may not be able to compete
successfully in the future against existing or new competitors.
We compete in various markets against a number
of companies, some of which have longer operating histories, greater name
recognition and significantly greater technical, financial, manufacturing and
marketing resources than we do. In addition, some of these companies have long
established relationships with our customers and potential customers in our
markets. In addition to current competitors, we believe that new competitors,
some of whom may have substantially greater financial, technical and marketing
resources than us, will seek to provide products to one or more of our markets
in the future. Such future competition could harm our business.
Intellectual Property and Proprietary Rights
Our success and competitiveness depends to an
extent on our ability to protect our proprietary technology. We protect our
technology by controlling access to our proprietary information and by
maintaining confidentiality agreements with our employees, consultants,
customers and suppliers, and, in some cases, through the use of patents,
trademark registrations and licenses. We maintain approximately 250 patents in
the U.S. and foreign jurisdictions, and we have approximately 65 additional
patent applications pending. These issued patents cover various aspects of
products in many of our key product categories, particularly our laser products.
We also have trademarks registered in the U.S. and foreign jurisdictions. We
will continue to actively pursue applications for new patents and trademarks as
we deem appropriate.
It is possible that, despite our efforts,
other parties may use, obtain or try to copy our products and technology.
Policing unauthorized use of our products and technology is difficult and time
consuming. The steps we take to protect our rights may not prevent
misappropriation of our products or technology. This is particularly the case in
foreign jurisdictions, where the intellectual property laws may not afford our
intellectual property rights the same protection as the laws of the United
States. We have in the past and may in the future initiate claims or litigation
against third parties for infringement of our proprietary rights, which claims
could result in costly litigation and the diversion of our technical and
management personnel.
In addition, infringement, invalidity, right
to use or ownership claims by third parties have been asserted against us in the
past and may be asserted against us in the future. We expect that the number and
significance of these matters will increase as our business expands. In
particular, the laser industry is characterized by a very large number of
patents, many of which are of questionable validity and some of which appear to
overlap with other issued patents. As a result, there is a significant amount of
uncertainty in the industry regarding patent protection and infringement. Any
claims of infringement brought by third parties could result in protracted and
costly litigation, and we could become subject to damages for infringement, or
to an injunction preventing us from selling one or more of our products or using
one or more of our trademarks. Such claims could also result in the necessity of
obtaining a license relating to one or more of our products or current or future
technologies, which may not be available on commercially reasonable terms or at
all. Any intellectual property litigation and the failure to obtain necessary
licenses or other rights or develop substitute technology could have a material
adverse effect on our business, financial condition and results of
operations.
13
Manufacturing
We manufacture instruments, components,
subassemblies and systems at domestic facilities located in Irvine, California;
Stratford, Connecticut; Franklin, Massachusetts; North Billerica, Massachusetts;
and Rochester, New York, and at international facilities in Beaune-la Rolande,
France; Brigueuil, France; Margate, United Kingdom; and Wuxi, China. We
manufacture lasers and laser systems at our facilities in Santa Clara,
California and Stahnsdorf, Germany. In addition, we subcontract all or a portion
of the manufacture of various products and components, such as laser power
supplies, optics, optical meters and certain low power lasers, to a number of
domestic and foreign third-party subcontractors and contract
manufacturers.
Our manufacturing processes are diverse and
consist of: purchasing raw materials, principally stainless steel, aluminum and
glass; processing the raw materials into components, subassemblies and finished
products; purchasing components, assembling and testing components and
subassemblies; and, for selected products, assembling the subassemblies and
components into integrated systems. We primarily design and manufacture our
products internally, although on a limited basis, we purchase completed products
from certain third-party suppliers and resell those products through our
distribution channels. Most of these completed products are produced to our
specifications and carry one of our product brands.
We currently procure various components and
materials, such as the sheet steel used in some of our vibration isolation
tables, and the laser diodes and laser crystals used in certain of our laser
products, from single or limited sources, due to unique component designs or
materials characteristics as well as certain quality and performance
requirements needed to manufacture our products. In some of such cases, the
number of available suppliers is limited by the existence of patents covering
the components or materials. In addition, we manufacture certain components
internally, and there are no readily available third-party suppliers of these
components. If single-sourced components were to become unavailable in adequate
amounts at acceptable quality levels or were to become unavailable on terms
satisfactory to us, we would be required to purchase comparable components from
other sources. While we believe that we would be able to obtain comparable
replacement components from other sources in a timely manner, if we were unable
to do so, our business, results of operations or financial condition could be
adversely affected.
In addition, we obtain some of the critical
capital equipment we use to manufacture certain of our products from sole or
limited sources due to the unique nature of the equipment. In some cases, such
equipment can only be serviced by the manufacturer or a very limited number of
service providers due to the complex and specialized nature of the equipment. If
service and/or spare parts for such equipment become unavailable, such equipment
could be rendered inoperable, which could cause delays in the production of our
products, and could require us to procure alternate equipment, if available,
which would likely involve long lead times and significant additional cost.
Backlog
Our consolidated backlog of orders totaled
$113.5 million at January 2, 2010 and $136.0 million at January 3, 2009. As of
January 2, 2010, $102.1 million of our consolidated backlog was scheduled to be
shipped on or before January 1, 2011. Orders for many of the products we sell to
OEM customers, which comprise a significant portion of our sales, are often
subject to rescheduling without penalty or cancellation without penalty other
than reimbursement of certain material costs. In addition, because we
manufacture a significant portion of our standard catalog products for
inventory, we often make shipments of these products upon or within a short time
period following receipt of an order. As a result, our backlog of orders at any
particular date may not be an accurate indicator of our sales for succeeding
periods.
14
Employees
As of February 28, 2010, we had approximately
1,625 employees worldwide. We believe that our relationships with our employees
are good.
Government Regulation
Regulatory Compliance
Our lasers and laser-based systems are subject
to the laser radiation safety regulations of the Radiation Control for Health
and Safety Act administered by the Center for Devices and Radiological Health of
the United States Food and Drug Administration. Among other things, these
regulations require a laser manufacturer to file new product and annual reports,
to maintain quality control and sales records, to perform product testing, to
distribute appropriate operating manuals, to incorporate certain design and
operating features in lasers sold to end-users and to certify and label each
laser sold to end-users as one of four classes (based on the level of radiation
from the laser that is accessible to users). Various warning labels must be
affixed and certain protective devices installed depending on the class of
product. The Center for Devices and Radiological Health is empowered to seek
fines and other remedies for violations of the regulatory requirements. We are
also subject to comparable laser safety regulations with regard to laser
products sold in Europe. We believe that we are currently in compliance with
these regulations.
Environmental Regulation
Our operations are subject to various federal,
state and local regulations relating to the protection of the environment,
including those governing discharges of pollutants into the air and water, the
management and disposal of hazardous substances and wastes and the cleanup of
contaminated sites. In the United States, we are subject to the federal
regulation and control of the Environmental Protection Agency (EPA). Comparable
authorities exist in other countries. Some of our operations require
environmental permits and controls to prevent and reduce air and water
pollution, and these permits are subject to modification, renewal and revocation
by issuing authorities. Future developments, administrative actions or
liabilities relating to environmental matters could have a material adverse
effect on our business, results of operations or financial
condition.
Although we believe that our safety procedures
for using, handling, storing and disposing of such materials comply with the
standards required by state and federal laws and regulations, we cannot
completely eliminate the risk of accidental contamination or injury from these
materials. In the event of such an accident involving such materials, we could
be liable for damages and such liability could exceed the amount of our
liability insurance coverage (if any) and the resources of our business.
Our former facility located in Mountain View,
California is an EPA-designated Superfund site and is subject to a cleanup and
abatement order from the California Regional Water Quality Control Board.
Spectra-Physics, along with several other entities with facilities located near
the Mountain View, California facility, have been identified as Responsible
Parties with respect to this Superfund site, due to releases of hazardous
substances during the 1960s and 1970s. The site is mature, and investigations
and remediation efforts have been ongoing for approximately 25 years.
Spectra-Physics and the other Responsible Parties have entered into a
cost-sharing agreement covering the costs of remediating the off-site
groundwater impact. In addition to our remediation obligations, we may be liable
for property damage or personal injury claims relating to this site. While we
are not aware of any claims at this time, such claims could be made against us
in the future. Thermo Fisher Scientific, Inc., formerly known as Thermo Electron
Corporation (Thermo), has agreed, in connection with our purchase of
Spectra-Physics, to indemnify us, subject to certain conditions, for costs of
remediation that are incurred and third party claims that are made prior to July
16, 2014, which arise from the releases of hazardous substances at or from the
Mountain View facility and are subject to remediation under the cost-sharing
agreement. However, our ultimate costs of remediation and other potential
liability are difficult to predict, and this indemnity may not cover all
liabilities relating to this site. If significant costs or other liability
relating to this site arise in the future and are not covered by this indemnity,
our business, financial condition and results of operations could be adversely
affected.
15
In addition, the European Union has enacted the Restriction on the Use of
Certain Hazardous Substances in Electrical and Electronic Equipment Directive
(RoHS) and the Waste Electrical and Electronic Equipment Directive (WEEE) for
implementation in each European Union member country. RoHS regulates the use of
certain hazardous substances in certain products, and WEEE requires the
collection, reuse and recycling of waste from certain products. The European
Union member states continue to define the scope of the implementation of RoHS
and WEEE. While many of our products are not subject to RoHS and WEEE
requirements, based on information we have received to date, certain of our
products sold in these countries are or will likely be subject to these
requirements. We will continue to monitor RoHS and WEEE guidance as it is
announced by individual jurisdictions to determine our responsibilities. The
guidance available to us to date suggests that in some instances we are not
directly responsible for compliance with RoHS and WEEE because some of our
products may be outside the scope of the directives. However, because the scope
of the directives continues to expand in the course of implementation by the
European Union member states, and because such products are sold under our brand
name, we will likely be directly or contractually subject to such regulations in
the case of many of our products. Also, final legislation from individual
jurisdictions that have not yet implemented the directives may impose different
or additional responsibilities upon us. We are also aware of similar legislation
that is currently in force or being considered in the United States, as well as
other countries, such as Japan and China. Our failure to comply with any of such
regulatory requirements or contractual obligations could result in our being
directly or indirectly liable for costs, fines or penalties and third-party
claims, and could jeopardize our ability to conduct business in countries in
these regions.
Availability of Reports
We make available free of charge on our web
site at www.newport.com our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and any amendments to such reports, as
soon as reasonably practicable after such reports are electronically filed with,
or furnished to, the Securities and Exchange Commission (SEC). We will also
provide electronic or paper copies of such reports free of charge, upon request
made to our Corporate Secretary at 1791 Deere Avenue, Irvine, California 92606.
All such reports are also available free of charge via EDGAR through the SEC
website at www.sec.gov. In addition, the public may read and copy materials
filed by us with the SEC at the SEC’s public reference room located at 100 F
Street, NE, Washington, DC 20549. Information regarding operation of the SEC’s
public reference room can be obtained by calling the SEC at 1-800-SEC-0330.
ITEM 1A. RISK FACTORS
The following is a summary of certain risks we face in our business. They
are not the only risks we face. Additional risks that we do not yet know of or
that we currently believe are immaterial may also impair our business
operations. If any of the events or circumstances described in the following
risks actually occur, our business, financial condition or results of operations
could suffer, and the trading price of our common stock could decline. In
assessing these risks, investors should also refer to the other information
contained or incorporated by reference in our other filings with the Securities
and Exchange Commission.
Our financial results are difficult to
predict, and if we fail to meet our financial guidance or the expectations of
investors, potential investors and/or securities analysts, the market price of
our common stock will likely decline significantly.
Our financial results in any given quarter
have fluctuated and will likely continue to fluctuate. These fluctuations are
typically unpredictable and can result from numerous factors including:
- fluctuations in our customers’
capital spending, industry cyclicality (particularly in the semiconductor
equipment industry), market seasonality (particularly in the scientific
research market), levels of government funding available to our customers and
other economic conditions within the markets we serve;
- demand for our products and the
products sold by our customers;
- the level of orders within a given
quarter and preceding quarters;
- the timing and level of
cancellations and delays of orders in backlog for our
products;
16
- the timing of product shipments
within a given quarter;
- variations in the mix of products
we sell;
- changes in our pricing practices
or in the pricing practices of our competitors or suppliers;
- our timing in introducing new
products;
- market acceptance of any new or
enhanced versions of our products;
- timing of new product
introductions by our competitors;
- timing and level of scrap and
warranty expenses;
- the availability, quality and cost
of components and raw materials we use to manufacture our
products;
- our ability to manufacture a
sufficient quantity of our products to meet customer demand;
- changes in our effective tax
rates;
- changes in interest income
(expense) resulting from repurchases of convertible notes, changes in our cash
and marketable securities balances, and changes in interest
rates;
- changes in bad debt expense based
on the collectibility of our accounts receivable;
- fluctuations in foreign currency
exchange rates; and
- our levels of expenses.
We may in the future choose to change prices,
increase spending, or add or eliminate products in response to actions by
competitors or in an effort to pursue new market opportunities. These actions
may also adversely affect our business and operating results and may cause our
results in a given period to be lower than our results in previous
periods.
In addition, we often recognize a substantial
portion of our sales in the last month of the quarter. Thus, variations in
timing of sales, particularly for our higher-priced, higher-margin products, can
cause significant fluctuations in our quarterly sales, gross margin and
profitability. Orders expected to ship in one period could shift to another
period due to changes in the anticipated timing of customers’ purchase
decisions, rescheduled delivery dates requested by our customers, or
manufacturing or logistics delays. Our operating results for a particular
quarter or year may be adversely affected if our customers, particularly our
largest customers, cancel or reschedule orders, or if we cannot fill orders in
time due to unexpected delays in manufacturing, testing, shipping and product
acceptance. Also, we base our manufacturing on our forecasted product mix for
the quarter. If the actual product mix varies significantly from our forecast,
we may not be able to fill some orders during that quarter, which would result
in delays in the shipment of our products and could shift sales to a subsequent
period. In addition, our expenses for any given quarter are typically based on
expected sales, and if sales are below expectations in any given quarter, the
adverse impact of the shortfall on our operating results may be magnified by our
limited ability to adjust spending quickly to compensate for the shortfall.
Due to these and other factors, we believe
that quarter-to-quarter comparisons of results from operations, or any other
similar period-to-period comparisons, are not reliable indicators of our future
performance. In any period, our results may be below the expectations of market
analysts and investors, which would likely cause the trading price of our common
stock to drop.
Our operating results may be adversely
affected by unfavorable economic and market conditions.
The current uncertain macroeconomic climate,
which includes but is not limited to decreased consumer confidence, volatile
corporate operating results, reduced capital spending, lower research budgets,
and the effects of reduced availability of credit, has led and could continue to
lead to reduced demand and increased price competition for our products,
increased risk of excess and obsolete inventory and higher overhead costs as a
percentage of revenue. Continued or increased weakness in our end markets could
negatively impact our revenue, gross margin and operating expenses, and
consequently have a material adverse effect on our business, financial condition
and results of operations.
17
In particular, ongoing concerns regarding the
availability of credit may make it more difficult for our customers to raise
capital, whether debt or equity, to finance their purchases of capital
equipment. Delays in our customers’ ability to obtain such financing, or the
unavailability of such financing, could adversely affect sales of our products
and systems, particularly high-value lasers and systems, and therefore harm our
business and operating results.
Further, a continued decline in the condition
of the global financial markets could adversely impact the market values or
liquidity of our investments. Our investment portfolio includes U.S. government
and agency debt securities, corporate debt securities, asset-backed securities
and certificates of deposit. Although we believe our portfolio continues to be
comprised of sound investments due to the credit quality and government
guarantees of the underlying investments, a further decline in the capital and
financial markets would adversely impact the market values of our investments
and their liquidity. Such a decline in market value that is
other-than-temporary, or any sale of our investments under illiquid market
conditions, could result in our recognition of an impairment charge on such
investments or a loss on such sales, either of which could have an adverse
effect on our financial condition and operating results.
We are dependent in part on the semiconductor
capital equipment market, which is volatile and unpredictable.
A significant portion of our current and
expected future business comes from sales of components, subsystems and laser
products to manufacturers of semiconductor fabrication, inspection and metrology
equipment and sales of capital equipment to integrated semiconductor device
manufacturers. The semiconductor capital equipment market has historically been
characterized by sudden and severe cyclical variations in product supply and
demand. The timing, severity and duration of these market cycles are difficult
to predict, and we may not be able to respond effectively to these cycles. This
market experienced a severe down-cycle from the middle of 2007 to the middle of
2009, which had a significant negative impact on our operating results. While we
experienced sequential quarterly increases in orders from our customers in this
market in the third and fourth quarters of 2009, the timing and extent of a
recovery in this market remains uncertain, which severely limits our ability to
predict our business prospects or financial results in this market.
During industry downturns, our revenues from
this market may decline suddenly and significantly. Our ability to rapidly and
effectively reduce our cost structure in response to such downturns is limited
by the fixed nature of many of our expenses in the near term and by our need to
continue our investment in next-generation product technology and to support and
service our products. In addition, due to the relatively long manufacturing lead
times for some of the systems and subsystems we sell to this market, we may
incur expenditures or purchase raw materials or components for products we
cannot sell. Accordingly, downturns in the semiconductor capital equipment
market may materially harm our operating results. Conversely, when upturns in
this market occur, we may have difficulty rapidly and effectively increasing our
manufacturing capacity to meet sudden increases in customer demand. If we fail
to do so we may lose business to our competitors and our relationships with our
customers may be harmed.
A limited number of customers account for a
significant portion of our sales to the microelectronics market, and if we lose
any of these customers or they significantly curtail their purchases of our
products, our results of operations would be harmed.
Our sales to the microelectronics market
(which is comprised primarily of semiconductor capital equipment, disk drive
manufacturing and solar panel manufacturing customers) constituted 23.1%, 29.4%,
and 28.7% of our consolidated net sales for the years 2009, 2008 and 2007,
respectively. We rely on a limited number of customers for a significant portion
of our sales to this market. Our top five customers in this market comprised
approximately 45.6%, 47.2% and 56.3% of our sales to this market for the years
2009, 2008 and 2007, respectively, with one customer making up a substantial
portion of such percentage in each of such years. No single customer in this
market comprised 10% or more of our consolidated net sales in 2009, 2008 or
2007. If any of our principal customers discontinues its relationship with us,
replaces us as a vendor for certain products or suffers downturns in its
business, our business and results of operations could be harmed significantly.
In addition, because a relatively small number of companies dominate the
semiconductor equipment portion of this market, and because those companies
rarely change vendors in the middle of a product’s life cycle, it may be
particularly difficult for us to replace these customers if we lose their
business.
18
The microelectronics market is characterized
by rapid technological change, frequent product introductions, changing customer
requirements and evolving industry standards. Because our customers face
uncertainties with regard to the growth and requirements of these markets, their
products and components may not achieve, or continue to achieve, anticipated
levels of market acceptance. If our customers are unable to deliver products
that gain market acceptance, it is likely that these customers will not purchase
our products or will purchase smaller quantities of our products. We often
invest substantial resources in developing our products, systems and subsystems
in advance of significant sales of these products, systems and/or subsystems to
such customers. A failure on the part of our customers’ products to gain market
acceptance, or a failure of the microelectronics market to grow would have a
significant negative effect on our business and results of operations.
Difficulties in executing our acquisitions
could adversely impact our business.
We have and will continue to acquire
businesses, and the efficient and effective integration of our acquired
businesses into our organization is critical to our growth. The process of
integrating acquired companies into our operations requires significant
resources and is time consuming, expensive and disruptive to our business.
Further, we may not realize the benefits we anticipate from these acquisitions
because of the following significant challenges:
- potentially incompatible cultural
differences between the two companies;
- incorporating the acquired
company’s technology and products into our current and future product lines,
and successfully generating market demand for these expanded product
lines;
- potential additional geographic
dispersion of operations;
- the diversion of our management’s
attention from other business concerns;
- the difficulty in achieving
anticipated synergies and efficiencies;
- the difficulty in integrating
disparate operational and information systems;
- unanticipated liabilities
associated with the acquired company;
- the difficulty in leveraging the
acquired company’s and our combined technologies and capabilities across all
product lines and customer bases; and
- our ability to retain key
customers, suppliers and employees of an acquired company.
Our failure to achieve the anticipated
benefits of any past or future acquisition or to successfully integrate and/or
manage the operations of the companies we acquire could harm our business,
results of operations and cash flows. Additionally, we may incur significant
charges in future quarters to reflect additional costs associated with past
acquisitions, including asset impairment charges and other costs related to
divestiture of acquired assets or businesses. Such charges could also include
impairment of goodwill associated with past acquisitions. For example, our
market capitalization decreased significantly during the fourth quarter of 2008,
which caused us to reevaluate the fair values of our divisions. This ultimately
led us to determine that goodwill and certain intangible assets associated with
our Lasers Division were impaired, and we recorded an impairment charge of
$119.9 million to write off the total goodwill balance and certain other
intangible assets associated with that division. While we believe that our
assumptions used in evaluating the goodwill associated with our PPT Division are
reasonable, we may be required to recognize a goodwill impairment charge in the
future.
19
Many of the markets and industries that we
serve are subject to rapid technological change, and if we do not introduce new
and innovative products or improve our existing products, our business and
results of operations will be negatively affected.
Many of our markets are characterized by rapid technological advances,
evolving industry standards, shifting customer needs, new product introductions
and enhancements, and the periodic introduction of disruptive technology that
displaces current technology due to a combination of price, performance and
reliability. As a result, many of the products in our markets can become
outdated quickly and without warning. We depend, to a significant extent, upon
our ability to enhance our existing products, to anticipate and address the
demands of the marketplace for new and improved and disruptive
technologies, either through internal development or by acquisitions, and to be
price competitive. If we or our competitors introduce new or enhanced products,
it may cause our customers to defer or cancel orders for our existing products.
If we or our competitors introduce disruptive technology that displaces current
technology, existing product platforms or lines of business from which we
generate significant revenue may be rendered obsolete. In addition, because
certain of our markets experience severe cyclicality in capital spending, if we
fail to introduce new products in a timely manner we may miss market upturns, or
may fail to have our products or subsystems designed into our customers’
products. We may not be successful in acquiring, developing, manufacturing or
marketing new products and technologies on a timely or cost-effective basis. If
we fail to adequately introduce new, competitive products and technologies on a
timely basis, our business and results of operations would be harmed.
Uncertainty in the development of the solar
energy market could reduce the revenue we expect to generate from product sales
to this market.
The solar energy market is evolving and the
extent to which solar energy technology will be widely adopted is uncertain.
Many factors may affect the viability of widespread adoption of solar energy
technology and demand for solar panels, including the following:
- the cost-effectiveness of solar
energy compared with conventional and other non-solar renewable energy sources
and products, including conventional energy sources such as coal and natural
gas;
- the performance and reliability of
solar panels compared with conventional and other non-solar renewable energy
sources and products;
- the availability and amount of
government subsidies and incentives to support the development of the solar
energy industry;
- the success of other renewable
energy generation technologies, such as hydroelectric, tidal, wind,
geothermal, solar thermal, concentrated photovoltaic, biomass and nuclear
fusion;
- fluctuations in economic and
market conditions that affect the price of, and demand for, conventional and
non-solar renewable energy sources, such as increases or decreases in the
price of coal, oil, natural gas and other fossil fuels;
- fluctuations in capital
expenditures by end-users of solar panels, which tend to decrease when the
economy slows and/or interest rates increase; and
- deregulation of the electric power
industry and the broader energy industry to permit widespread adoption of
solar electricity.
If solar panel technology is not widely
adopted or if demand for solar panels fails to develop sufficiently, we may be
unable to generate the revenue we currently anticipate from sales of our
products for solar panel manufacturing applications.
20
We offer products for multiple industries and
must face the challenges of supporting the distinct needs of each of the markets
we serve.
We offer products for a number of markets.
Because we operate in multiple markets, we must work constantly to understand
the needs, standards and technical requirements of many different applications
within these industries, and must devote significant resources to developing
different products for these industries. Product development is costly and time
consuming. We must anticipate trends in our customers’ industries and develop
products before our customers’ products are commercialized. If we do not
accurately predict our customers’ needs and future activities, we may invest
substantial resources in developing products that do not achieve broad market
acceptance. Our decision to continue to offer products to a given market or to
penetrate new markets is based in part on our judgment of the size, growth rate
and other factors that contribute to the attractiveness of a particular market.
If our product offerings in any particular market are not competitive or our
analyses of a market are incorrect, our business and results of operations would
be harmed.
Because the sales cycle for some of our
products is long and difficult to predict, and certain of our orders are subject
to rescheduling or cancellation, we may experience fluctuations in our operating
results.
Many of our capital equipment, system and
subsystem products are complex, and customers for these products require
substantial time to make purchase decisions. These customers often perform, or
require us to perform, extensive configuration, testing and evaluation of our
products before committing to purchasing them. The sales cycle for our capital
equipment, system and subsystem products from initial contact through shipment
varies significantly, is difficult to predict and can last more than one year.
The orders comprising our backlog are generally subject to rescheduling without
penalty or cancellation without penalty other than reimbursement for certain
material costs. We have from time to time experienced order rescheduling and
cancellations that have caused our revenues in a given period to be materially
less than would have been expected based on our backlog at the beginning of the
period. If we experience such rescheduling and/or cancellations in the future,
our operating results will fluctuate from period to period. These fluctuations
could harm our results of operations.
If we are delayed in introducing our new
products into the marketplace, our operating results will
suffer.
Because many of our products are sophisticated
and complex, we may experience delays in introducing new products or
enhancements to our existing products. If we do not introduce our new products
or enhancements into the marketplace in a timely fashion, our customers may
choose to use competitors’ products. In addition, because certain of our
markets, such as the semiconductor equipment market, are highly cyclical in
nature, if we fail to timely introduce new products in advance of an upturn in
the market’s cycle, we may be foreclosed from selling products to certain
customers until the next cycle. As such, our inability to introduce new or
enhanced products in a timely manner could cause our business and results of
operations to suffer.
We face significant risks from doing business
in foreign countries.
Our business is subject to risks inherent in
conducting business internationally. For the years ended January 2, 2010,
January 3, 2009 and December 29, 2007, our international revenues accounted for
approximately 53.7%, 53.1% and 49.7%, respectively, of total net sales, with a
substantial portion of international sales originating in Europe and Japan. We
expect that international revenues will continue to account for a significant
percentage of total net sales for the foreseeable future, and that in
particular, the proportion of our sales to Asian customers will continue to
increase. Our international operations expose us to various risks, which
include:
- adverse changes or instability in
the political or economic conditions in countries or regions where we
manufacture or sell our products;
- challenges of administering our
business globally;
- the actions of U.S. and foreign
regulatory authorities, including embargoes, export restrictions, tariffs,
trade restrictions and trade barriers, license requirements, currency controls
and other rules and regulations applicable to the importing and exporting of
our products, as well as laws prohibiting certain payments or other business
practices in foreign countries, all of which are complicated and potentially
conflicting and may impose strict and severe penalties for
noncompliance;
21
- longer accounts receivable
collection periods;
- overlapping, differing or more
burdensome tax structures;
- adverse currency
fluctuations;
- differing protection of
intellectual property;
- more complex and burdensome labor
laws and practices in countries where we have employees;
- difficulties in staffing and
managing each of our individual foreign operations; and
- increased risk of exposure to terrorist activities.
In addition, fluctuations in foreign exchange
rates could affect the sales price in local currencies of our products in
foreign markets, potentially making our products less price competitive. Such
exchange rate fluctuations could also increase the costs and expenses of our
foreign operations when translated into U.S. dollars or require us to modify our
current business practices. If we experience any of the risks associated with
international business, our business and results of operations could be
significantly harmed.
We face substantial competition, and if we
fail to compete effectively, our operating results will suffer.
The markets for our products are intensely
competitive, and we believe that competition from both new and existing
competitors will increase in the future. We compete in several specialized
markets, against a limited number of companies in each market. We also face
competition in some of our markets from our existing and potential customers who
have developed or may develop products that are competitive to ours, or who
engage subcontract manufacturers or system integrators to manufacture products
or systems on their behalf. Some of our existing and potential competitors are
more established, enjoy greater name recognition and possess greater financial,
technological and marketing resources than we do. Other competitors are small
and highly specialized firms that are able to focus on only one aspect of a
market. We compete on the basis of product performance, features, quality,
reliability, the breadth of our product portfolio and price and on our ability
to manufacture and deliver our products on a timely basis. We may not be able to
compete successfully in the future against existing or new competitors. In
addition, competitive pressures may force us to reduce our prices, which would
negatively affect our operating results. If we do not respond adequately to
competitive challenges, our business and results of operations would be
harmed.
Our international sales and operations may be
adversely impacted by export controls.
Exports of our products and technology are
subject to export controls imposed by the U.S. Government and administered by
the U.S. Departments of Commerce and State. In certain instances, these
regulations may require obtaining licenses from the administering agency prior
to exporting products or technology to international locations or foreign
nationals. For products and technology subject to the Export Administration
Regulations administered by the Department of Commerce’s Bureau of Industry and
Security, the requirement for a license is dependent on the type and end use of
the product and technology, the final destination and the identity and
nationality of the end user. Virtually all exports of defense articles subject
to the International Traffic in Arms Regulations administered by the Department
of State’s Directorate of Defense Trade Controls require a license. Given the
current global political climate, obtaining export licenses can be difficult and
time-consuming, and we may not be successful in obtaining them. Failure to
obtain export licenses to enable product and technology exports could reduce our
revenue and could adversely affect our business, financial condition and results
of operations. Compliance with U.S. Government regulations may also subject us
to additional fees and costs. The absence of comparable export restrictions on
competitors in other countries may adversely affect our competitive position. In
addition, failure to comply with any of these export regulations could result in
civil and criminal, monetary and non-monetary penalties, disruptions to our
business, limitations on our ability to export products and technology and
damage to our reputation.
22
If we fail to protect our intellectual
property and proprietary technology, we may lose our competitive
advantage.
Our success and ability to compete depend in
large part upon protecting our proprietary technology. We rely on a combination
of patent, trademark and trade secret protection and nondisclosure agreements to
protect our proprietary rights. The steps we have taken may not be sufficient to
prevent the misappropriation of our intellectual property, particularly in
foreign countries where the laws may not protect our proprietary rights as fully
as in the United States. The patent and trademark law and trade secret
protection may not be adequate to deter third party infringement or
misappropriation of our patents, trademarks and similar proprietary rights. In
addition, patents issued to us may be challenged, invalidated or circumvented.
Our rights granted under those patents may not provide competitive advantages to
us, and the claims under our patent applications may not be allowed. We have in
the past and may in the future be subject to or may initiate interference
proceedings in the United States Patent and Trademark Office, which can demand
significant financial and management resources. The process of seeking patent
protection can be time consuming and expensive and patents may not be issued
from currently pending or future applications. Moreover, our existing patents or
any new patents that may be issued may not be sufficient in scope or strength to
provide meaningful protection or any commercial advantage to us. We have in the
past and may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights in order to determine the scope and
validity of our proprietary rights or the proprietary rights of our competitors,
which claims could result in costly litigation, the diversion of our technical
and management personnel and the assertion of counterclaims by the defendants,
including counterclaims asserting invalidity of our patents. We will take such
actions where we believe that they are of sufficient strategic or economic
importance to us to justify the cost.
We have experienced, and may in the future
experience, intellectual property infringement claims, which could be costly and
time consuming to defend.
We have from time to time received
communications from third parties alleging that we are infringing certain
trademarks, patents or other intellectual property rights held by them. Whenever
such claims arise, we evaluate their merits. Any claims of infringement brought
by third parties could result in protracted and costly litigation, and we could
become subject to damages for infringement, or to an injunction preventing us
from selling one or more of our products or using one or more of our trademarks.
Such claims could also result in the necessity of obtaining a license relating
to one or more of our products or current or future technologies, which may not
be available on commercially reasonable terms or at all. Any intellectual
property litigation and the failure to obtain necessary licenses or other rights
or develop substitute technology may divert management’s attention from other
matters and could have a material adverse effect on our business, financial
condition and results of operations. In addition, the terms of our customer
contracts typically require us to indemnify the customer in the event of any
claim of infringement brought by a third party based on our products. Any claims
of this kind may have a material adverse effect on our business, financial
condition or results of operations.
If we are unable to attract new employees and
retain and motivate existing employees, our business and results of operations
will suffer.
Our ability to maintain and grow our business
is directly related to the service of our employees in each area of our
business. Our future performance will be directly tied to our ability to hire,
train, motivate and retain qualified personnel. Competition for personnel in the
technology marketplace is intense. We have from time to time in the past
experienced attrition in certain key positions, and we expect to continue to
experience this attrition in the future. The absence during recent periods of
incentive plan bonuses and equity award vesting as a result of not meeting
certain financial performance targets could adversely affect our ability to
attract new employees and to retain and motivate our existing employees. If we
are unable to hire sufficient numbers of employees with the experience and
skills we need or to retain and motivate our existing employees, our business
and results of operations would be harmed.
23
Our reliance on sole source and limited source
suppliers and service providers could result in delays in production and
distribution of our products.
We obtain some of the materials and components
used to build our products, systems and subsystems, such as the sheet steel used
in some of our vibration isolation tables, and the crystals and semiconductor
laser diodes used in certain of our laser products, from single or limited
sources due to unique component designs as well as specialized quality and
performance requirements needed to manufacture our products. If our components
or raw materials are unavailable in adequate amounts at acceptable quality
levels or are unavailable on satisfactory terms, we may be required to purchase
them from alternative sources, if available, which could increase our costs and
cause delays in the production and distribution of our products. If we do not
obtain comparable replacement components from other sources in a timely manner,
our business and results of operations will be harmed. Many of our suppliers
require long lead times to deliver the quantities of components that we need. If
we fail to accurately forecast our needs, or if we fail to obtain sufficient
quantities of components that we use to manufacture our products, then delays or
reductions in production and shipment of our products could occur, which would
harm our business and results of operations.
In addition, we obtain some of the critical
capital equipment we use to manufacture certain of our products from sole or
limited sources due to the unique nature of the equipment. In some cases, such
equipment can only be serviced by the manufacturer or a very limited number of
service providers due to the complex and specialized nature of the equipment. If
service and/or spare parts for such equipment become unavailable, such equipment
could be rendered inoperable, which could cause delays in the production of our
products, and could require us to procure alternate equipment, if available,
which would likely involve long lead times and significant additional cost.
Our failure to successfully manage the
transition of certain of our manufacturing operations to international locations
and to contract manufacturers could harm our business.
As part of our cost-reduction efforts, we
continue to transition the manufacture of certain of our product lines and
subassemblies from higher-cost manufacturing locations to our facility in Wuxi,
China, and to selected contract manufacturers in Asia. We have historically
directly manufactured most of our products at the same physical location
throughout the products’ lives, or sold products manufactured by third parties
on a private label basis. We have only recent experience transitioning the
manufacture of our products to different global locations or to third party
manufacturers. If we are unable to successfully manage the transition of the
manufacture of these products, our results of operations could be
harmed.
In particular, transferring product lines to
our facility in Wuxi, China and our contract manufacturers’ facilities in Asia
requires us to transplant complex manufacturing equipment and processes across a
large geographical distance and to train a completely new workforce concerning
the use of this equipment and these processes. If we are unable to manage this
transfer and training smoothly and comprehensively, we could suffer
manufacturing and supply chain delays, excessive product defects, harm to our
results of operations and our reputation with our customers, and loss of
customers. We also may not realize the cost and tax advantages that we currently
anticipate from locating operations in China, due to rising material, labor and
shipping costs and rapidly changing Chinese regulations.
Additionally, qualifying contract
manufacturers and commencing volume production are expensive and time-consuming
activities, and there is no guarantee we will do so successfully. Further, our
reliance on contract manufacturers reduces our control over the assembly
process, quality assurance, production costs and material and component supply
for our products. If we fail to manage our relationship with the contract
manufacturers, or if any of the contract manufacturers experience financial
difficulty, or delays, disruptions, capacity constraints or quality control
problems in their operations, our ability to ship products to our customers
could be impaired and our competitive position and reputation could be harmed.
Further, if we or our contract manufacturers are unable to negotiate with
suppliers for reduced component costs, our operating results could be
harmed.
In addition, our contract manufacturers may
terminate our agreements with them upon prior notice to us or for reasons such
as if we become insolvent, or if we fail to perform a material obligation under
the agreement. If we are required to change contract manufacturers or assume
internal manufacturing operations for any reason, including the termination of
one of our contracts, we will likely suffer manufacturing and shipping delays,
lost revenue, increased costs and damage to our customer relationships, any of
which could harm our business.
24
Our products could contain defects, which
would increase our costs and harm our business.
Many of our products, especially our laser and
automation products, are inherently complex in design and require ongoing
regular maintenance. Further, the manufacture of these products often involves a
highly complex and precise process. As a result of the technical complexity of
these products, design defects, changes in our or our suppliers’ manufacturing
processes or the inadvertent use of defective materials by us or our suppliers
could adversely affect our manufacturing yields and product reliability. This
could in turn harm our business, operating results, financial condition and
customer relationships.
We provide warranties for our products, and we
accrue allowances for estimated warranty costs at the time we recognize revenue
for the sale of the products. The determination of such allowances requires us
to make estimates of product return rates and expected costs to repair or
replace the products under warranty. We establish warranty reserves based on
historical warranty costs for our products. If actual return rates or repair and
replacement costs differ significantly from our estimates, our results of
operations could be negatively impacted.
Our customers may discover defects in our
products after the products have been fully deployed and operated under peak
stress conditions. In addition, some of our products are combined with products
from other suppliers, which may contain defects. As a result, should problems
occur, it may be difficult to identify the source of the problem. If we are
unable to identify and fix defects or other problems, we could experience, among
other things:
- loss of
customers;
- increased costs of product returns
and warranty expenses;
- increased costs required to
analyze and mitigate the defects or problems;
- damage to our brand
reputation;
- failure to attract new customers
or achieve market acceptance;
- diversion of development and
engineering resources; or
- legal action by our
customers.
The occurrence of any one or more of the
foregoing factors could seriously harm our business, financial condition and
results of operations.
Our products are subject to potential product
liability claims which, if successful, could adversely affect our results of
operations.
Many of our products may be hazardous if not
operated properly or if defective. We are exposed to significant risks for
product liability claims if property damage, personal injury or death results
from the use of our products. We may experience material product liability
losses in the future. We currently maintain insurance against product liability
claims. However, our insurance coverage may not continue to be available on
terms that we accept, if at all. This insurance coverage also may not adequately
cover liabilities that we incur. Further, if our products are defective, we may
be required to recall or redesign these products. A successful claim against us
that exceeds our insurance coverage level, or any claim or product recall, could
have a material adverse effect on our business, financial condition and results
of operations.
25
Our convertible debt imposes significant
financial obligations upon us, and certain provisions of our convertible notes
could discourage a change in control.
In February 2007, we issued $175 million of
convertible subordinated notes, of which $126.8 million was outstanding as of
January 2, 2010. The notes are subordinated to all of our existing and future
senior indebtedness. The notes mature on February 15, 2012 and bear interest at
a rate of 2.5% per year, payable in cash semiannually in arrears on February 15
and August 15 of each year. These notes are included in long-term debt in our
consolidated balance sheet. Holders of the notes may convert their notes under
certain specified circumstances which may occur prior to maturity, and upon
conversion, a holder will receive cash in lieu of shares of our common stock for
the value of the notes, as determined in the manner set forth in the indenture
governing the notes. We may also be required to deliver additional cash or
common stock or a combination of cash and common stock upon
conversion.
Our ability to meet our semiannual interest
payment obligations under the notes and our cash payment obligations upon
maturity or conversion of the notes will depend upon our future cash balances.
The amount of cash available for repayment of the notes will depend on our usage
of our existing cash balances and our operating performance and ability to
generate cash flow from operations in future periods, which will be subject to
financial, business and other factors affecting our operations, many of which
are beyond our control.
In addition, the notes may become immediately due and payable upon an
“event of default,” which generally consists of (i) a default in the payment of
any principal amount or fundamental change purchase price due with
respect to the notes, when the same becomes due and payable, regardless
of whether such payment is permitted pursuant to the subordination provisions of
the indenture pursuant to which the notes were issued; (ii) a default in payment
of any interest (including additional interest) under the notes, which default
continues for 30 days, regardless of whether such payment is permitted pursuant
to the subordination provisions of the indenture; (iii) a default in the
delivery when due of all cash and any shares of common stock payable upon
conversion with respect to the notes, which default continues for 15 days,
regardless of whether such delivery is permitted pursuant to the subordination
provisions of the indenture; (iv) our failure to comply with any of its other
agreements in the notes or the indenture upon our receipt of notice of such
default from the trustee or from holders of not less than 25% in aggregate
principal amount of the notes, and the failure to cure (or obtain a waiver of)
such default within 60 days after receipt of such notice; (v) a default in the
payment of principal by the end of any applicable grace period or resulting in
acceleration of other of our indebtedness for borrowed money where the aggregate
principal amount with respect to which the default or acceleration has occurred
exceeds $10 million and such acceleration has not been rescinded or annulled or
such indebtedness repaid within a period of 30 days after written notice to us
by the trustee or us and the trustee by the holders of at least 25% in aggregate
principal amount of the notes, provided that if any such default is cured,
waived, rescinded or annulled, then the event of default by reason thereof would
not be deemed to have occurred; and/or (vi) certain events of bankruptcy,
insolvency or reorganization affecting us or any of our significant
subsidiaries.
Upon maturity, or prior to maturity if the
notes become immediately due and payable upon an event of default, we would need
to obtain additional financing or significantly deplete our available cash, or
both, in order to repay the notes. Any additional financing may not be available
on reasonable terms or at all, and significant depletion of our available cash
could harm our ability to fund operations.
In addition, certain provisions of our
convertible notes could make it more difficult or more expensive for a third
party to acquire us. Upon the occurrence of certain transactions constituting a
fundamental change, which include a change in control, holders of the notes will
have the right, at their option, to require us to repurchase all of their notes
or any portion of the principal amount of such notes. The magnitude of the
amount of any repurchase could discourage a third party from acquiring us.
26
While we believe we currently have adequate
internal control over financial reporting, we are required to evaluate our
internal control over financial reporting each year, and any adverse results
from such evaluation could result in a loss of investor confidence in our
financial reports and have an adverse effect on our stock
price.
Pursuant to rules and regulations promulgated
by the Securities and Exchange Commission under Section 404 of the
Sarbanes-Oxley Act of 2002, we are required to furnish a report by our
management each year on our internal control over financial reporting. This
report contains, among other matters, an assessment of the effectiveness of our
internal control over financial reporting as of the end of our fiscal year,
including a statement as to whether or not our internal control over financial
reporting is effective. This assessment must include disclosure of any material
weaknesses in our internal control over financial reporting identified by
management. This report must also contain a statement that our auditors have
issued an attestation report on such internal controls.
The Committee of Sponsoring Organizations of
the Treadway Commission (COSO) provides a framework for companies to assess and
improve their internal control systems. Management’s assessment of internal
controls over financial reporting requires management to make subjective
judgments, some of which will be in areas that may be open to interpretation. As
such, the report may be uniquely difficult to prepare, and our auditors may not
agree with our assessments.
If we are unable to assert each year that our
internal control over financial reporting is effective (or if our auditors are
unable to attest that our internal control over financial reporting is
effective), we could lose investor confidence in the accuracy and completeness
of our financial reports, which would have an adverse effect on our stock price.
In addition, if any unidentified material weaknesses were to result in
fraudulent activity and/or a material misstatement or omission in our financial
statements, we could suffer losses and be subject to civil and criminal
penalties, all of which could have a material adverse effect on our business,
financial condition and results of operations.
Difficulties with our global information
technology system could harm our business.
Any failure or malfunctioning of our global
information technology system, errors or misuse by system users, or inadequacy
of the system in addressing the needs of our operations, could disrupt our
ability to timely and accurately manufacture and ship products, which could have
a material adverse effect on our business, financial condition and results of
operations. Any such failure, errors, misuse or inadequacy could also disrupt
our ability to timely and accurately process, report and evaluate key operations
metrics and key components of our results of operations, financial position and
cash flows. Any such disruptions would likely divert our management and key
employees’ attention away from other business matters. Any disruptions or
difficulties that may occur in connection with our global information technology
system could also adversely affect our ability to complete important business
processes such as the evaluation of our internal control over financial
reporting and attestation activities pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002.
Compliance with environmental regulations and
potential environmental liabilities could adversely affect our financial
results.
Our operations are subject to various federal,
state and local regulations relating to the protection of the environment,
including those governing discharges of pollutants into the air and water, the
management and disposal of hazardous substances and wastes and the cleanup of
contaminated sites. In the United States, we are subject to the federal
regulation and control of the Environmental Protection Agency (EPA). Comparable
authorities are involved in other countries. Some of our operations require
environmental permits and controls to prevent and reduce air and water
pollution, and these permits are subject to modification, renewal and revocation
by issuing authorities. Future developments, administrative actions or
liabilities relating to environmental matters could have a material adverse
effect on our business, results of operations or financial
condition.
Although we believe that our safety procedures
for using, handling, storing and disposing of such materials comply with the
standards required by state and federal laws and regulations, we cannot
completely eliminate the risk of accidental contamination or injury from these
materials. In the event of such an accident involving such materials, we could
be liable for damages and such liability could exceed the amount of our
liability insurance coverage (if any) and the resources of our business.
27
Our former facility located in Mountain View,
California is an EPA-designated Superfund site and is subject to a cleanup and
abatement order from the California Regional Water Quality Control Board.
Spectra-Physics, along with several other entities with facilities located near
the Mountain View, California facility, have been identified as Responsible
Parties with respect to this Superfund site, due to releases of hazardous
substances during the 1960s and 1970s. The site is mature, and investigations
and remediation efforts have been ongoing for approximately 25 years.
Spectra-Physics and the other Responsible Parties have entered into a
cost-sharing agreement covering the costs of remediating the off-site
groundwater impact. In addition to our remediation obligations, we may be liable
for property damage or personal injury claims relating to this site. While we
are not aware of any claims at this time, such claims could be made against us
in the future. Thermo Fisher Scientific, Inc., formerly known as Thermo Electron
Corporation (Thermo), has agreed, in connection with our purchase of
Spectra-Physics, to indemnify us, subject to certain conditions, for costs of
remediation that are incurred and third party claims that are made prior to July
16, 2014, which arise from the releases of hazardous substances at or from the
Mountain View facility and are subject to remediation under the cost-sharing
agreement. However, our ultimate costs of remediation and other potential
liability are difficult to predict, and this indemnity may not cover all
liabilities relating to this site. If significant costs or other liability
relating to this site arise in the future and are not covered by this indemnity,
our business, financial condition and results of operations could be adversely
affected.
The environmental regulations to which we are
subject, include a variety of federal, state, local and international
environmental regulations restricting the use and disposal of materials used in
the manufacture of our products, or requiring design changes or recycling of our
products. If we fail to comply with any present or future regulations, we could
be subject to future liabilities, the suspension of manufacturing or a
prohibition on the sale of products we manufacture. In addition, such
regulations could restrict our ability to equip our facilities or could require
us to acquire costly equipment, or to incur other significant expenses to comply
with environmental regulations, including expenses associated with the recall of
any non-compliant product and the management of historical
waste.
From time to time new regulations are enacted,
and it is difficult to anticipate how such regulations will be implemented and
enforced. We continue to evaluate the necessary steps for compliance with
regulations as they are enacted. For example, the European Union has enacted the
Restriction on the Use of Certain Hazardous Substances in Electrical and
Electronic Equipment Directive (RoHS) and the Waste Electrical and Electronic
Equipment Directive (WEEE) for implementation in each European Union member
country. RoHS regulates the use of certain hazardous substances in certain
products, and WEEE requires the collection, reuse and recycling of waste from
certain products. The European Union member states continue to define the scope
of the implementation of RoHS and WEEE. Based on information we have received to
date, certain of our products sold in these countries are or will likely be
subject to RoHS and WEEE requirements. We will continue to monitor RoHS and WEEE
guidance as it is announced by individual jurisdictions to determine our
responsibilities. The guidance available to us to date suggests that in some
instances we are not directly responsible for compliance with RoHS and WEEE
because some of our products may be outside the scope of the directives.
However, because the scope of the directives continues to expand in the course
of implementation by the European Union member states, and because such products
are sold under our brand name, we will likely be directly or contractually
subject to such regulations in the case of many of our products. Also, final
legislation from individual jurisdictions that have not yet implemented the
directives may impose different or additional responsibilities upon us. We are
also aware of similar legislation that is currently in force or being considered
in the United States, as well as other countries, such as Japan and China. Our
failure to comply with any of such regulatory requirements or contractual
obligations could result in our being directly or indirectly liable for costs,
fines or penalties and third-party claims, and could jeopardize our ability to
conduct business in countries in these regions.
28
Natural disasters or power outages could
disrupt or shut down our operations or those of our contract manufacturers,
which would negatively impact our operations.
We are headquartered, and have significant
operations, in the State of California and other areas where our operations are
susceptible to damages from earthquakes, floods, fire, loss of power or water
supplies, or other similar contingencies. Our contract manufacturers’ operations
are also subject to these occurrences. We currently have comprehensive business
continuation plans for our global information technology systems and for most of
our operations and facilities, as well as disaster recovery procedures for our
remaining operations and facilities. Despite these contingency plans and
procedures, if any of our facilities or those of our contract manufacturers were
to experience a catastrophic loss or significant power outages, it could disrupt
our operations, delay production, shipments and revenue, and result in large
expenses to repair or replace the facility, any of which would harm our
business. We are predominantly uninsured for losses and interruptions caused by
earthquakes.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our corporate headquarters is located at 1791
Deere Avenue, Irvine, California 92606. We lease this facility under a lease
expiring in February 2012. Our primary manufacturing operations for each of our
divisions are located in the following facilities:
Division |
Primary Facility
Locations |
Approximate Facility
Size |
Lasers |
Santa Clara, California Stahnsdorf, Germany |
|
139,000 square
feet 12,000 square feet |
|
Photonics and Precision Technologies |
Irvine, California Rochester, New York Franklin,
Massachusetts North Billerica, Massachusetts Stratford,
Connecticut Beaune-la Rolande, France Brigueuil, France Wuxi,
China Margate, United Kingdom |
|
272,000 square
feet 58,000 square feet 56,000 square feet 41,000 square
feet 32,000 square feet 86,000 square feet 44,000 square
feet 29,000 square feet 16,500 square feet |
|
We own portions of our Rochester, New York and
Beaune-la Rolande, France facilities, and we own our Brigueuil, France and
Margate, United Kingdom facilities. We lease all other facilities under leases
with expiration dates ranging from 2010 to 2021. In addition to these primary
facilities, we lease a number of other facilities worldwide for administration,
sales and/or service. We believe that our facilities are adequate for our
current needs and that, if required, we will be able to extend or renew our
leases, or locate suitable substitute space, on commercially reasonable terms as
our leases expire. We also believe that suitable additional space will be
available on commercially reasonable terms in the future to accommodate
expansion of our operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in
litigation relating to claims arising out of our operations in the normal course
of business. We currently are not a party to any legal proceedings, the adverse
outcome of which, in management’s opinion, individually or in the aggregate,
would have a material adverse effect on our results of operations, financial
position or cash flows.
ITEM 4. RESERVED
29
PART II
ITEM 5. |
|
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Price Range of Common Stock
Our common stock is traded on the NASDAQ
Global Select Market under the symbol NEWP. As of February 28, 2010, we had 884
common stockholders of record based upon the records of our transfer agent,
which do not include beneficial owners of common stock whose shares are held in
the names of various securities brokers, dealers and registered clearing
agencies. The following table reflects the high and low sales prices of our
common stock for each quarterly period during the last two fiscal years:
Quarter Ended |
|
High |
|
Low |
January 2, 2010 |
|
$ |
9.66 |
|
$ |
7.08 |
October 3, 2009 |
|
|
9.46 |
|
|
5.19 |
July 4, 2009 |
|
|
6.88 |
|
|
4.56 |
April 4, 2009 |
|
|
6.60 |
|
|
2.93 |
January 3, 2009 |
|
|
11.00 |
|
|
4.81 |
September 27, 2008 |
|
|
13.08 |
|
|
9.24 |
June 28, 2008 |
|
|
13.94 |
|
|
10.47 |
March 29, 2008 |
|
|
13.94 |
|
|
9.34 |
Dividends
We declared no dividends on our common stock
during 2009 or 2008. We do not intend to pay cash dividends in the foreseeable
future, however, we will periodically review this issue in the future based on
changes in our financial position and investment opportunities, as well as any
changes in the tax treatment of dividends.
Purchases of Equity Securities
We made no purchases of our equity
securities during the fourth quarter of the year ended January 2,
2010.
30
Information Regarding Equity Compensation
Plans
The following table sets forth information
with respect to securities authorized for issuance under our equity compensation
plans as of January 2, 2010:
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
Number of Securities |
|
|
|
|
|
|
Remaining Available |
|
|
to be Issued upon |
|
Weighted-Average |
|
for Future Issuance |
|
|
Exercise of |
|
Exercise Price of |
|
under Equity |
|
|
Outstanding |
|
Outstanding |
|
Compensation Plans |
|
|
Options, Warrants |
|
Options, Warrants |
|
(excluding
securities |
|
|
and Rights |
|
and Rights |
|
reflected in column
(a)) |
Plan Category |
|
(a) |
|
(b) |
|
(c) |
Equity Compensation Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
Approved by Security Holders(1) |
|
|
5,499,516 |
|
|
|
$ |
13.92 |
|
|
|
2,273,756 |
|
Equity Compensation Plans Not |
|
|
|
|
|
|
|
|
|
|
|
|
|
Approved by Security
Holders(2) |
|
|
209,715 |
|
|
|
$ |
52.45 |
|
|
|
-- |
|
Total |
|
|
5,709,231 |
|
|
|
|
|
|
|
|
2,273,756 |
|
|
____________________
(1) |
|
The number of
shares reflected in column (a) for equity compensation plans approved by
security holders includes (i) outstanding options to purchase an aggregate
of 2,223,216 shares of our common stock, which were issued under our 1992
Stock Incentive Plan and our 2001 Stock Incentive Plan, (ii) outstanding
stock-settled stock appreciation rights with respect to an aggregate of
925,155 shares of our common stock, which were issued under our 2006
Performance-Based Stock Incentive Plan, and (iii) outstanding restricted
stock units representing the right to receive upon vesting an aggregate of
2,351,145 shares of our common stock, which were issued under our 2006
Performance-Based Stock Incentive Plan. The weighted-average exercise
price reflected in column (b) for equity compensation plans approved by
security holders represents the combined weighted-average exercise price
(or base value) of all outstanding options (having a weighted-average
exercise price of $17.98 per share) and all outstanding stock-settled
stock appreciation rights (having a weighted-average base value of $4.18
per share). All outstanding restricted stock units were awarded without
payment of any purchase price.
|
|
(2) |
|
The number of
shares reflected in column (a) for equity compensation plans not approved
by security holders consists of outstanding options to purchase shares of
our common stock issued under our 1999 Stock Incentive Plan (1999 Plan)
having a weighted-average exercise price of $52.45, and excludes one
remaining outstanding option to purchase 1,988 shares of our common stock
having an exercise price of $3.93, which was granted upon the assumption
and conversion of former options to purchase shares of common stock of
MRSI in connection with our acquisition of MRSI in February 2002. The
options granted in connection with our acquisition of MRSI were granted
outside of a plan pursuant to individual nonqualified stock option
agreements, and, therefore, no additional securities are available for
future grants.
|
Equity Compensation Plans Not Approved by Security Holders
In November 1999, our Board adopted our 1999
Plan, pursuant to which nonqualified options to purchase shares of our common
stock were granted to employees (excluding officers and members of our Board)
from November 1999 until May 2001. In May 2001, upon the approval by our
stockholders of our 2001 Stock Incentive Plan, the 1999 Plan was terminated for
the purposes of future grants. As of January 2, 2010, options to purchase a
total of 209,715 shares of our common stock were outstanding under the 1999
Plan. All options granted under the 1999 Plan were granted at an exercise price
equal to the fair market value of the common stock on the grant date, and
generally vested in 25% increments on each of the first four anniversaries of
the grant date. No option is exercisable more than ten years following the grant
date. The right to exercise an option will terminate earlier in the event of
termination of the continuous service (as defined in the option agreement) of
the employee.
31
Stock Performance Graph
The following graph compares the cumulative
total stockholder return on $100 invested in our common stock for the five years
ended January 2, 2010, with the cumulative total return on $100 invested in each
of (i) the Nasdaq Market Index and (ii) our peer group. The graph assumes all
investments were made at market value on January 2, 2005 and the reinvestment of
all dividends.
The peer group reflected in the graph
represents a combination of all companies comprising the Hemscott Semiconductor
Equipment & Materials Industry Group (834) Index and the Hemscott Scientific
& Technical Instruments Industry Group (837) Index, published by
Morningstar, Inc., with these indices weighted one-third (1/3) and two-thirds
(2/3), respectively. A listing of the companies comprising each index is
available from us by written request to our Corporate Secretary.
COMPARES 5-YEAR CUMULATIVE RETURN
AMONG
NEWPORT CORPORATION, NASDAQ MARKET INDEX AND
PEER GROUP
The material in this performance graph is not
“soliciting material” and is not deemed filed with the SEC and is not to be
incorporated by reference in any filing of Newport under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, whether
made before or after the date hereof and irrespective of any general
incorporation language in any such filing.
32
ITEM 6. SELECTED FINANCIAL DATA
The table below presents selected consolidated
financial data of Newport and our subsidiaries as of and for the years ended
January 2, 2010, January 3, 2009, December 29, 2007, December 30, 2006 and
December 31, 2005. The consolidated balance sheet data as of January 2, 2010 and
January 3, 2009, and the consolidated statement of operations data for the years
ended January 2, 2010, January 3, 2009 and December 29, 2007 have been derived
from our audited consolidated financial statements included in this Annual
Report on Form 10-K. The consolidated balance sheet data as of December 29,
2007, December 30, 2006 and December 31, 2005 and the consolidated statement of
operations data for the years ended December 30, 2006 and December 31, 2005 have
been derived from our audited consolidated financial statements that are not
included in this Annual Report on Form 10-K.
The selected consolidated financial data set
forth below should be read in conjunction with our consolidated financial
statements and related notes thereto and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” included elsewhere in this
Annual Report on Form 10-K.
|
|
For the Year Ended (1) |
(In thousands,
except percentages) |
|
January 2, 2010 |
|
January 3, 2009 |
|
December 29, 2007 |
|
December 30, 2006 |
|
December 31, 2005 |
|
|
(2) |
|
(3) |
|
(3) |
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF
OPERATIONS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
366,989 |
|
|
$ |
445,336 |
|
|
$ |
445,197 |
|
|
$ |
454,724 |
|
|
$ |
403,733 |
|
Cost of sales |
|
|
224,387 |
|
|
|
274,542 |
|
|
|
259,636 |
|
|
|
256,756 |
|
|
|
234,480 |
|
Gross profit |
|
|
142,602 |
|
|
|
170,794 |
|
|
|
185,561 |
|
|
|
197,968 |
|
|
|
169,253 |
|
|
Selling, general and administrative
expenses |
|
|
112,177 |
|
|
|
118,518 |
|
|
|
116,476 |
|
|
|
114,533 |
|
|
|
102,002 |
|
Research and development expense |
|
|
36,948 |
|
|
|
46,068 |
|
|
|
42,570 |
|
|
|
41,981 |
|
|
|
35,949 |
|
Loss (gain) on sale of assets and
related costs (4) |
|
|
4,355 |
|
|
|
(2,504 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Impairment charges (5) |
|
|
360 |
|
|
|
119,944 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Operating income (loss) |
|
|
(11,238 |
) |
|
|
(111,232 |
) |
|
|
26,515 |
|
|
|
41,454 |
|
|
|
31,302 |
|
|
Recovery (write-down) of note receivable
and other amounts related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
previously discontinued operations, net (6) |
|
|
101 |
|
|
|
(7,040 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Write-down of minority interest investment (7) |
|
|
- |
|
|
|
(2,890 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Gain on extinguishment of debt
(8) |
|
|
328 |
|
|
|
7,734 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Interest and other expense, net |
|
|
(8,564 |
) |
|
|
(6,751 |
) |
|
|
(4,053 |
) |
|
|
(759 |
) |
|
|
(1,842 |
) |
Income (loss) from continuing operations
before income taxes |
|
|
(19,373 |
) |
|
|
(120,179 |
) |
|
|
22,462 |
|
|
|
40,695 |
|
|
|
29,460 |
|
Income tax provision (benefit) (9) |
|
|
(1,967 |
) |
|
|
28,545 |
|
|
|
(17,229 |
) |
|
|
2,193 |
|
|
|
3,746 |
|
Income (loss) from continuing operations
before discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations and extraordinary gain |
|
|
(17,406 |
) |
|
|
(148,724 |
) |
|
|
39,691 |
|
|
|
38,502 |
|
|
|
25,714 |
|
Loss from discontinued operations, net of income tax benefits
(10) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,075 |
) |
|
|
(16,973 |
) |
Extraordinary gain on settlement of
litigation (11) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,891 |
|
Net income (loss) |
|
$ |
(17,406 |
) |
|
$ |
(148,724 |
) |
|
$ |
39,691 |
|
|
$ |
37,427 |
|
|
$ |
11,632 |
|
|
Percentage of net
sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
38.9 |
% |
|
|
38.4 |
% |
|
|
41.7 |
% |
|
|
43.5 |
% |
|
|
41.9 |
% |
Selling, general and administrative
expenses |
|
|
30.6 |
% |
|
|
26.6 |
% |
|
|
26.2 |
% |
|
|
25.2 |
% |
|
|
25.3 |
% |
Research and development expense |
|
|
10.1 |
% |
|
|
10.4 |
% |
|
|
9.6 |
% |
|
|
9.2 |
% |
|
|
8.9 |
% |
Operating income (loss) |
|
|
(3.1 |
)% |
|
|
(24.9 |
)% |
|
|
5.9 |
% |
|
|
9.1 |
% |
|
|
7.8 |
% |
Income (loss) from continuing operations before
discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations and extraordinary
gain |
|
|
(4.7 |
)% |
|
|
(33.4 |
)% |
|
|
8.9 |
% |
|
|
8.5 |
% |
|
|
6.4 |
% |
Net income (loss) |
|
|
(4.7 |
)% |
|
|
(33.4 |
)% |
|
|
8.9 |
% |
|
|
8.2 |
% |
|
|
2.9 |
% |
33
|
|
As of or for the Year
Ended |
(In thousands, except per share and
worldwide employment figures) |
|
January 2, 2010 |
|
January 3, 2009 |
|
December 29, 2007 |
|
December 30, 2006 |
|
December 31, 2005 |
PER SHARE INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
before discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations and extraordinary gain |
|
$ |
(0.48 |
) |
|
$ |
(4.11 |
) |
|
$ |
1.03 |
|
$ |
0.95 |
|
|
$ |
0.62 |
|
Loss from discontinued operations, net of income tax
benefits |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
(0.03 |
) |
|
|
(0.41 |
) |
Extraordinary gain on settlement of
litigation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
0.07 |
|
Net income (loss) |
|
$ |
(0.48 |
) |
|
$ |
(4.11 |
) |
|
$ |
1.03 |
|
$ |
0.92 |
|
|
$ |
0.28 |
|
|
Diluted net income (loss) per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before
discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations and extraordinary
gain |
|
$ |
(0.48 |
) |
|
$ |
(4.11 |
) |
|
$ |
1.02 |
|
$ |
0.91 |
|
|
$ |
0.60 |
|
Loss from discontinued operations, net
of income tax benefits |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
(0.02 |
) |
|
|
(0.40 |
) |
Extraordinary gain on settlement of litigation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
0.07 |
|
Net income (loss) |
|
$ |
(0.48 |
) |
|
$ |
(4.11 |
) |
|
$ |
1.02 |
|
$ |
0.89 |
|
|
$ |
0.27 |
|
|
Shares used in computation of income
(loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
36,175 |
|
|
|
36,155 |
|
|
|
38,479 |
|
|
40,698 |
|
|
|
41,281 |
|
Diluted |
|
|
36,175 |
|
|
|
36,155 |
|
|
|
39,058 |
|
|
42,167 |
|
|
|
42,716 |
|
|
Total stockholders’ equity per diluted
share |
|
$ |
7.04 |
|
|
$ |
7.34 |
|
|
$ |
10.93 |
|
$ |
10.32 |
|
|
$ |
8.82 |
|
|
BALANCE SHEET
INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and marketable securities |
|
$ |
141,923 |
|
|
$ |
148,420 |
|
|
$ |
143,864 |
|
$ |
85,413 |
|
|
$ |
71,022 |
|
Working capital |
|
$ |
236,510 |
|
|
$ |
263,507 |
|
|
$ |
284,676 |
|
$ |
200,808 |
|
|
$ |
150,318 |
|
Total assets |
|
$ |
493,407 |
|
|
$ |
524,903 |
|
|
$ |
698,323 |
|
$ |
593,015 |
|
|
$ |
529,406 |
|
Short-term obligations |
|
$ |
11,056 |
|
|
$ |
14,089 |
|
|
$ |
12,402 |
|
$ |
9,481 |
|
|
$ |
12,559 |
|
Long-term obligations (includes obligations under capital
leases) |
|
$ |
122,636 |
|
|
$ |
136,807 |
|
|
$ |
153,489 |
|
$ |
52,125 |
|
|
$ |
51,372 |
|
Stockholders’ equity |
|
$ |
254,636 |
|
|
$ |
265,197 |
|
|
$ |
426,838 |
|
$ |
434,953 |
|
|
$ |
376,583 |
|
|
MISCELLANEOUS
STATISTICS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at year end |
|
|
36,316 |
|
|
|
36,049 |
|
|
|
36,918 |
|
|
41,458 |
|
|
|
40,036 |
|
Average worldwide employment |
|
|
1,683 |
|
|
|
1,900 |
|
|
|
1,943 |
|
|
1,940 |
|
|
|
1,978 |
|
Sales per employee |
|
$ |
218 |
|
|
$ |
234 |
|
|
$ |
229 |
|
$ |
234 |
|
|
$ |
204 |
|
____________________
(1) |
|
We use
a conventional 52/53-week accounting fiscal year. Our fiscal year ends on
the Saturday closest to December 31, and our fiscal quarters end on the
Saturday closest to the end of each corresponding calendar quarter. Fiscal
year 2009 (referred to herein as 2009) ended on January 2, 2010, fiscal
year 2008 (referred to herein as 2008) ended on January 3, 2009, fiscal
year 2007 (referred to herein as 2007) ended on December 29, 2007, fiscal
year 2006 (referred to herein as 2006) ended on December 30, 2006, and
fiscal year 2005 (referred to herein as 2005) ended on December 31, 2005.
Fiscal year 2008 consisted of 53 weeks and fiscal years 2009, 2007, 2006
and 2005 each consisted of 52 weeks. |
|
(2) |
|
In
July 2009, we entered into an asset exchange transaction in which we
acquired substantially all of the assets of the New Focus business. Our
results of operations for 2009 included the results of operations of the
New Focus business from July 4, 2009, the closing date of the
acquisition. |
|
(3) |
|
During
the first quarter of 2009, we adopted Accounting Standards Codification
(ASC) 470-20, Debt – Debt with Conversion and Other
Options (formerly
FSP APB 14-1), which requires the liability and equity components of
convertible debt instruments to be separately accounted for in a manner
that reflects the non-convertible debt borrowing rate for interest expense
recognition. These provisions have been applied retrospectively upon
adoption and, therefore, certain amounts for 2007 and 2008 have been
reclassified and revised. See further discussion in Note 8 of the Notes to
Consolidated Financial Statements. |
|
(4) |
|
In
2009, we entered into an asset exchange transaction in which we sold
substantially all of the assets of our diode laser business, which had a
book value of $14.9 million, which resulted in a loss of $4.4 million
after considering the fair value of these assets of $11.1 million and
selling costs of $0.6 million. In 2008, we sold a building under a
sale-leaseback agreement for $7.0 million, net of $0.3 million in selling
costs. We recorded a gain on the sale of the building of $2.5 million
after considering the net book value of the building and the present value
of the leaseback agreement. |
34
(5) |
|
In
2009, we determined that we would not continue to pursue technology
related to purchased in-process research and development and recorded an
impairment charge of $0.4 million associated with such technology. In
2008, we determined that goodwill and other intangible assets related to
our Lasers Division were impaired and recorded impairment charges of
$104.6 million related to goodwill and $15.4 million related to other
acquired intangible assets. |
|
(6) |
|
In
2005, we sold our robotic systems operations to Kensington Laboratories
LLC (Kensington) for $0.5 million in cash and a note receivable of $5.7
million, after adjustments provided for in the purchase agreement, and
subleased the facility relating to such operations to Kensington. In 2008,
due to uncertainty regarding collectibility of such note receivable and
amounts owed under the sublease, we wrote off such note receivable and
other amounts owed in full, resulting in charges totaling $7.0 million,
net of amounts recovered relating to the sublease. In 2009, we entered
into a settlement agreement with Kensington pursuant to which Kensington
paid us $0.2 million and transferred to us certain assets included in the
collateral securing the note. In 2009, we recognized $0.1 million as a
recovery on the note, net of certain costs. See further discussion in Note
16 of the Notes to Consolidated Financial Statements. |
|
(7) |
|
In
2008, we determined that a minority interest investment had an
other-than-temporary decline in value and wrote off $2.9 million,
representing the full carrying value of such investment. |
|
(8) |
|
In
2009, we extinguished $20.2 million of our convertible subordinated notes
for $18.7 million. After allocating $0.3 million of the extinguished
amount to the equity component of the notes, we recorded a gain of $0.3
million on extinguishment of the debt, net of unamortized fees and debt
discount. In 2008, we extinguished $28.0 million of our convertible
subordinated notes for $16.8 million, and we recorded a gain of $7.7
million on extinguishment of the debt, net of unamortized fees and debt
discount. |
|
(9) |
|
We
have previously established a valuation allowance against our deferred tax
assets due to uncertainty as to the timing and ultimate realization of
those assets. In 2007, we reduced the valuation allowance against our
deferred tax assets by $19.8 million, and in 2008, we reestablished such
valuation allowance and recorded an additional valuation allowance of $4.6
million. See further discussion in Note 11 of the Notes to Consolidated
Financial Statements regarding our valuation allowance. |
|
(10) |
|
In
2005, our Board of Directors approved a plan to sell our robotic systems
operations. This divestiture has been accounted for as discontinued
operations for all periods presented. |
|
(11) |
|
In
March 2005, we settled a dispute arising out of our acquisition of MRSI.
As a result of this settlement, we recorded an extraordinary gain of $2.9
million in the first quarter of 2005. |
35
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes included in this Annual Report on Form
10-K. This discussion contains forward-looking statements that involve risks and
uncertainties. These statements are based on assumptions that we consider
reasonable. When used in this report, the words “anticipate,” “believe,” “can,”
“continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,”
“predict,” “should,” “will,” “would,” and similar expressions or the negative of
such expressions are intended to identify these forward-looking statements. In
addition, any statements that refer to projections of our future financial
performance, trends in our businesses, or other characterizations of future
events or circumstances are forward-looking statements. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors including, but not limited to, those discussed in
Item 1A (Risk Factors) of Part I of this Annual Report on Form 10-K.
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 and subsystems and advanced automated manufacturing
systems. Our products are used worldwide in industries including scientific
research, microelectronics, aerospace and defense/security, life and health
sciences and industrial manufacturing. We operate within two distinct business
segments, our Lasers Division and our PPT Division. Both of our divisions 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
and markets.
The following is a discussion and analysis of
certain factors that have affected our results of operations and financial
condition during the periods included in the accompanying consolidated financial
statements.
Acquisitions and Divestitures
On July 4, 2009, we completed an asset
exchange transaction with Oclaro, Inc. (Oclaro), pursuant to which we acquired
certain assets and assumed certain liabilities related to Oclaro’s New Focus
business, and we sold certain assets and transferred certain liabilities related
to our diode laser operations based in Tucson, Arizona to Oclaro. The
acquisition of the New Focus business expanded our product offerings to include
a number of new high-performance products, including opto-electronics,
high-resolution actuators, high-speed detectors and modulators, opto-mechanics,
tunable lasers, and custom-engineered solutions designed for OEMs.
The fair value of the New Focus business on
the acquisition date was $14.1 million, and the purchase price was paid by the
transfer to Oclaro of our diode laser assets and liabilities, which had a fair
value of $11.1 million, and the payment of $3.0 million in cash. We incurred
$0.2 million in acquisition related expenses, which have been expensed as
incurred and are included in selling, general and administrative expenses in the accompanying consolidated statements of
operations.
Below is a summary of the purchase
price, assets acquired and liabilities assumed:
|
(In thousands) |
|
|
|
|
|
Assets acquired and liabilities
assumed: |
|
|
|
|
|
Current assets |
|
$ |
8,930 |
|
|
Goodwill |
|
|
1,392 |
|
|
Purchased intangible
assets |
|
|
4,830 |
|
|
Other assets |
|
|
1,247 |
|
|
Current liabilities |
|
|
(2,299 |
) |
|
|
|
$ |
14,100 |
|
|
36
Our diode laser assets had a net book value of
$14.9 million, which resulted in a loss of $4.4 million after considering the
fair value of these assets of $11.1 million and selling costs of $0.6 million.
This loss has been included in loss (gain) on sale of assets and related costs in our consolidated statements of operations.
These assets had previously been included in our Lasers Division.
Adoption of Financial Accounting Standards Board (FASB) ASC 470-20
(formerly FSP APB 14-1)
During the first quarter of 2009, we adopted
ASC 470-20, Debt – Debt with Conversion and Other Options, which requires the liability and equity
components of convertible debt instruments to be separately accounted for in a
manner that reflects the non-convertible debt borrowing rate for interest
expense recognition. In addition, direct issuance costs associated with the
convertible debt instruments are required to be allocated to the liability and
equity components in proportion to the allocation of proceeds and accounted for
as debt issuance costs and equity issuance costs, respectively. These provisions
have been applied retrospectively upon adoption. In accordance with ASC 470-20,
we have recorded a debt discount of $27.5 million and a deferred tax liability
of $10.6 million and have allocated $0.9 million of issuance costs to the equity
component. Such amounts were calculated using an income approach and assumed a
non-convertible debt borrowing rate of 6.25%, which is also the effective
interest rate used to calculate interest expense. Due to the valuation allowance
maintained against our deferred tax assets, the recording of the deferred tax
liability resulted in a reduction to this valuation allowance rather than in a
reduction in capital in excess of par value. Upon the adoption of ASC 470-20,
the amortization of the debt discount resulted in an increase in non-cash
interest expense of $4.2 million and $4.9 million for our fiscal years 2008 and
2007, respectively. Our consolidated statements of operations for 2008 and 2007
have been retrospectively adjusted compared with previously reported amounts as
follows:
|
|
Year Ended |
(In thousands) |
|
January 3, |
|
December 29, |
|
|
2009 |
|
2007 |
Additional non-cash interest
expense |
|
$ |
(5,182 |
) |
|
$ |
(4,459 |
) |
Reduction in amortization of debt issuance costs |
|
|
322 |
|
|
|
269 |
|
Reduction in gain on extinguishment of
debt: |
|
|
|
|
|
|
|
|
Reduction in write off of debt
issuance costs |
|
|
62 |
|
|
|
- |
|
Write off of debt discount |
|
|
(2,987 |
) |
|
|
- |
|
Total reduced gain on extinguishment of debt |
|
|
(2,925 |
) |
|
|
- |
|
Retrospective change in net income
(loss) |
|
$ |
(7,785 |
) |
|
$ |
(4,190 |
) |
|
Change to basic earnings per
share |
|
$ |
(0.22 |
) |
|
$ |
(0.11 |
) |
Change to diluted earnings per share |
|
$ |
(0.22 |
) |
|
$ |
(0.11 |
) |
Fiscal Year End
We use a conventional 52/53-week accounting
fiscal year. Our fiscal year ends on the Saturday closest to December 31, and
our fiscal quarters end on the Saturday closest to the end of each corresponding
calendar quarter. Fiscal year 2009 (referred to herein as 2009) ended on January
2, 2010, fiscal year 2008 (referred to herein as 2008) ended on January 3, 2009
and fiscal year 2007 (referred to herein as 2007) ended on December 29, 2007.
Fiscal year 2008 consisted of 53 weeks and fiscal years 2009 and 2007 each
consisted of 52 weeks.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of
Financial Condition and Results of Operations is based on our consolidated
financial statements included in this Annual Report on Form 10-K, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires our
management to 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. Our significant
accounting policies are discussed in Note 1 (Organization and Summary of
Significant Accounting Policies) to the Notes to Consolidated Financial
Statements, included in Item 15 (Exhibits, Financial Statement Schedules) of
this Annual Report on Form 10-K. 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
expense. 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 adverse
effect on our reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods.
37
Revenue Recognition
We recognize revenue after title to and risk
of loss of products have passed to the customer, or delivery of the service has
been completed, provided that persuasive evidence of an arrangement exists, the
fee is fixed or determinable and collectibility is reasonably assured. We
recognize revenue and related costs for arrangements with multiple deliverables,
such as equipment and installation, as each element is delivered or completed
based upon its relative fair value, determined based upon the price that would
be charged on a standalone basis. If a portion of the total contract price is
not payable until installation is complete, we do not recognize such portion as
revenue until completion of installation; however, we record the full cost of
the product at the time of shipment. Revenue for extended service contracts is
recognized over the related contract periods. Certain sales to international
customers are made through third-party distributors. A discount below list price
is generally provided at the time the product is sold to the distributor, and
such discount is reflected as a reduction in net sales. Freight costs billed to
customers are included in net sales, and
freight costs incurred are included in selling, general and administrative expenses. Sales taxes collected from customers are
recorded on a net basis and any amounts not yet remitted to tax authorities are
included in accrued expenses and other current
liabilities.
In the event that we determine that all of the
criteria for recognition of revenue have not been met for a transaction, the
amount of revenue that we recognize in a given reporting period could be
adversely affected. In particular, our ability to recognize revenue for
high-value product shipments could cause significant fluctuations in the amounts
of revenue reported from period to period depending on the timing of the
shipments and the terms of sale of such products.
Our customers (including distributors)
generally have 30 days from the original invoice date (generally 60 days for
international customers) to return a standard catalog product purchase for
exchange or credit. Catalog products must be returned in the original condition
and meet certain other criteria. Custom, option-configured and certain other
products as defined in the terms and conditions of sale cannot be returned
without our consent. For certain products, we establish a sales return reserve
based on the historical product returns. If actual product returns are
significant and/or exceed our established sales return reserves, our net sales
could be adversely affected.
Accounts and Notes Receivable
We record reserves for specific receivables
deemed to be at risk for collection, as well as a reserve based on our
historical collections experience. We estimate the collectibility of customer
receivables on an ongoing basis by reviewing past due invoices and assessing the
current creditworthiness of each customer. A considerable amount of judgment is
required in assessing the ultimate realization of these
receivables.
Certain of our Japanese customers provide us
with promissory notes on the due date of the receivable. The payment dates of
the promissory notes generally range between 60 and 150 days from the original
receivable due date. For balance sheet presentation purposes, amounts due to us
under such promissory notes are reclassified from accounts receivable to notes
receivable. At January 2, 2010 and January 3, 2009, notes receivable, net totaled $2.3 million and $6.6 million, respectively. Certain of these
promissory notes are sold with recourse to banks in Japan with which we
regularly do business. The sales of these receivables have been accounted for as
secured borrowings, as we have not met the criteria for sale treatment in
accordance with ASC 860, Transfers and Servicing. The principal amount of the promissory notes sold with recourse is
included in both notes receivable, net
and short-term obligations until the
underlying note obligations are ultimately satisfied through payment by the
customers to the banks. At January 2, 2010 and January 3, 2009, the principal
amount of such promissory notes included in notes receivable, net and short-term obligations in the accompanying
consolidated balance sheets totaled $1.3 million and $4.3 million,
respectively.
38
Pension Plans
Several of our non-U.S. subsidiaries have
defined benefit pension plans covering substantially all full-time employees at
those subsidiaries. Some of the plans are unfunded, as permitted under the plans
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 our 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 our pension plans.
Inventories
We state our inventories at the lower of cost
(determined on either a first-in, first-out (FIFO) or average cost basis) or
fair market value and include materials, labor and manufacturing overhead. We
write down excess and obsolete inventory to net realizable value. Once we write
down the carrying value of inventory, a new cost basis is established, and we do
not increase the newly established cost basis based on subsequent changes in
facts and circumstances. In assessing the ultimate realization of inventories,
we make judgments as to future demand requirements and compare those
requirements with the current and committed inventory levels. We record any
amounts required to reduce the carrying value of inventory to net realizable
value as a charge to cost of sales. Should actual demand requirements differ
from our estimates, we may be required to reduce the carrying value of inventory
to net realizable value, resulting in a charge to cost of sales which could
adversely affect our operating results.
Warranty
Unless otherwise stated in our product
literature or in our agreements with our customers, products sold by our PPT
Division generally carry a one-year warranty from the original invoice date on
all product materials and workmanship, other than filters, gratings and crystals
products, which generally carry a 90 day warranty. Products of this division
sold to OEM customers generally carry longer warranties, typically 15 to 19
months. Products sold by our Lasers Division carry warranties that vary by
product and product component, but that generally range from 90 days to two
years. In certain cases, such warranties for Lasers Division products are
limited by either a set time period or a maximum amount of usage of the product,
whichever occurs first. Defective products will either be repaired or replaced,
generally at our option, upon meeting certain criteria. We accrue 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 at the
time revenue for that product is recognized. While we engage in extensive
product quality programs and processes, including actively monitoring and
evaluating the quality of our component suppliers, our warranty obligations are
affected by product failure rates, material usage and service delivery costs
incurred in correcting a product failure. Should actual product failure rates,
material usage and/or service delivery costs negatively differ from our
estimates, revisions to the estimated warranty obligation would be required
which could adversely affect our operating results.
Impairment of Assets
We assess the impairment of long-lived assets
at least annually and whenever events or changes in circumstances indicate that
their carrying value may not be recoverable. The determination of related
estimated useful lives and whether or not these assets are impaired involves
significant judgments, related primarily to the future profitability and/or
future value of the assets. Changes in our strategic plan and/or market
conditions could significantly impact these judgments and could require
adjustments to recorded asset balances.
39
We hold minority interests in companies having
operations or technologies in areas which are within or adjacent to our
strategic focus when acquired, all of which are privately held and whose values
are difficult to determine. Investments in technology companies involve
significant risks, including the risks that such companies may be unable to
raise additional required operating capital on acceptable terms or at all, or
may not achieve or maintain market acceptance of their technology or products.
In the event that any of such risks occurs, the value of our investment could
decline significantly. In addition, because there is no public market for the
securities we have acquired, our ability to liquidate our investments is
limited, and such markets may not develop in the future. During 2008, we
determined that a minority interest investment had an other-than-temporary
decline in value and wrote off $2.9 million, representing the full carrying
value of such investment. At January 3, 2009 and January 2, 2010, none of our
minority interest investments had any carrying value. If we are able to
liquidate our holdings in any minority interest investments in the future, any
proceeds received from such a transaction will be recognized as a gain in the
period in which the stock is sold.
Goodwill represents the excess of the purchase
price of the net assets of acquired entities over the fair value of such assets.
Under ASC 350-20, Intangibles – Goodwill and Other,
goodwill and other
intangible assets are not amortized but are tested for impairment at least
annually or when circumstances exist that would indicate an impairment of such
goodwill or other intangible assets. We perform the annual impairment test as of
the beginning of the fourth quarter of each year. A two-step test is used to
identify the potential impairment and to measure the amount of impairment, if
any. The first step is based upon a comparison of the fair value of each of our
reporting units, as defined, and the carrying value of the reporting unit’s net
assets, including goodwill. If the fair value of the reporting unit exceeds its
carrying value, goodwill is considered not to be impaired; otherwise, step two
is required. Under step two, the implied fair value of goodwill, calculated as
the difference between the fair value of the reporting unit and the fair value
of the net assets of the reporting unit, is compared with the carrying
value of goodwill. The excess of the carrying value of goodwill over the implied
fair value represents the amount impaired. Based upon this two-step process, we
determined that our goodwill was not impaired as of the beginning of the fourth
quarter of 2008. However, due to a continued decline in our market
capitalization, we reevaluated our goodwill as of the end of the fourth quarter
of 2008 and determined that the goodwill related to our Lasers Division was
impaired and recorded a goodwill impairment charge of $104.6 million. There were
no such impairments during 2007 or 2009.
During 2008, we conducted an impairment
analysis on our intangible assets and, due to diminished cash flow projections
for certain products, determined that certain developed technology related to
our Lasers Division was impaired. Accordingly, we recorded impairment charges
totaling $15.4 million, which consisted of a charge of $12.5 million related to
developed technology associated with the Spectra-Physics acquisition and a
charge of $2.9 million related to developed technology that we acquired from
Picarro, Inc. (Picarro) in 2006. During 2009, we determined we would not
continue to pursue technology related to certain purchased in-process research
and development related to the New Focus business and recorded an impairment
charge of $0.4 million associated with such technology.
We determine our reporting units by
identifying those operating segments or components for which discrete financial
information is available which is regularly reviewed by the management of that
unit. For any acquisition, we allocate goodwill to the applicable reporting unit
at the completion of the purchase price allocation through specific
identification.
Fair value of our reporting units is
determined using a combination of a comparative company analysis, a comparative
transaction analysis, and a discounted cash flow analysis. The comparative
company analysis establishes fair value by applying market multiples to our
revenue and earnings before interest, income taxes, depreciation and
amortization. Such multiples are determined by comparing our reporting
units with other publicly traded companies within the respective industries
that have similar economic characteristics. The comparative transaction analysis
establishes fair value by applying market multiples to our revenue. Such
multiples are determined through recent mergers and acquisitions for companies
within the respective industries that have similar economic characteristics to
our reporting units. The discounted cash flow analysis establishes fair value by
estimating the present value of the projected future cash flows of each
reporting unit. The present value of estimated discounted future cash flows is
determined using our estimates of revenue and costs for the reporting units,
driven by assumed growth rates, as well as appropriate discount rates. The
discount rate is determined using a weighted-average cost of capital that
incorporates market participant data and a risk premium applicable to each
reporting unit. In 2008, in performing the impairment analysis from which we
concluded that the goodwill related to our Lasers Division was impaired, we
determined that, due to market volatility, past transactions were deemed not to
be comparable to the expected results from current transactions, and therefore,
the comparative transaction analysis was excluded from such
analysis.
40
Income Taxes
Our income tax expense (benefit), deferred tax
assets and liabilities and reserves for unrecognized tax benefits reflect
management’s best assessment of estimated future taxes. We are subject to income
taxes in both the U.S. and numerous foreign jurisdictions. Significant judgments
and estimates are required in determining our consolidated income tax expense
(benefit).
We utilize the asset and liability method of
accounting for income taxes as set forth in ASC 740, Income Taxes. The
application of tax laws and regulations is subject to legal and factual
interpretation, judgment and uncertainty. Tax laws themselves are subject to
change as a result of changes in fiscal policy, changes in legislation,
evolution of regulations and court rulings. Therefore, the actual liability for
U.S. or foreign taxes may be materially different from our estimates, which
could result in the need to record additional liabilities or to reverse
previously recorded tax liabilities. Differences between actual results and our
assumptions, or changes in our assumptions in future periods, are recorded in
the period they become known.
Deferred income taxes are recognized for the
future tax consequences of temporary differences using enacted statutory tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Temporary differences
include the difference between the financial statement carrying amounts and the
tax bases of existing assets and liabilities and operating loss and tax credit
carryforwards. The effect of a change in tax rates on deferred taxes is
recognized in income in the period that includes the enactment date. In
accordance with the provisions of ASC 740, a valuation allowance for deferred
tax assets is recorded to the extent we cannot determine that the ultimate
realization of the net deferred tax assets is more likely than not. Realization
of deferred tax assets is principally dependent upon the achievement of future
taxable income, the estimation of which requires significant management
judgment.
We had previously established a valuation
allowance on all our U.S. deferred tax assets, due to the uncertainty
surrounding the timing and ultimate realization of these assets. In the fourth
quarter of 2007, we recorded a partial release of $19.8 million of the valuation
allowance due to the fact that we had cumulative pre-tax income for the three
years then ended and were projecting pre-tax income for 2008 and 2009. During
the fourth quarter of 2008, we determined that goodwill and certain purchased
intangible assets related to our Lasers Division were impaired, and we recorded
impairment charges of $119.9 million, which resulted in a cumulative three-year
loss position as of January 3, 2009. After evaluating this loss position
together with other positive and negative facts, we determined that it was more
likely than not that some or all of our net deferred tax assets will not be
realized. Therefore, we reestablished the $19.8 million valuation allowance that
had been previously released in 2007. Furthermore, due to the impairment charges
recorded related to our Lasers Division, we determined that certain qualifying
tax planning strategies were no longer deemed prudent and feasible and, as a
result, recorded an additional valuation allowance of $4.6 million in 2008. In
the fourth quarter of 2009, after evaluating all positive and negative facts, it
was determined that it was more likely than not that we would realize the net
deferred tax assets applicable to our German entity. Therefore, we recorded a
release of the valuation allowance associated with this entity of $2.5 million.
We utilize ASC 740-10-25, Income Taxes – Recognition, which requires income tax positions to meet a more-likely-than-not
recognition threshold to be recognized in the financial statements. Under ASC
740-10-25, tax positions that previously failed to meet the more-likely-than-not
threshold should be recognized in the first subsequent financial reporting
period in which that threshold is met. Previously recognized tax positions that
no longer meet the more-likely-than-not threshold should be derecognized in the
first subsequent financial reporting period in which that threshold is no longer
met. As a multi-national corporation, we are subject to taxation in many
jurisdictions, and the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax laws and regulations in various
taxing jurisdictions. If we ultimately determine that the payment of these
liabilities will be unnecessary, we reverse the liability and recognize a tax
benefit during the period in which we determine the liability no longer applies.
Conversely, we record additional tax charges in a period in which we determine
that a recorded tax liability is less than we expect the ultimate assessment to
be. As a result of these adjustments, our effective tax rate in a given
financial statement period could be materially affected.
41
Stock-Based Compensation
We account for stock-based compensation in
accordance with ASC 718, Compensation – Stock Compensation. Under the fair value recognition provision
of ASC 718, stock-based compensation cost is estimated at the grant date based
on the fair value of the award. We estimate the fair value of stock options and
stock appreciation rights granted using the Black-Scholes-Merton option pricing
model and a single option award approach. The fair value of restricted stock and
restricted stock unit awards is based on the closing market price of our common
stock on the date of grant.
Determining the appropriate fair value of
stock options and stock appreciation rights at the grant date requires
significant judgment, including estimating the volatility of our common stock
and expected term of the awards. We compute expected volatility based on
historical volatility over the expected term. The expected term represents the
period of time that stock options and stock appreciation rights are expected to
be outstanding and is determined based on our historical experience, giving
consideration to the contractual terms of the stock-based awards, vesting
schedules and expected exercise behavior.
A substantial portion of our awards vest based
upon the achievement of one or more financial performance goals established by
the Compensation Committee of our Board of Directors. Currently, such
performance goals relate to the fiscal year in which the award is granted, and
if such performance goals are met, the awards vest in equal installments on the
first three anniversaries of the grant date. For awards issued prior to 2009,
the vesting of such awards is conditioned upon achievement of performance goals
relating to three annual performance periods. Until we have determined that
performance goals have been met, the amount of expense that we record relating
to performance-based awards is estimated based on the likelihood of achieving
the performance goals. Estimating the likelihood of achievement of performance
goals requires significant judgment, as such estimates are based on forecasted
results of operations. We also make certain judgments regarding expected
forfeitures of all stock-based awards, which may vary significantly from actual
forfeitures. If our actual results of operations or forfeitures differ from our
estimates, we may need to increase or decrease stock-based compensation expense
related to performance-based awards, which could significantly impact the amount
of stock-based compensation expense recorded in a given period.
The fair value of performance-based awards,
adjusted for estimated forfeitures and estimated achievement of performance
goals (or actual achievement of performance goals once determined), is amortized
using the graded vesting method over the requisite service period of the award,
which is generally the vesting period. The fair value of time-based awards,
adjusted for estimated forfeitures, is amortized on a straight-line basis over
the requisite service period of the award, which is generally the vesting
period.
The total stock-based compensation expense
included in our consolidated statements of operations was as follows:
|
Year Ended |
(In thousands) |
January 2, |
|
January 3, |
|
December 29, |
|
2010 |
|
2009 |
|
2007 |
Cost of sales |
$ |
137 |
|
$ |
52 |
|
$ |
425 |
Selling, general and administrative expenses |
|
1,979 |
|
|
1,654 |
|
|
3,005 |
Research and development
expense |
|
216 |
|
|
97 |
|
|
238 |
|
$ |
2,332 |
|
$ |
1,803 |
|
$ |
3,668 |
|
42
Results of Operations for the Years Ended
January 2, 2010, January 3, 2009 and December 29, 2007
The following table
represents our results of operations for the periods indicated as a percentage
of net sales:
|
Percentage of Net
Sales |
|
For the Year Ended |
|
January 2, |
|
January 3, |
|
December 29, |
|
2010 |
|
2009 |
|
2007 |
Net sales |
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
Cost of sales |
61.1 |
|
|
61.6 |
|
|
58.3 |
|
Gross profit |
38.9 |
|
|
38.4 |
|
|
41.7 |
|
|
Selling, general and administrative
expenses |
30.6 |
|
|
26.6 |
|
|
26.2 |
|
Research and development expense |
10.1 |
|
|
10.4 |
|
|
9.6 |
|
Loss (gain) on sale of assets and
related costs |
1.2 |
|
|
(0.6 |
) |
|
- |
|
Impairment charges |
0.1 |
|
|
26.9 |
|
|
- |
|
Operating income (loss) |
(3.1 |
) |
|
(24.9 |
) |
|
5.9 |
|
|
Recovery (write-down) of note receivable
and other amounts |
|
|
|
|
|
|
|
|
related to previously discontinued operations, net |
0.0 |
|
|
(1.6 |
) |
|
- |
|
Write-down of minority interest investment |
- |
|
|
(0.7 |
) |
|
- |
|
Gain on extinguishment of debt |
0.1 |
|
|
1.7 |
|
|
- |
|
Interest and other expense, net |
(2.3 |
) |
|
(1.5 |
) |
|
(0.9 |
) |
Income (loss) before income taxes |
(5.3 |
) |
|
(27.0 |
) |
|
5.0 |
|
|
Income tax provision (benefit) |
(0.5 |
) |
|
6.4 |
|
|
(3.9 |
) |
Net income (loss) |
(4.8 |
)% |
|
(33.4 |
)% |
|
8.9 |
% |
|
In the following discussion regarding our
results of operations, due to changes in our market classifications for certain
of our customers and product applications, certain prior period amounts have
been reclassified among our end markets to conform to the current period
presentation.
Net Sales
For 2009, 2008 and
2007, our net sales totaled $367.0 million, $445.3 million and $445.2 million,
respectively. Our total net sales decreased $78.3 million, or 17.6%, in 2009
compared with 2008. Net sales by our PPT Division decreased $38.1 million, or
14.8%, and net sales by our Lasers Division decreased $40.2 million, or 21.4%,
in 2009 compared with the prior year period. Our total net sales were
approximately equal in 2008 and 2007. Net sales by our Lasers Division increased
$2.3 million, or 1.3%, and net sales by our PPT Division decreased $2.2 million,
or 0.9%, in 2008 compared with 2007. During 2009, we experienced decreases in
net sales compared with 2008 in all of our end markets. These decreases resulted
primarily from poor worldwide macroeconomic conditions and the cyclical downturn
in the semiconductor equipment industry. While uncertain global economic
conditions persisted throughout the year, our total sales increased
significantly in the second half of 2009 compared with the first half, and we
expect total net sales in 2010 to be greater than the 2009 level. While our
total net sales in 2008 were approximately equal to our net sales in 2007, our
net sales in the first half of 2008 were $14.7 million higher than in the first
half of 2007, while our net sales in the second half of 2008 were $14.6 million
lower than in the second half of 2007. This decrease was due primarily to the
deterioration of overall macroeconomic conditions during the second half of
2008.
Net sales to the scientific research,
aerospace and defense/security markets were $143.4 million, $150.3 million and
$150.5 million for 2009, 2008 and 2007, respectively. The decrease of $6.9
million, or 4.6%, in 2009 compared with 2008 was due primarily to decreased
sales to research customers, including universities, resulting from lower
funding from governmental entities, corporations and private foundations, and
decreased sales to defense contractor customers, offset in part by additional
sales from our acquisition of the New Focus business. Generally, our net sales
to these markets by both of our divisions may fluctuate from period to period
due to the timing of large sales relating to major research programs and, in
some cases, these fluctuations may be offsetting between our divisions or
between such periods.
43
Net sales to the microelectronics market were
$84.7 million, $130.3 million and $127.2 million for 2009, 2008 and 2007,
respectively. The decrease of $45.6 million, or 35.0%, in 2009 compared with
2008 was due primarily to a significant decline in sales of products and systems
to our semiconductor capital equipment customers as a result of the cyclical
downturn in that industry, and due to the fact that sales of laser-based disk
texturing systems that occurred in 2008 did not recur in 2009. The increase of
$3.1 million, or 2.4%, in 2008 compared with 2007 was due primarily to
significant increases in sales of products and systems for solar panel
manufacturing applications and laser-based disk texturing systems, offset in
part by a significant decrease in sales for other microelectronics applications,
particularly in the semiconductor equipment industry due to the cyclical
downturn in that industry.
Net sales to the life and health sciences
market were $87.5 million, $90.1 million and $89.4 million for 2009, 2008 and
2007, respectively. The decrease of $2.6 million, or 2.9%, in 2009 compared with
2008 was due primarily to the divestiture of our diode laser operations at the
end of the second quarter of 2009, and to decreased sales of products for
bioinstrumentation applications, offset in part by higher sales of products for
bioimaging applications. Our sales to customers in this market increased
slightly in 2008 compared with 2007 despite the overall macroeconomic
downturn.
Net sales to our industrial and other end
markets were $51.4 million, $74.6 million and $78.1 million for 2009, 2008 and
2007, respectively. The decreases of $23.2 million, or 31.2%, in 2009 compared
with 2008, and $3.5 million, or 4.5%, in 2008 compared with 2007 were due
primarily to the poor macroeconomic conditions worldwide.
Geographically, net sales were as
follows:
|
Year Ended |
|
|
|
|
|
|
|
|
January 2, |
|
January 3, |
|
|
|
|
|
Percentage |
(In thousands, except
percentages) |
2010 |
|
2009 |
|
(Decrease) |
|
(Decrease) |
United States |
$ |
169,947 |
|
$ |
208,736 |
|
$ |
(38,789 |
) |
|
(18.6 |
)% |
Europe |
|
97,886 |
|
|
114,936 |
|
|
(17,050 |
) |
|
(14.8 |
) |
Pacific Rim |
|
79,770 |
|
|
100,676 |
|
|
(20,906 |
) |
|
(20.8 |
) |
Other |
|
19,386 |
|
|
20,988 |
|
|
(1,602 |
) |
|
(7.6 |
) |
Total sales |
$ |
366,989 |
|
$ |
445,336 |
|
$ |
(78,347 |
) |
|
(17.6 |
)% |
|
|
Year Ended |
|
|
|
|
|
Percentage |
|
January 3, |
|
December 29, |
|
Increase / |
|
Increase / |
(In thousands, except
percentages) |
2009 |
|
2007 |
|
(Decrease) |
|
(Decrease) |
United States |
$ |
208,736 |
|
$ |
223,891 |
|
$ |
(15,155 |
) |
|
(6.8 |
)% |
Europe |
|
114,936 |
|
|
112,695 |
|
|
2,241 |
|
|
2.0 |
|
Pacific Rim |
|
100,676 |
|
|
80,946 |
|
|
19,730 |
|
|
24.4 |
|
Other |
|
20,988 |
|
|
27,665 |
|
|
(6,677 |
) |
|
(24.1 |
) |
Total sales |
$ |
445,336 |
|
$ |
445,197 |
|
$ |
139 |
|
|
0.0 |
% |
|
|
|
Poor global macroeconomic conditions in 2009
resulted in decreased sales to customers in all geographies compared with 2008.
In particular, sales to the United States, Europe and the Pacific Rim were
negatively impacted by the continued cyclical downturn in the semiconductor
equipment industry, and sales to the Pacific Rim were also negatively impacted
by sales of laser-based disk texturing systems in 2008 that did not recur in
2009.
44
The decrease in sales to customers in the
United States in 2008 compared with the prior year period was due primarily to
decreased sales to our semiconductor manufacturing equipment customers, offset
in part by increased sales of products for solar panel manufacturing
applications. Our increased sales to customers in Europe in 2008 compared with
the prior year were due primarily to increased sales to our industrial
manufacturing customers. Our increased sales to the Pacific Rim in 2008 were due
in large part to increased sales of laser-based disk texturing systems and
products for solar panel manufacturing applications compared with the prior year
period. The decrease in sales to customers in other areas of the world in 2008
was due primarily to decreased sales to our semiconductor manufacturing
equipment customers.
Gross Margin
Gross margin was 38.9%, 38.4% and 41.7% for
2009, 2008 and 2007, respectively. The increase in gross margin in 2009 compared
with 2008 was due primarily to improved gross margins in our Lasers Division as
a result of the divestiture of our diode laser operations, decreased warranty
expenses and lower personnel costs resulting from headcount reductions, and
improved operating efficiencies at certain facilities as a result of our cost
reduction actions, offset in part by lower absorption of fixed overhead costs
resulting from reduced sales. The decrease in gross margin in 2008 compared with
2007 was due primarily to reduced absorption of fixed overhead costs due to
lower manufacturing volume, a higher proportion of sales of products with lower
gross margins in both our PPT Division and Lasers Division, and an increase in
inventory reserves in our Lasers Division.
Selling, General and Administrative (SG&A)
Expenses
SG&A expenses totaled $112.2 million, or
30.6% of net sales, $118.5 million, or 26.6% of net sales, and $116.5 million,
or 26.2% of net sales, during 2009, 2008 and 2007, respectively. The decrease in
SG&A expenses in absolute dollars in 2009 compared with 2008 was due
primarily to decreased wages, consulting expenses, travel expenses, advertising
expenses, shipping costs, accounting fees and insurance expenses, offset in part
by increased rent, incentive compensation, bad debt expense and benefits costs.
The increase in SG&A expenses in 2008 compared with 2007 was due primarily
to increases in rent and utilities, depreciation expense and freight costs,
offset in part primarily by decreases in professional fees and recruitment and
relocation costs.
In general, we expect that SG&A expenses
will vary as a percentage of sales in the future based on our sales level in any
given period. Because the majority of our SG&A expenses are fixed in the
short term, these changes in SG&A expenses will likely not be in proportion
to the changes in net sales.
Research and Development (R&D) Expense
R&D expense totaled $36.9 million, or
10.1% of net sales, $46.1 million, or 10.4% of net sales, and $42.6 million, or
9.6% of net sales, during 2009, 2008 and 2007, respectively. The decrease in
R&D expense in 2009 compared with 2008 was due to reduced spending in both
our Lasers and PPT Divisions. The decrease in R&D spending in our Lasers
Division was due primarily to the reduced expenses resulting from the
divestiture of our diode laser operations in the second half of the year and
reduced headcount within the remainder of the division. The decrease in R&D
spending in our PPT Division was due primarily to reduced spending on projects
related to solar cell manufacturing applications, as the design and development
of certain products was completed during 2008, and to reduced headcount. The
increase in R&D expense in 2008 compared with 2007 was due primarily to
increased investment on new product development programs, particularly for solar
panel manufacturing applications.
We believe that the continued development and
advancement of our products and technologies is critical to our future success,
and we intend to continue to invest in R&D initiatives, while working to
ensure that the efforts are focused and the funds 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 the changes in net sales.
45
Impairment Charges
During the fourth quarter of 2009, we determined that we would not
continue to pursue technology related to certain purchased in-process research
and development related to the New Focus business and recorded an impairment
charge of $0.4 million associated with such technology.
During the fourth quarter of 2008, due to
a decline in our market capitalization and diminished cash flow projections
related to certain laser products, we determined that goodwill and certain
purchased intangible assets related to our Lasers Division were impaired. As a
result, we recorded goodwill impairment charges totaling $104.6 million, which
consisted of a charge of $103.0 million related to goodwill associated with the
acquisition of Spectra-Physics and a charge of $1.6 million related to goodwill
associated with the acquisition of certain assets from Picarro. In addition, we
recorded impairment charges related to certain purchased intangible assets
totaling $15.4 million, which consisted of a charge of $12.5 million related to
developed technology associated with the acquisition of Spectra-Physics and a
charge of $2.9 million related to developed technology acquired from Picarro.
Write-Down of Note Receivable and Other Amounts
In 2005, we sold our robotic systems
operations to Kensington Laboratories LLC (Kensington) for $0.5 million in cash
and a note receivable of $5.7 million, after adjustments provided for in the
purchase agreement, and subleased the facility relating to such operations to
Kensington. We had previously classified this business as a discontinued
operation. Kensington failed to make certain principal, interest and rent
payments due under our agreements. The note was secured by a first-priority
security interest in certain Kensington assets. In 2008, due to uncertainty
regarding the collectibility of such amounts, we wrote off the note receivable
and other amounts owed in full, resulting in charges totaling $7.0 million, net
of amounts recovered relating to the sublease. In accordance with the Securities
and Exchange Commission Staff Accounting Bulletin Topic 5.Z.5, we have recorded
this write-down through continuing operations in our consolidated statements of
operations. In 2009, we entered into a settlement agreement with Kensington
pursuant to which Kensington paid us $0.2 million and transferred to us certain
assets included in the collateral securing the note. In 2009, we recognized $0.1
million as a recovery on the note, net of certain costs.
Write-Down of Minority Interest Investment
We own a minority interest in a privately
held developer of flip chip and advanced packaging equipment for back-end
semiconductor manufacturing applications. During the fourth quarter of 2008, we
determined that such investment had declined in value and that such decline was
other-than-temporary. Accordingly, we recorded a charge of $2.9 million to write
off the full carrying value of this investment. This company has filed a
registration statement for an initial public offering. If and when this offering
is complete, the public market for the company’s stock would create greater
liquidity for this investment. If we are able to liquidate our holdings in the
future, any proceeds received from such a transaction will be recognized as a
gain in the period in which the stock is sold.
Gain on Extinguishment of Debt
During 2009, we extinguished $20.2
million of our convertible subordinated notes at a weighted-average price equal
to 91.6% of the principal amount of the notes, or $18.7 million. After
allocating $0.3 million to the equity component, we recorded a gain of $0.3
million on extinguishment of debt, net of unamortized fees and debt discount.
During 2008, we extinguished $28.0 million of our convertible subordinated notes
at a weighted-average price equal to 59.9% of the principal amount of the notes,
or $16.8 million. We recorded a gain of $7.7 million on extinguishment of debt,
net of unamortized fees and debt discount.
Gain on Sale of Building
During 2008, we sold a building under a
sale-leaseback agreement for $7.0 million, net of $0.3 million in selling costs.
We recorded a gain on the sale of the building of $2.5 million after considering
the net book value of the building and the present value of the leaseback
agreement. The lease of the building expired on December 31, 2009.
46
Interest and Other Expense, Net
Interest and other expense, net was $8.6
million, $6.8 million and $4.1 million in 2009, 2008 and 2007, respectively. The
increase in interest and other expense, net in 2009 compared with 2008 was due
primarily to lower interest income earned as a result of lower interest rates
and transaction losses resulting from foreign currency fluctuations, offset in
part by lower interest expense related to our convertible subordinated notes due
to the extinguishment of $28.0 million of the notes in the fourth quarter of
2008. The increase in interest and other expense, net in 2008 compared with 2007
was due to lower interest income earned as a result of lower interest rates and
lower cash balances and higher interest expense due to a full year of accrued
interest on our convertible subordinated notes, which were issued in February
2007. In addition, in 2008 we ceased accruing interest on our note receivable
from Kensington due to the uncertainty as to the collectibility of such interest
owed, further reducing interest income. Our interest and other expense in 2008
was offset in part by transaction gains resulting from currency
fluctuations.
Income Taxes
Our effective income tax rate was a tax
benefit of 10.2% for 2009, tax expense of (23.8%) for 2008 and tax benefit of
(76.7%) for 2007. In 2007, after analyzing all positive and negative facts, we
released $19.8 million of the valuation allowance recorded against our U.S.
deferred tax assets, which accounted for a substantial portion of the tax
benefit in 2007. In 2008, the impairment of goodwill and other intangible assets
related to our Lasers Division resulted in a cumulative three-year loss
position. After evaluating this loss position, together with other positive and
negative factors, we reestablished the $19.8 million valuation allowance
released previously. In addition, in 2008, due to such impairment of goodwill
and other intangible assets, we determined that certain qualifying tax planning
strategies were no longer deemed prudent and feasible and, as a result, we
recorded an additional valuation allowance of $4.6 million. These amounts
accounted for a substantial portion of our tax expense in 2008. In the fourth
quarter of 2009, after evaluating all positive and negative facts, we determined
that it was more likely than not that we would realize the net deferred tax
assets applicable to our German subsidiary. Therefore, we recorded a release of
the valuation allowance associated with that entity of $2.5 million, which
accounted for a significant portion of the 2009 tax benefit. In addition,
increases in global tax contingencies and the impact of foreign tax rate
variances had a significant impact on our 2009 effective tax rate. Until such
time as the valuation allowance recorded against our U.S. deferred tax assets is
fully released, the Federal tax provision related to future earnings will be
offset substantially by a reduction in the valuation allowance related to our
net operating loss carryforwards.
We adopted the provisions of ASC 740-10-25
effective as of the beginning of fiscal year 2007. As a result of applying the
provisions of ASC 740-10-25, our reserve for uncertain tax positions increased
by $2.9 million, deferred income tax assets increased by $1.1 million, and
stockholders’ equity decreased by $1.8 million as of the beginning of fiscal
year 2007. As of January 2, 2010, we had $9.5 million of gross unrecognized tax
benefits and the total amount of net unrecognized tax benefits that, if
recognized, would affect the effective tax rate was $9.1 million. We believe
that it is reasonably possible that unrecognized tax benefits may decrease by
$0.6 million within the next twelve months. We accrue interest and penalties
related to unrecognized tax benefits in our provision for income taxes. Such
amounts were not significant as of January 2, 2010.
Liquidity and Capital Resources
Our cash and cash equivalents and marketable
securities balances decreased to $141.9 million as of January 2, 2010 from
$148.4 million as of January 3, 2009. The decrease was attributable primarily to
cash used to extinguish $20.2 million of our convertible subordinated notes,
capital expenditures related primarily to facility consolidation activities, the
cash payment related to our asset exchange transaction with Oclaro and net
repayments of short-term borrowings, offset in part by cash generated from
operations.
Net cash provided by our operating
activities of $24.7 million was attributable primarily to cash provided by our
results of operations, a decrease of $7.0 million in accounts and notes
receivable due to lower sales levels and an increase of $1.1 million in accrued
expenses and other liabilities due to increased deferred revenue, offset in part
by an increase of $6.2 million in gross inventory, a decrease of $2.1 million in
accounts payable due to the timing of payments and an increase in prepaid
expenses and other assets of $1.4 million due to prepaid contract costs. During
2009, while we used cash for gross inventory purchases, our net inventory
actually decreased by $8.9 million primarily as a result of $10.3 million in
charges related to excess and obsolete inventory and $1.9 million in
amortization of demonstration equipment, as well as a net decrease in inventory
of $3.4 million in connection with our asset exchange transaction with Oclaro,
in which we transferred inventory related to our diode laser manufacturing
operations and acquired inventory related to the New Focus
business.
47
Net cash provided by investing activities of
$8.1 million consisted of net sales and maturities of marketable securities of
$20.8 million, offset in part by purchases of property and equipment of $9.7
million and the $3.0 million cash payment related to our asset exchange
transaction with Oclaro.
Net cash used in financing activities of $20.6
million consisted of the extinguishment of $20.2 million of our convertible
subordinated notes for $18.7 million, and net repayments of short-term
borrowings of $2.7 million, offset in part by $0.8 million received as
consideration for the issuance of common stock in connection with the exercise
of stock options and participation in our employee stock purchase
plan.
As of January 2, 2010, we had cash and cash
equivalents of $87.7 million and marketable securities of $54.2 million. The
majority of the marketable securities are invested in one portfolio managed by
an investment management firm, under the oversight of our senior financial
management team. This portfolio manager invests the funds allocated in
accordance with our Investment Policy, which is reviewed regularly by our senior
financial management and the Audit Committee of our Board of Directors. We
expect that our cash balances will fluctuate in the future based on factors such
as cash used in or provided by ongoing operations, acquisitions or divestitures,
investments in other companies, share and note repurchases, capital expenditures
and contractual obligations, and changes in interest rates.
In February 2007, we issued $175 million of
convertible subordinated notes due 2012, which notes bear interest at a rate of
2.5% per year, payable in cash semiannually in arrears on February 15 and August
15 of each year. The sale of the notes generated net proceeds of $169.4 million
after deducting offering fees and expenses. At the time of issuance of the
notes, we used $40.0 million of the net proceeds from the offering to repurchase
2.1 million shares of our common stock at a purchase price of $18.86 per share,
and $48.2 million of the net proceeds from the offering to prepay all of our
long-term debt owed to Thermo pursuant to the note originally issued as part of
the purchase price for Spectra-Physics in 2004. During 2007 and 2008, we used a
portion of the proceeds from these notes to repurchase shares of our common
stock under the stock repurchase programs approved by our Board of Directors, as
described in more detail below. In addition, as noted above, during 2009 and
2008, we extinguished $20.2 million and $28.0 million of these notes for $18.7
million and $16.8 million, respectively. We intend to use the remaining proceeds
from the offering for working capital and other general corporate purposes,
which may include potential acquisitions, additional repurchases of our common
stock or extinguishment or early repayment of the convertible
notes.
In June 2008, we issued 300 million yen ($3.2
million at January 2, 2010) in private placement bonds through a Japanese bank
and used the proceeds from such issuance to pay the amounts outstanding under an
expiring line of credit. These bonds bear interest at a rate of 1.55% per year,
payable in cash semiannually in arrears on June 30 and December 31 of each year.
The bonds mature on June 30, 2011. The bonds are included in long-term debt in
the accompanying consolidated balance sheets.
At January 2, 2010, we had a total of three
lines of credit, including one domestic revolving line of credit and two
revolving lines of credit with Japanese banks. In addition, we had two other
agreements with Japanese banks under which we sell trade notes receivable with
recourse.
Our domestic revolving line of credit has a
total credit limit of $3.0 million and expires on December 1, 2010. Certain
certificates of deposit held at this lending institution collateralize this line
of credit, which bears interest at either the prevailing London Interbank
Offered Rate (LIBOR) (0.23% at January 2, 2010) plus 1.00% or the British
Bankers Association LIBOR Daily Floating Rate (0.17% at January 2, 2010) plus
1.00%, at our option, and carries an unused line fee of 0.25% per year. At
January 2, 2010, there were no balances outstanding under this line of credit,
with $1.7 million available, after considering outstanding letters of credit
totaling $1.3 million.
48
Our two revolving lines of credit with
Japanese banks totaled 1.1 billion yen ($11.9 million at January 2, 2010) and
expire as follows: $8.7 million on February 28, 2010 (which has subsequently
been extended to May 31, 2010) and $3.2 million on May 31, 2010. The $8.7
million line of credit bears interest at the prevailing bank rate and the $3.2
million line of credit bears interest at LIBOR plus 1.75%. Certain certificates
of deposit held by the lending institution’s U.S. affiliate collateralize the
$3.2 million line of credit. At January 2, 2010, we had $9.7 million outstanding
and $2.2 million available for borrowing under these lines of credit. Amounts
outstanding under these revolving lines of credit are included in short-term obligations in the accompanying consolidated balance sheets. Our two other agreements
with Japanese banks, under which we sell trade notes receivable with recourse,
totaled 550 million yen ($6.0 million at January 2, 2010), have no expiration
dates and bear interest at the bank’s prevailing rate. At January 2, 2010, we
had $1.3 million outstanding and $4.7 million available for the sale of notes
receivable under these agreements. Amounts outstanding under these agreements
are included in short-term obligations in the accompanying consolidated balance
sheets. As of January 2, 2010, the weighted-average
effective interest rate on all of our Japanese borrowings, including the private
placement bonds, was 2.4%.
In 2006, our Board of Directors approved a
share repurchase program, authorizing the purchase of up to 4.2 million shares
of our common stock. During the first quarter of 2008, we repurchased 1.1
million shares of common stock under this program in the open market at an
average price of $10.78 per share for a total of $11.4 million, which completed
our purchases under this program.
In May 2008, our Board of Directors approved a
new share repurchase program, authorizing the purchase of up to 4.0 million
shares of our common stock. Purchases may be made under this program from time
to time in the open market or in privately negotiated transactions, and the
timing and amount of the purchases will be based on factors including our share
price, cash balances, expected cash requirements and general business and market
conditions. Under this program, we repurchased 127,472 shares for $1.4 million
during 2008. We made no purchases under this program in 2009. As of January 2,
2010, a total of approximately 3.9 million shares remained available for
repurchase under the program.
During 2010, we expect to use $8
million to $12 million of cash for capital expenditures.
We believe our current working capital
position, together with our expected future cash flows from operations will be
adequate to fund our operations in the ordinary course of business, anticipated
capital expenditures, debt payment requirements and other contractual
obligations for at least the next twelve months. However, this belief is based
upon many assumptions and is subject to numerous risks (see “Risk Factors” on
pages 16-29), and there can be no assurance that we will not require additional
funding in the future.
Except for the aforementioned capital
expenditures, we have no present agreements or commitments with respect to any
material acquisitions of other businesses, products, product rights or
technologies or any other material capital expenditures. However, we will
continue to evaluate acquisitions of and/or investments in products,
technologies, capital equipment or improvements or companies that complement our
business and may make such acquisitions and/or investments in the future.
Accordingly, we may need to obtain additional sources of capital in the future
to finance any such acquisitions and/or investments. We may not be able to
obtain such financing on commercially reasonable terms, if at all. In the
current global macroeconomic climate, we believe it may be difficult to obtain
additional financing if needed. Even if we are able to obtain additional
financing, it may contain undue restrictions on our operations, in the case of
debt financing, or cause substantial dilution for our stockholders, in the case
of equity financing.
49
Contractual Obligations
We lease certain of our manufacturing and
office facilities and equipment under non-cancelable leases, certain of which
contain renewal options. In addition to the base rent, we are generally required
to pay insurance, real estate taxes and other operating expenses relating to
such facilities.
As of January 2, 2010, we had no material
purchase obligations. Our long-term debt, capital and operating lease
obligations, and pension benefit obligations at January 2, 2010 were as follows:
|
Capital |
|
Long-Term |
|
Operating |
|
Pension |
|
Total |
(In thousands) |
Leases |
|
Debt |
|
Leases |
|
Benefits |
|
Obligations |
Payments Due By Period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
$ |
260 |
|
|
$ |
3,169 |
|
|
$ |
9,395 |
|
$ |
409 |
|
$ |
13,233 |
2011 |
|
259 |
|
|
|
3,169 |
|
|
|
8,220 |
|
|
1,326 |
|
|
12,974 |
2012 |
|
215 |
|
|
|
128,360 |
|
|
|
5,242 |
|
|
844 |
|
|
134,661 |
2013 |
|
192 |
|
|
|
- |
|
|
|
4,687 |
|
|
780 |
|
|
5,659 |
2014 |
|
191 |
|
|
|
- |
|
|
|
4,159 |
|
|
807 |
|
|
5,157 |
Thereafter |
|
643 |
|
|
|
- |
|
|
|
16,553 |
|
|
11,619 |
|
|
28,815 |
|
Total minimum payments |
|
1,760 |
|
|
|
134,698 |
|
|
$ |
48,256 |
|
$ |
15,785 |
|
$ |
200,499 |
|
Less amount representing interest |
|
(370 |
) |
|
|
(7,923 |
) |
|
|
|
|
|
|
|
|
|
Present value of
obligation |
$ |
1,390 |
|
|
$ |
126,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have subleased certain of our facilities.
Future minimum rentals to be received by us under non-cancelable subleases at
January 2, 2010 were as follows:
|
|
Operating |
|
(In thousands) |
Leases |
|
Payments Due By Period: |
|
|
|
2010 |
$ |
373 |
|
2011 |
|
322 |
|
2012 |
|
19 |
|
Total minimum sublease
payments |
$ |
714 |
|
Our gross unrecognized tax benefits at January
2, 2010 were $9.5 million. It is reasonably possible that unrecognized tax
benefits may decrease by $0.6 million within the next twelve months. However, we
are not able to provide a detailed estimate of the timing of payments due to the
uncertainty of when the related tax settlements are due.
New Accounting Standards
In October 2009, the FASB issued Accounting
Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements – a consensus of the FASB
Emerging Issues Task Force, which amends the guidance in ASC 605, Revenue Recognition. ASU No. 2009-13 eliminates the residual method of accounting for
revenue on undelivered products and instead, requires companies to allocate
revenue to each of the deliverable products based on their relative selling
price. In addition, this ASU expands the disclosure requirements surrounding
multiple-deliverable arrangements. ASU No. 2009-13 will be effective for revenue
arrangements entered into for fiscal years beginning on or after June 15, 2010.
We are currently evaluating the impact that ASU No. 2009-13 will have on our
financial position and results of operations.
50
In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements, which amends the guidance in ASC 820,
Fair Value Measurements and
Disclosures. ASU No.
2010-06 requires companies to disclose transfers between Level 1 and
Level 2 within the fair value hierarchy and describe the reasons for the
transfers. In addition, in the reconciliation of assets and liabilities in Level
3 of the fair value hierarchy, companies are required to present sales,
purchases, issuances and settlements on a gross rather than net basis. ASU No.
2010-06 also clarifies that companies should provide fair value measurement
disclosures for each class of assets and liabilities and that companies should
disclose the inputs and valuation techniques used to measure assets and
liabilities that fall in either Level 2 or Level 3. ASU No. 2010-06 will be
effective for interim and annual periods beginning after December 15, 2009,
except for the new Level 3 reconciliation disclosures, which will be effective
for interim and annual periods beginning after December 15, 2010. This update is
not expected to have a material impact on our financial position and results of
operations.
ITEM 7A. 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.
From time to time we use 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 and payables. We do not engage in currency
speculation. The forward exchange contracts generally require us to exchange
U.S. dollars for foreign currencies at maturity, at rates agreed to at the
inception of the contracts. If the counterparties to the exchange 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. Such contracts are typically closed out prior to the end of each
quarter. Transaction gains and losses are included in net income (loss) in our
consolidated statements of operations. Net foreign exchange gains and losses
were not material to our reported results of operations for the last three
years. There were no forward exchange contracts outstanding at January 2, 2010
or January 3, 2009.
As currency exchange rates change, translation
of the statements of operations of international operations into U.S. dollars
affects the year-over-year comparability of operating results. We do not
generally hedge translation risks because cash flows from international
operations are generally reinvested locally. We do not enter into hedges to
minimize volatility of reported earnings because we do not believe they are
justified by the exposure or the cost.
Changes in currency exchange rates that would
have the largest impact on translating our future international operating income
include the euro and Japanese yen. We estimate that a 10% change in foreign
exchange rates would not have had a material effect on our reported net loss for
the year ended January 2, 2010. We believe that this quantitative measure has
inherent limitations because, as discussed in the first paragraph of this
section, it does not take into account any governmental actions or changes in
either customer purchasing patterns or our financing and operating strategies.
Interest Rate Risk
The interest rates we pay on certain of our
debt instruments are subject to interest rate risk. Our collateralized line of
credit bears interest at either the prevailing London Interbank Offered Rate
(LIBOR) plus 1.00% or the British Bankers Association LIBOR Daily Floating Rate
plus 1.00%, at our option. Our $3.2 million revolving line of credit with a
Japanese bank bears interest at LIBOR plus 1.75%. Our other revolving line of
credit and other credit agreements with Japanese banks bear interest at the
lending bank’s prevailing rate. Our convertible subordinated notes and private
placement bonds bear interest at a fixed rate of 2.5% and 1.55% per year,
respectively, and are not impacted by changes in interest rates. Our investments
in cash, cash equivalents and marketable securities, which totaled $141.9
million at January 2, 2010, are sensitive to changes in the general level of
U.S. interest rates. We estimate that a 10% change in the interest rate earned
on our investment portfolio or a 10% change in interest rates on our lines of
credit would not have had a material effect on our net loss for
2009.
51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item
are included in Part IV, Item 15 of this Annual Report on Form 10-K and are
presented beginning on page F-1. The supplementary financial information
required by this item is included in Note 17, Supplementary Quarterly
Consolidated Financial Data (Unaudited), of the Notes to Consolidated Financial
Statements on page F-40.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
As previously reported in our Current Report
on Form 8-K filed with the Securities and Exchange Commission on April 3, 2009,
on March 30, 2009, the Audit Committee of our Board of Directors approved the
dismissal of Ernst & Young LLP, and the engagement of Deloitte & Touche
LLP, as our independent registered public accounting firm. There were no
disagreements or reportable events requiring disclosure pursuant to Item 304(a)
of Regulation S-K of the Securities Act of 1933, as amended, in connection with
such change in accountants and, accordingly, there are no transactions or events
requiring disclosure in this Annual Report on Form 10-K pursuant to Item 304(b)
of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
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 Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this Annual Report on Form
10-K (Evaluation Date) have concluded that as of the Evaluation Date, our
disclosure controls and procedures are 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.
Management’s Annual Report on Internal Control
Over Financial Reporting
Internal Control Over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. This process includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures are being made only in accordance
with authorizations of our management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on our financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of the internal control over financial reporting
to future periods are subject to risk that the internal control may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
52
Management’s Assessment of the Effectiveness of our Internal Control Over
Financial Reporting
Management has evaluated the effectiveness of
our internal control over financial reporting as of January 2, 2010. In
conducting its evaluation, management used the framework set forth in
Internal Control – Integrated
Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on our evaluation under such framework, our management has concluded that our
internal control over financial reporting was effective as of January 2, 2010.
Attestation Report
Deloitte & Touche LLP, the independent
registered public accounting firm that audited our consolidated financial
statements included in this Annual Report on Form 10-K for our fiscal year ended
January 2, 2010, has issued an attestation report on our internal control over
financial reporting. Such attestation report is included below under the heading
“Attestation Report of Independent Registered Public Accounting Firm.”
Changes in Internal Control Over Financial
Reporting
There were no changes in our internal control
over financial reporting during the fourth quarter of the year ended January 2,
2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Attestation Report of Independent Registered
Public Accounting Firm
To the Board of
Directors and Stockholders of
Newport Corporation
Irvine, California
We have audited the
internal control over financial reporting of Newport Corporation and
subsidiaries (the Company) as of January 2, 2010, based on criteria established
in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Assessment of the
Effectiveness of our Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our
audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal
control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial
officers, or persons performing similar functions, and effected by the company’s
board of directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
53
Because of the
inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that
the controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of January 2, 2010, based on the criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited,
in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial
statement schedule as of and for the year ended January 2, 2010 of the Company
and our report dated March 5, 2010 expressed an unqualified opinion on those
financial statements and financial statement schedule and included an
explanatory paragraph regarding the retrospective adjustment to the consolidated
financial statements for the adoption of Accounting Standards Codification
Subtopic 470-20, Debt – Debt with Conversion and Other
Options, in 2009.
/s/ Deloitte
& Touche LLP
Costa Mesa,
California
March 5, 2010
ITEM 9B. OTHER INFORMATION
Not applicable.
54
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required hereunder is
incorporated herein by reference to our Proxy Statement to be filed within 120
days of January 2, 2010 and delivered to stockholders in connection with our
2010 Annual Meeting of Stockholders, which is expected to be held on May 18,
2010.
ITEM 11. EXECUTIVE COMPENSATION
The information required hereunder is
incorporated herein by reference to our Proxy Statement to be filed within 120
days of January 2, 2010 and delivered to stockholders in connection with our
2010 Annual Meeting of Stockholders, which is expected to be held on May 18,
2010.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
All information required hereunder is
incorporated herein by reference to our Proxy Statement to be filed within 120
days of January 2, 2010 and delivered to stockholders in connection with our
2010 Annual Meeting of Stockholders, which is expected to be held on May 18,
2010, with the exception of the information regarding securities authorized for
issuance under our equity compensation plans, which is set forth in Item 5 of
this Annual Report on Form 10-K under the heading “Information Regarding Equity
Compensation Plans” and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required hereunder is
incorporated herein by reference to our Proxy Statement to be filed within 120
days of January 2, 2010 and delivered to stockholders in connection with our
2010 Annual Meeting of Stockholders, which is expected to be held on May 18,
2010.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required hereunder is
incorporated herein by reference to our Proxy Statement to be filed within 120
days of January 2, 2010 and delivered to stockholders in connection with our
2010 Annual Meeting of Stockholders, which is expected to be held on May 18,
2010.
55
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
(a) |
|
The following documents are filed as part of this Annual Report on
Form 10-K: |
|
|
|
|
|
(1) |
|
Financial
Statements. |
|
|
|
|
|
|
|
See
Index to Financial Statements and Schedule on page F-1. |
|
|
|
|
|
(2) |
|
Financial Statement
Schedules. |
|
|
|
|
|
|
|
See Index to
Financial Statements and Schedule on page F-1. All other schedules are
omitted as the required information is not present or is not present in
amounts sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial statements
or notes thereto.
|
|
|
|
|
|
(3) |
|
Exhibits. |
|
|
|
|
|
|
|
The
following exhibits are filed (or incorporated by reference herein) as part
of this Annual Report on Form 10-K: |
Exhibit |
|
|
Number |
|
Description of
Exhibit |
2.1 |
|
|
Stock Purchase
Agreement dated May 28, 2004 by and among the Registrant, Thermo Electron
Corporation and other related parties (incorporated by reference to
Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on June
17, 2004).
|
|
|
|
|
3.1 |
|
|
Restated
Articles of Incorporation of the Registrant, as amended to date
(incorporated by reference to Exhibit 3.1 of the Registrant’s Annual
Report on Form 10-K for the year ended December 30,
2006).
|
|
|
|
|
3.2 |
|
|
Restated Bylaws
of the Registrant, as amended to date (incorporated by reference to
Exhibit 3.2 of the Registrant’s Annual Report on Form 10-K for the year
ended July 31, 1992).
|
|
|
|
|
4.1 |
|
|
Indenture,
dated February 7, 2007, between the Registrant and Wells Fargo Bank, N.A.
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on
February 7, 2007).
|
|
|
|
|
4.2 |
|
|
Registration
Rights Agreement, dated February 7, 2007, between the Registrant and
Merrill, Lynch, Pierce, Fenner & Smith Incorporated (incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on February 7,
2007).
|
|
|
|
|
4.3 |
|
|
Form of 2.50% Convertible Subordinated Note due 2012 (incorporated
by reference to Exhibit 10.3 to the Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on February 7,
2007).
|
|
|
|
|
10.1 |
|
|
Lease Agreement
dated March 27, 1991, as amended, pertaining to premises located in
Irvine, California (incorporated by reference to Exhibit 10.1 of the
Registrant’s Annual Report on Form 10-K for the year ended July 31,
1992).
|
56
Exhibit |
|
|
Number |
|
Description of
Exhibit |
10.2 |
|
|
First Amendment
to Lease dated January 31, 2002, between the Registrant and IRP Muller
Associates, LLC pertaining to premises located in Irvine, California
(incorporated by reference to Exhibit 10.2 of the Registrant’s Annual
Report on Form 10-K for the year ended December 31,
2001).
|
|
|
|
|
10.3 |
|
|
Second
Amendment to Lease dated September 28, 2004, between the Registrant and
BCSD Properties, L.P. pertaining to premises located in Irvine, California
(incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended October 2,
2004).
|
|
|
|
|
10.4 |
* |
|
1992 Stock
Incentive Plan (incorporated by reference to exhibit in the Registrant’s
1992 Proxy Statement).
|
|
|
|
|
10.5 |
* |
|
1999 Stock
Incentive Plan (incorporated by reference to Exhibit 10.11 of the
Registrant’s Annual Report on Form 10-K for the year ended December 31,
1999).
|
|
|
|
|
10.6 |
* |
|
Amendment to
1999 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to
the Registrant’s Registration Statement on Form S-3, No. 333-40878, filed
with the Securities and Exchange Commission on July 6,
2000).
|
|
|
|
|
10.7 |
* |
|
2001 Stock
Incentive Plan (incorporated by reference to Appendix B to the
Registrant’s Definitive Proxy Statement filed with the Securities and
Exchange Commission on April 27, 2001).
|
|
|
|
|
10.8 |
* |
|
Form of
Nonqualified Stock Option Agreement under the Registrant’s 2001 Stock
Incentive Plan, as amended (incorporated by reference to Exhibit 10.9 of
the Registrant’s Annual Report on Form 10-K for the year ended December
31, 2002). |
|
|
|
|
10.9 |
* |
|
Form of
Incentive Stock Option Agreement under the Registrant’s 2001 Stock
Incentive Plan (incorporated by reference to Exhibit 10.10 of the
Registrant’s Annual Report on Form 10-K for the year ended December 31,
2002).
|
|
|
|
|
10.10 |
* |
|
Form of Restricted Stock Agreement under the Registrant’s 2001
Stock Incentive Plan (incorporated by reference to Exhibit 10.3 of the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended October
2, 2004).
|
|
|
|
|
10.11 |
* |
|
Form of
Nonqualified Stock Option Agreement between the Registrant and each of the
former optionholders of Micro Robotics Systems, Inc. (incorporated by
reference to Exhibit 4.1 of the Registrant’s Registration Statement on
Form S-8, File No. 333-86268, filed with the Securities and Exchange
Commission on April 15, 2002).
|
|
|
|
|
10.12 |
* |
|
2006
Performance-Based 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 10, 2006).
|
|
|
|
|
10.13 |
* |
|
Form of
Restricted Stock Unit Award Agreement under the Registrant’s 2006
Performance-Based Stock Incentive Plan (incorporated by reference to
Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 23, 2006).
|
|
|
|
|
10.14 |
* |
|
Form of
Restricted Stock Unit Award Agreement (as revised March 2009) under the
Registrant’s 2006 Performance-Based Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended April 4, 2009).
|
|
|
|
|
10.15 |
* |
|
Form of Stock
Appreciation Right Award Agreement under the Registrant’s 2006
Performance-Based Stock Incentive Plan (incorporated by reference to
Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended April 4, 2009).
|
57
Exhibit |
|
|
Number |
|
Description of
Exhibit |
10. |
16* |
|
Amended and
Restated Employee Stock Purchase Plan, as amended (incorporated by
reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2005).
|
|
|
|
|
10. |
17* |
|
Severance
Compensation Agreement dated April 1, 2008 between the Registrant and
Robert J. Phillippy, President and Chief Executive Officer (incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on April 7,
2008).
|
|
|
|
|
10. |
18* |
|
Severance
Compensation Agreement dated April 1, 2008 between the Registrant and
Charles F. Cargile, Senior Vice President, Chief Financial Officer and
Treasurer (incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 7, 2008).
|
|
|
|
|
10. |
19* |
|
Form of
Severance Compensation Agreement between the Registrant and certain of its
executive and other officers (incorporated by reference to Exhibit 10.3 to
the Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 7, 2008).
|
|
|
|
|
10. |
20* |
|
Form of
Indemnification Agreement between the Registrant and each of its directors
and executive officers (incorporated by reference to Exhibit 10.3 of the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).
|
|
|
|
|
10. |
21 |
|
Loan Agreement
between the Registrant and Bank of America, N.A. dated January 2, 2008
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on
January 7, 2008).
|
|
|
|
|
10. |
22 |
|
Amendment No. 1
to Loan Agreement between the Registrant and Bank of America, N.A. dated
December 1, 2008 (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on December 4, 2008).
|
|
|
|
|
10. |
23 |
|
Security
Agreement between the Registrant and Bank of America, N.A. dated December
1, 2008 (incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 4, 2008).
|
|
|
|
|
10. |
24 |
|
Amendment No. 2
to Loan Agreement between the Registrant and Bank of America, N.A. dated
November 30, 2009 (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on December 2, 2009).
|
|
|
|
|
16. |
1 |
|
Letter from
Ernst & Young LLP to the Securities and Exchange Commission, dated
March 31, 2009 (incorporated by reference to Exhibit 16.1 to the
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 3, 2009).
|
|
|
|
|
21. |
1 |
|
Subsidiaries of the
Registrant. |
|
|
|
|
23. |
1 |
|
Consent of Independent Registered Public
Accounting Firm. |
|
|
|
|
23. |
2 |
|
Consent of Independent Registered Public
Accounting Firm. |
|
|
|
|
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.
|
____________________
* |
|
This
exhibit is identified as a management contract or compensatory plan or
arrangement pursuant to Item 15(a)(3) of Form
10-K. |
58
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) 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, on March 5, 2010.
NEWPORT CORPORATION |
|
|
|
By: |
/s/ Robert J. Phillippy |
|
|
Robert J. Phillippy |
|
President and Chief Executive
Officer |
POWER OF ATTORNEY
The undersigned directors and officers of
Newport Corporation constitute and appoint Robert J. Phillippy and Charles F.
Cargile, or either of them, as their true and lawful attorney and agent with
power of substitution, to do any and all acts and things in our name and behalf
in our capacities as directors and officers and to execute any and all
instruments for us and in our names in the capacities indicated below, which
said attorney and agent may deem necessary or advisable to enable said
corporation to comply with the Securities Exchange Act of 1934, as amended, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this Annual Report on Form 10-K, including
specifically but without limitation, power and authority to sign for us or any
of us in our names in the capacities indicated below, any and all amendments
(including post-effective amendments) hereto; and we do hereby ratify and
confirm all that said attorney and agent shall do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE |
|
TITLE |
|
DATE |
|
|
|
|
|
/s/ Robert J. Phillippy |
|
President and Chief Executive Officer |
|
March 5,
2010 |
Robert J. Phillippy |
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ Charles F. Cargile |
|
Senior Vice President, Chief Financial Officer |
|
March 5,
2010 |
Charles F. Cargile |
|
and Treasurer (Principal Financial Officer) |
|
|
|
|
|
|
|
/s/ Mark J. Nelson |
|
Vice President and Corporate Controller |
|
March 5,
2010 |
Mark J. Nelson |
|
|
|
|
|
|
|
|
|
/s/ Robert L. Guyett |
|
Director |
|
March 5,
2010 |
Robert L. Guyett |
|
|
|
|
|
|
|
|
|
/s/ Michael T. O’Neill |
|
Director |
|
March 5,
2010 |
Michael T. O’Neill |
|
|
|
|
|
|
|
|
|
/s/ C. Kumar N. Patel |
|
Director |
|
March 5,
2010 |
C. Kumar N. Patel |
|
|
|
|
|
|
|
|
|
/s/ Kenneth F.
Potashner |
|
Director |
|
March 5,
2010 |
Kenneth F. Potashner |
|
|
|
|
|
|
|
|
|
/s/ Peter J. Simone |
|
Director |
|
March 5,
2010 |
Peter J. Simone |
|
|
|
|
59
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
|
|
Page |
Reports of Independent Registered Public
Accounting Firms |
|
F-2 |
|
|
|
Consolidated statements of operations
for the years ended |
|
|
January 2, 2010, January 3, 2009 and December 29, 2007 |
|
F-4 |
|
|
|
Consolidated balance sheets as of
January 2, 2010 and January 3, 2009 |
|
F-5 |
|
|
|
Consolidated statements of cash flows
for the years ended |
|
|
January 2, 2010, January 3, 2009 and December 29, 2007 |
|
F-6 |
|
|
|
Consolidated statements of comprehensive
income (loss) and stockholders’ equity |
|
|
for
the years ended January 2, 2010, January 3, 2009 and December 29,
2007 |
|
F-7 |
|
|
|
Notes to consolidated financial
statements |
|
F-8 |
|
|
|
Financial Statement Schedule – Schedule
II – Valuation and qualifying accounts |
|
F-41 |
F-1
Report of Independent Registered Public
Accounting Firm
To the Board of
Directors and Stockholders of
Newport Corporation
Irvine, California
We have audited the
accompanying consolidated balance sheet of Newport Corporation and subsidiaries
(the “Company”) as of January 2, 2010, and the related consolidated statements
of operations, comprehensive income (loss) and stockholders’
equity, and cash flows for the year ended January 2, 2010. Our audit also
included the consolidated financial statement schedule listed in Item 15(a).
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements and financial statement
schedule based on our audit.
We conducted our
audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of January 2, 2010, and the results of its
operations and its cash flows for the year ended January 2, 2010, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
As discussed in Note
8 to the consolidated financial statements, the Company retrospectively adjusted
the consolidated financial statements for the adoption of Accounting Standards
Codification Subtopic 470-20, Debt – Debt with Conversion and Other Options, in 2009.
We have also audited,
in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company’s internal control over financial reporting
as of January 2, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 5, 2010
expressed an unqualified opinion on the Company's internal control over
financial reporting.
/s/ Deloitte &
Touche LLP
Costa Mesa,
California
March 5, 2010
F-2
Report of Independent Registered Public
Accounting Firm
The Board of
Directors and Stockholders of Newport Corporation
We have audited the
accompanying consolidated balance sheet of Newport Corporation as of January 3,
2009, and the related consolidated statements of operations, comprehensive
income (loss) and stockholders' equity, and cash flows for each of the two years
in the period ended January 3, 2009. Our audits also included the financial
statement schedule listed in Item 15(a). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our
audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Newport Corporation at January 3, 2009,
and the consolidated results of its operations and its cash flows for each of
the two years in the period ended January 3, 2009, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note
8 of the consolidated financial statements, effective January 4, 2009, the
Company changed its method of accounting for its convertible debt with the
adoption of the guidance originally issued in Financial Accounting Standards
Board (FASB) Staff Position APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled In Cash
upon Conversion (Including Partial Cash Settlement), and codified in FASB
Accounting Standards Codification (ASC) Topic 470-20, Debt - Debt with Conversion and Other Options.
/s/ Ernst & Young
LLP
Orange County,
California
March 16, 2009, except for Note 8, as to which the date is March
5, 2010
F-3
NEWPORT CORPORATION
Consolidated
Statements of Operations
(In thousands, except per share data)
|
|
Year Ended |
|
|
January 2, |
|
January 3, |
|
December 29, |
|
|
2010 |
|
2009 |
|
2007 |
Net sales |
|
$ |
366,989 |
|
|
$ |
445,336 |
|
|
$ |
445,197 |
|
Cost of sales |
|
|
224,387 |
|
|
|
274,542 |
|
|
|
259,636 |
|
Gross profit |
|
|
142,602 |
|
|
|
170,794 |
|
|
|
185,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses |
|
|
112,177 |
|
|
|
118,518 |
|
|
|
116,476 |
|
Research and development expense |
|
|
36,948 |
|
|
|
46,068 |
|
|
|
42,570 |
|
Loss (gain) on sale of assets and
related costs |
|
|
4,355 |
|
|
|
(2,504 |
) |
|
|
- |
|
Impairment charges |
|
|
360 |
|
|
|
119,944 |
|
|
|
- |
|
Operating income (loss) |
|
|
(11,238 |
) |
|
|
(111,232 |
) |
|
|
26,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery (write-down) of note receivable
and other amounts |
|
|
|
|
|
|
|
|
|
|
|
|
related to previously discontinued operations, net |
|
|
101 |
|
|
|
(7,040 |
) |
|
|
- |
|
Write-down of minority interest investment |
|
|
- |
|
|
|
(2,890 |
) |
|
|
- |
|
Gain on extinguishment of debt |
|
|
328 |
|
|
|
7,734 |
|
|
|
- |
|
Interest and other expense, net |
|
|
(8,564 |
) |
|
|
(6,751 |
) |
|
|
(4,053 |
) |
Income (loss) before income
taxes |
|
|
(19,373 |
) |
|
|
(120,179 |
) |
|
|
22,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) |
|
|
(1,967 |
) |
|
|
28,545 |
|
|
|
(17,229 |
) |
Net income (loss) |
|
$ |
(17,406 |
) |
|
$ |
(148,724 |
) |
|
$ |
39,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.48 |
) |
|
$ |
(4.11 |
) |
|
$ |
1.03 |
|
Diluted |
|
$ |
(0.48 |
) |
|
$ |
(4.11 |
) |
|
$ |
1.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in the computation of income
(loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
36,175 |
|
|
|
36,155 |
|
|
|
38,479 |
|
Diluted |
|
|
36,175 |
|
|
|
36,155 |
|
|
|
39,058 |
|
See accompanying
notes.
F-4
NEWPORT CORPORATION
Consolidated Balance
Sheets
(In thousands, except share and per share data)
|
|
January 2, |
|
January 3, |
|
|
2010 |
|
2009 |
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
87,727 |
|
|
$ |
74,874 |
|
Marketable securities |
|
|
54,196 |
|
|
|
73,546 |
|
Accounts receivable, net of allowance for doubtful accounts of
$3,111 |
|
|
|
|
|
|
|
|
and $1,642 as of January 2, 2010 and January 3, 2009,
respectively |
|
|
72,553 |
|
|
|
75,258 |
|
Notes receivable |
|
|
2,264 |
|
|
|
6,610 |
|
Inventories |
|
|
89,908 |
|
|
|
98,833 |
|
Deferred income taxes |
|
|
4,835 |
|
|
|
13,456 |
|
Prepaid expenses and other current assets |
|
|
13,963 |
|
|
|
10,740 |
|
Total current assets |
|
|
325,446 |
|
|
|
353,317 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
52,901 |
|
|
|
60,245 |
|
Goodwill |
|
|
69,932 |
|
|
|
68,540 |
|
Deferred income taxes |
|
|
4,437 |
|
|
|
2,555 |
|
Intangible assets,
net |
|
|
28,166 |
|
|
|
26,696 |
|
Investments and other assets |
|
|
12,525 |
|
|
|
13,550 |
|
|
|
$ |
493,407 |
|
|
$ |
524,903 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Short-term obligations |
|
$ |
11,056 |
|
|
$ |
14,089 |
|
Accounts payable |
|
|
24,312 |
|
|
|
24,636 |
|
Accrued payroll and related expenses |
|
|
22,231 |
|
|
|
21,827 |
|
Accrued expenses and other current liabilities |
|
|
31,337 |
|
|
|
29,258 |
|
Total current liabilities |
|
|
88,936 |
|
|
|
89,810 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
121,231 |
|
|
|
135,478 |
|
Obligations under capital
leases, less current portion |
|
|
1,231 |
|
|
|
1,220 |
|
Accrued pension liabilities |
|
|
10,215 |
|
|
|
10,652 |
|
Deferred income taxes and
other liabilities |
|
|
17,158 |
|
|
|
22,546 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Common stock, par value $0.1167 per share, 200,000,000 shares
authorized; |
|
|
|
|
|
|
|
|
36,315,834 and 36,048,634 shares issued and outstanding as of |
|
|
|
|
|
|
|
|
January 2, 2010 and January 3, 2009, respectively |
|
|
4,238 |
|
|
|
4,207 |
|
Capital in excess of par value |
|
|
409,773 |
|
|
|
407,047 |
|
Accumulated other comprehensive income |
|
|
10,379 |
|
|
|
6,291 |
|
Accumulated deficit |
|
|
(169,754 |
) |
|
|
(152,348 |
) |
Total stockholders’ equity |
|
|
254,636 |
|
|
|
265,197 |
|
|
|
$ |
493,407 |
|
|
$ |
524,903 |
|
|
See accompanying
notes.
F-5
NEWPORT CORPORATION
Consolidated
Statements of Cash Flows
(In thousands)
|
|
Year Ended |
|
|
January 2, |
|
January 3, |
|
December 29, |
|
|
2010 |
|
2009 |
|
2007 |
CASH FLOWS FROM OPERATING
ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(17,406 |
) |
|
$ |
(148,724 |
) |
|
$ |
39,691 |
|
Adjustments to reconcile net income (loss) to net cash provided
by |
|
|
|
|
|
|
|
|
|
|
|
|
operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
19,932 |
|
|
|
21,882 |
|
|
|
20,991 |
|
Amortization of discount on convertible subordinated notes |
|
|
4,575 |
|
|
|
5,182 |
|
|
|
4,459 |
|
Impairment of goodwill and intangible assets |
|
|
360 |
|
|
|
119,944 |
|
|
|
- |
|
Deferred income taxes, net |
|
|
210 |
|
|
|
15,186 |
|
|
|
(19,679 |
) |
Provision for losses on inventories |
|
|
10,298 |
|
|
|
7,989 |
|
|
|
4,501 |
|
Write-down of note receivable and other amounts |
|
|
|
|
|
|
|
|
|
|
|
|
related to previously discontinued operations |
|
|
- |
|
|
|
7,061 |
|
|
|
- |
|
Write-down of minority interest investment |
|
|
- |
|
|
|
2,890 |
|
|
|
- |
|
Stock-based compensation expense |
|
|
2,332 |
|
|
|
1,803 |
|
|
|
3,668 |
|
Provision for doubtful accounts, net |
|
|
1,346 |
|
|
|
574 |
|
|
|
190 |
|
Loss on disposal of diode laser assets |
|
|
3,765 |
|
|
|
- |
|
|
|
- |
|
Loss (gain) on disposal of property and equipment |
|
|
860 |
|
|
|
(2,818 |
) |
|
|
198 |
|
Gain on extinguishment of debt |
|
|
(328 |
) |
|
|
(7,734 |
) |
|
|
- |
|
Increase (decrease) in cash, net of acquisitions and divestitures, due to
changes in: |
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable |
|
|
7,021 |
|
|
|
9,435 |
|
|
|
9,862 |
|
Inventories |
|
|
(6,179 |
) |
|
|
5,537 |
|
|
|
(22,712 |
) |
Prepaid expenses and other assets |
|
|
(1,419 |
) |
|
|
(64 |
) |
|
|
(2,193 |
) |
Accounts payable |
|
|
(2,083 |
) |
|
|
(8,538 |
) |
|
|
1,147 |
|
Accrued payroll and related expenses |
|
|
293 |
|
|
|
(1,101 |
) |
|
|
(5,032 |
) |
Accrued expenses and other liabilities |
|
|
1,088 |
|
|
|
16,223 |
|
|
|
284 |
|
Net cash provided by operating activities |
|
|
24,665 |
|
|
|
44,727 |
|
|
|
35,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and
equipment |
|
|
(9,668 |
) |
|
|
(18,575 |
) |
|
|
(18,705 |
) |
Proceeds from the sale of property and equipment, net of selling
costs |
|
|
- |
|
|
|
6,983 |
|
|
|
- |
|
Purchase of marketable
securities |
|
|
(36,701 |
) |
|
|
(71,789 |
) |
|
|
(58,061 |
) |
Proceeds from the sale and maturity of marketable securities |
|
|
57,485 |
|
|
|
51,759 |
|
|
|
54,013 |
|
Acquisition of
business |
|
|
(3,000 |
) |
|
|
- |
|
|
|
- |
|
Net cash provided by (used in) investing activities |
|
|
8,116 |
|
|
|
(31,622 |
) |
|
|
(22,753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance
long-term debt |
|
|
- |
|
|
|
3,307 |
|
|
|
147,543 |
|
Proceeds related to equity component of long-term debt |
|
|
- |
|
|
|
- |
|
|
|
27,457 |
|
Debt issuance costs |
|
|
- |
|
|
|
- |
|
|
|
(4,690 |
) |
Equity issuance costs |
|
|
- |
|
|
|
- |
|
|
|
(873 |
) |
Repayment of long-term
debt |
|
|
(18,644 |
) |
|
|
(16,850 |
) |
|
|
(48,403 |
) |
Proceeds from short term borrowings |
|
|
23,867 |
|
|
|
33,184 |
|
|
|
14 |
|
Repayment of short term
borrowings |
|
|
(26,609 |
) |
|
|
(34,704 |
) |
|
|
- |
|
Proceeds from the issuance of common stock under employee plans |
|
|
765 |
|
|
|
2,053 |
|
|
|
5,064 |
|
Purchases of the Company’s
common stock |
|
|
- |
|
|
|
(12,822 |
) |
|
|
(86,998 |
) |
Net cash provided by (used in) financing activities |
|
|
(20,621 |
) |
|
|
(25,832 |
) |
|
|
39,114 |
|
Impact of foreign exchange rate changes on cash balances |
|
|
693 |
|
|
|
(1,136 |
) |
|
|
1,071 |
|
Net increase (decrease) in cash and cash
equivalents |
|
|
12,853 |
|
|
|
(13,863 |
) |
|
|
52,807 |
|
Cash and cash equivalents at beginning of year |
|
|
74,874 |
|
|
|
88,737 |
|
|
|
35,930 |
|
Cash and cash equivalents at end of
year |
|
$ |
87,727 |
|
|
$ |
74,874 |
|
|
$ |
88,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow
information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during
the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
4,185 |
|
|
$ |
5,146 |
|
|
$ |
3,793 |
|
Income taxes, net |
|
$ |
(53 |
) |
|
$ |
26 |
|
|
$ |
3,488 |
|
Property and equipment accrued in accounts payable at year end |
|
$ |
1,460 |
|
|
$ |
- |
|
|
$ |
- |
|
See accompanying
notes.
F-6
NEWPORT CORPORATION
Consolidated Statements of Comprehensive Income (Loss) and Stockholders’
Equity
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in |
|
other |
|
|
|
|
|
Total |
|
|
Common Stock |
|
excess of |
|
comprehensive |
|
Accumulated
|
|
stockholders' |
|
|
Shares |
|
Amount |
|
par value |
|
income |
|
deficit |
|
equity |
December 30, 2006 |
|
41,458 |
|
$ |
4,838 |
|
|
$ |
467,235 |
|
|
$ |
4,410 |
|
|
$ |
(41,530 |
) |
|
$ |
434,953 |
|
Net income |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
39,691 |
|
|
|
39,691 |
|
Foreign currency translation
gain |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,868 |
|
|
|
- |
|
|
|
4,868 |
|
Unrecognized net pension gain, net of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income tax of $457 |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
783 |
|
|
|
- |
|
|
|
783 |
|
Unrealized gain on marketable
securities |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
182 |
|
|
|
- |
|
|
|
182 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,524 |
|
Cumulative effect on prior year
accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deficit related to the adoption of ASC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
740-10-25 (formerly FIN 48) (Note 11) |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,785 |
) |
|
|
(1,785 |
) |
Equity component of long-term debt |
|
- |
|
|
|
- |
|
|
|
27,457 |
|
|
|
- |
|
|
|
- |
|
|
|
27,457 |
|
Equity issuance costs |
|
- |
|
|
|
- |
|
|
|
(873 |
) |
|
|
- |
|
|
|
- |
|
|
|
(873 |
) |
Issuance of common stock under employee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plans |
|
842 |
|
|
|
98 |
|
|
|
4,966 |
|
|
|
- |
|
|
|
- |
|
|
|
5,064 |
|
Stock-based compensation
expense |
|
- |
|
|
|
- |
|
|
|
3,497 |
|
|
|
- |
|
|
|
- |
|
|
|
3,497 |
|
Repurchases of common stock |
|
(5,382 |
) |
|
|
(628 |
) |
|
|
(86,370 |
) |
|
|
- |
|
|
|
- |
|
|
|
(86,998 |
) |
December 29, 2007 |
|
36,918 |
|
|
|
4,308 |
|
|
|
415,912 |
|
|
|
10,243 |
|
|
|
(3,624 |
) |
|
|
426,839 |
|
Net loss |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(148,724 |
) |
|
|
(148,724 |
) |
Foreign currency translation
loss |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,251 |
) |
|
|
- |
|
|
|
(3,251 |
) |
Unrecognized net pension gain, net of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income tax of $48 |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
|
|
- |
|
|
|
6 |
|
Unrealized loss on marketable
securities |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(707 |
) |
|
|
- |
|
|
|
(707 |
) |
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(152,676 |
) |
Issuance of common stock under
employee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plans |
|
320 |
|
|
|
38 |
|
|
|
2,015 |
|
|
|
- |
|
|
|
- |
|
|
|
2,053 |
|
Stock-based compensation expense |
|
- |
|
|
|
- |
|
|
|
1,803 |
|
|
|
- |
|
|
|
- |
|
|
|
1,803 |
|
Repurchases of common stock |
|
(1,189 |
) |
|
|
(139 |
) |
|
|
(12,683 |
) |
|
|
- |
|
|
|
- |
|
|
|
(12,822 |
) |
January 3, 2009 |
|
36,049 |
|
|
|
4,207 |
|
|
|
407,047 |
|
|
|
6,291 |
|
|
|
(152,348 |
) |
|
|
265,197 |
|
Net loss |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(17,406 |
) |
|
|
(17,406 |
) |
Foreign currency translation gain |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,394 |
|
|
|
- |
|
|
|
2,394 |
|
Unrecognized net pension loss, net
of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income tax of $186 |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(607 |
) |
|
|
- |
|
|
|
(607 |
) |
Unrealized gain on marketable securities, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of income tax of
$600 |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,301 |
|
|
|
- |
|
|
|
2,301 |
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,318 |
) |
Issuance of common stock under employee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plans |
|
267 |
|
|
|
31 |
|
|
|
734 |
|
|
|
- |
|
|
|
- |
|
|
|
765 |
|
Extinguishment of equity component
of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
long-term debt |
|
- |
|
|
|
- |
|
|
|
(340 |
) |
|
|
- |
|
|
|
- |
|
|
|
(340 |
) |
Stock-based compensation expense |
|
- |
|
|
|
- |
|
|
|
2,332 |
|
|
|
- |
|
|
|
- |
|
|
|
2,332 |
|
January 2, 2010 |
|
36,316 |
|
|
$ |
4,238 |
|
|
$ |
409,773 |
|
|
$ |
10,379 |
|
|
$ |
(169,754 |
) |
|
$ |
254,636 |
|
|
See accompanying
notes.
F-7
NEWPORT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization
Newport Corporation
(the Company) is a global supplier of advanced technology products and systems
to a wide range of industries, including scientific research, microelectronics,
aerospace and defense/security, life and health sciences, and industrial
manufacturing. The Company provides a broad portfolio of products to customers
in these end markets, allowing it to offer them an end-to-end resource for
photonics solutions.
Basis of Presentation
The accompanying
financial statements include the accounts of the Company and its wholly owned
subsidiaries. All intercompany transactions and balances have been eliminated in
consolidation.
The Company uses a
conventional 52/53-week accounting fiscal year ending on the Saturday closest to
December 31, and its fiscal quarters end on the Saturday closest to the end of
each corresponding calendar quarter. Fiscal year 2009 (referred to herein as
2009) ended January 2, 2010, fiscal year 2008 (referred to herein as 2008) ended
on January 3, 2009 and fiscal year 2007 (referred to herein as 2007) ended on
December 29, 2007. Fiscal year 2008 consisted of 53 weeks and fiscal years 2009
and 2007 each consisted of 52 weeks.
Foreign Currency Translation
Assets and
liabilities for the Company’s international operations are translated into U.S.
dollars using current rates of exchange in effect at the balance sheet dates.
Items of income and expense for the Company’s international operations are
translated using the monthly average exchange rates in effect for the period in
which the items occur. The functional currency for the majority of the Company’s
international operations is the local currency. Where the local currency is the
functional currency, the resulting translation gains and losses are included as
a component of stockholders’ equity in accumulated other comprehensive income.
Where the U.S. dollar is the functional currency, the resulting translation
gains and losses are included in the results of operations. Realized foreign
currency transaction gains and losses for all entities are included in the
results of operations.
Derivative Instruments
The Company
recognizes all derivative financial instruments in the consolidated financial
statements at fair value regardless of the purpose or intent for holding the
instrument. The accounting for changes in the fair value (i.e., gains or losses)
of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of hedging
relationship. The Company does not engage in currency speculation; however, the
Company uses 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 and payables. Such
contracts do not qualify for hedge accounting and accordingly, changes in fair
values are reported in the statement of operations. The forward exchange
contracts generally require the Company to exchange U.S. dollars for foreign
currencies at maturity, at rates agreed to at the inception of the contracts. If
the counterparties to the exchange contracts (typically highly rated banks) do
not fulfill their obligations to deliver the contracted currencies, the Company
could be at risk for any currency related fluctuations. Such contracts are
typically closed out prior to the end of each quarter. Transaction gains and
losses are included in interest and other expense, net in the accompanying consolidated statements of
operations. There were no forward exchange contracts outstanding at January 2,
2010 or January 3, 2009.
Cash and Cash Equivalents and Marketable
Securities
The Company considers
cash and highly liquid investments with an original maturity of three months or
less at the date of purchase to be cash equivalents. Investments with original
maturities exceeding three months at the date of purchase are classified as
marketable securities. All marketable securities are classified as available for
sale and are recorded at market value using the specific identification method;
unrealized gains and losses are reflected in accumulated other comprehensive income in the accompanying consolidated balance
sheets, unless the Company determines there is an other-than-temporary
impairment, in which case the loss is recorded in the consolidated statements of
operations.
F-8
Accounts and Notes
Receivable
The Company records
reserves for specific receivables deemed to be at risk for collection, as well
as a reserve based on its historical collections experience. The Company
estimates the collectibility of customer receivables on an ongoing basis by
reviewing past due invoices and assessing the current creditworthiness of each
customer. A considerable amount of judgment is required in assessing the
ultimate realization of these receivables.
Certain of the
Company’s Japanese customers provide the Company with promissory notes on the
due date of the receivable. The payment dates of the promissory notes range
between 60 and 150 days from the original receivable due date. For balance sheet
presentation purposes, amounts due to the Company under such promissory notes
are reclassified from accounts receivable to notes receivable. At January 2,
2010 and January 3, 2009, notes receivable, net totaled $2.3 million and $6.6 million, respectively. Certain of these
promissory notes are sold with recourse to banks in Japan with which the Company
regularly does business. The sales of these receivables have been accounted for
as secured borrowings, as the Company has not met the criteria for sale
treatment in accordance with Accounting Standards Codification (ASC) 860-30,
Transfers and Servicing - Secured Borrowing
and Collateral. The
principal amount of the promissory notes sold with recourse is included in both
notes receivable, net and short-term obligations until the underlying note obligations are ultimately satisfied through
payment by the customers to the banks. At January 2, 2010 and January 3, 2009,
the principal amount of such promissory notes included in notes receivable, net and short-term obligations in the accompanying consolidated balance
sheets totaled $1.3 million and $4.3 million, respectively.
Concentrations of Credit Risk
Financial instruments
that potentially subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents, marketable securities, foreign exchange
contracts and accounts receivable. The Company maintains cash and cash
equivalents with and purchases its foreign exchange contracts from major
financial institutions and performs periodic evaluations of the relative credit
standing of these financial institutions in order to limit the amount of credit
exposure with any one institution. The majority of the Company’s marketable
securities are managed by an investment management firm, under the oversight of
the Company’s senior financial management team. The portfolio manager invests
the funds in accordance with the Company’s investment policy, which, among other
things, limits the amounts that may be invested with one issuer. Such policy is
reviewed regularly by the Company’s senior financial management team and the
Audit Committee of the Company’s Board of Directors.
The Company’s
customers are concentrated in the scientific research, aerospace and
defense/security, microelectronics, life and health sciences and industrial
manufacturing markets, and their ability to pay may be influenced by the
prevailing macroeconomic conditions present in these markets. Receivables from
the Company’s customers are generally unsecured. To reduce the overall risk of
collection, the Company performs ongoing evaluations of its customers’ financial
condition. For the years ended January 2, 2010, January 3, 2009 and December 29,
2007, no customer accounted for 10% or more of the Company’s net sales or 10% or
more of the Company’s gross accounts receivable as of the end of such year.
Pension Plans
Several of the
Company’s non-U.S. subsidiaries have defined benefit pension plans covering
substantially all full-time employees at those subsidiaries. Some of the plans
are unfunded, as permitted under the plans 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.
F-9
Inventories
Inventories are
stated at the lower of cost (determined on either a first-in, first-out (FIFO)
or average cost basis) or fair market value and include materials, labor and
manufacturing overhead. The Company writes down excess and obsolete inventory to
net realizable value. Once the Company writes down the carrying value of
inventory, a new cost basis is established, and the Company does not increase
the newly established cost basis based on subsequent changes in facts and
circumstances. In assessing the ultimate realization of inventories, the Company
makes judgments as to future demand requirements and compares those requirements
with the current or committed inventory levels. The Company records any amounts
required to reduce the carrying value of inventory to net realizable value as a
charge to cost of sales.
Property and Equipment
Property and
equipment are stated at cost, less accumulated depreciation. Depreciation
expense includes amortization of assets under capital leases. Depreciation is
recorded principally on a straight-line basis over the estimated useful lives of
the assets as follows:
|
Buildings and improvements |
3 to 40 years |
|
Machinery and equipment |
2 to 20 years |
|
Office equipment |
3 to 10
years |
Leasehold
improvements are amortized over the shorter of their estimated useful life or
the remaining lease term.
Intangible Assets, including Goodwill
Intangible assets,
other than goodwill and indefinite-lived trademarks and trade names, are
amortized on a straight-line basis over their estimated useful lives as follows:
|
Developed technology |
10 years |
|
Customer relationships |
10 years |
|
Other |
1 to 3
years |
Indefinite-lived
trademarks and trade names are subject to annual impairment testing and are not
amortized.
Goodwill represents
the excess of the purchase price of the net assets of acquired entities over the
fair value of such assets. Under ASC 350, Intangibles – Goodwill and Other, goodwill and other intangible assets are not
amortized but are tested for impairment at least annually or when circumstances
exist that would indicate an impairment of such goodwill or other intangible
assets. The Company performs the annual impairment test as of the beginning of
the fourth quarter of each year. A two-step test is used to identify the
potential impairment and to measure the amount of impairment, if any. The first
step is based upon a comparison of the fair value of each of the Company’s
reporting units, as defined, and the carrying value of the reporting unit’s net
assets, including goodwill. If the fair value of the reporting unit exceeds its
carrying value, goodwill is considered not to be impaired; otherwise, step
two is required. Under step two, the implied fair value of goodwill, calculated
as the difference between the fair value of the reporting unit and the fair
value of the net assets of the reporting unit, is compared with the
carrying value of goodwill. The excess of the carrying value of goodwill over
the implied fair value represents the amount impaired. Based upon this two-step
process, the Company determined that its goodwill was not impaired as of the
beginning of the fourth quarter of 2008. However, due to a continued decline in
its market capitalization, the Company reevaluated its goodwill as of the end of
the fourth quarter of 2008 and determined that the goodwill related to its
Lasers Division was impaired and recorded a goodwill impairment charge of $104.6
million. There were no such impairments during 2007 or 2009.
F-10
During 2008, the
Company conducted an impairment analysis on its intangible assets and, due to
diminished cash flow projections for certain products, determined that
certain developed technology related to its Lasers Division was impaired.
Accordingly, the Company recorded impairment charges totaling $15.4 million,
which consisted of a charge of $12.5 million related to developed technology
acquired by the Company in connection with its acquisition of Spectra-Physics,
Inc. and certain related photonics entities (collectively, Spectra-Physics) in
2004 and a charge of $2.9 million related to developed technology that the
Company acquired from Picarro, Inc. (Picarro) in 2006. During 2009, the Company
determined it was no longer going to pursue technology related to certain
purchased in-process research and development related to the New Focus business
and recorded an impairment charge of $0.4 million associated with such
technology.
The Company
determines its reporting units by identifying those operating segments or
components for which discrete financial information is available which is
regularly reviewed by the management of that unit. For any acquisition, the
Company allocates goodwill to the applicable reporting unit at the completion of
the purchase price allocation through specific identification.
Fair value of the
Company’s reporting units is determined using a combination of a comparative
company analysis, weighted at 25%, a comparative transaction analysis, weighted
at 25%, and a discounted cash flow analysis, weighted at 50%. The comparative
company analysis establishes fair value by applying market multiples to the
Company’s revenue and earnings before interest, income taxes, depreciation and
amortization. Such multiples are determined by comparing the Company’s reporting
units with other publicly traded companies within the respective industries
that have similar economic characteristics. In addition, a control premium is
added to reflect the value an investor would pay to obtain a controlling
interest, which is consistent with the median control premium for transactions
in those industries in which the Company does business. The comparative
transaction analysis establishes fair value by applying market multiples to the
Company’s revenue. Such multiples are determined through recent mergers and
acquisitions for companies within the respective industries that have similar
economic characteristics to the Company’s reporting units. The discounted cash
flow analysis establishes fair value by estimating the present value of the
projected future cash flows of each reporting unit and applying a terminal
growth rate. The present value of estimated discounted future cash flows is
determined using the Company’s estimates of revenue and costs for the reporting
units, driven by assumed growth rates, as well as appropriate discount rates.
The discount rate is determined using a weighted-average cost of capital that
incorporates market participant data and a risk premium applicable to each
reporting unit. In 2008, in performing the impairment analysis from which the
Company concluded that the goodwill related to its Lasers Division was impaired,
the Company determined that, due to market volatility, past transactions were
deemed not to be comparable to the expected results from current transactions,
and therefore, the comparative transaction analysis was excluded from such
analysis, and an additional weight of 25% was added to the discounted cash flow
analysis.
Investments
The Company holds
minority interest investments in companies having operations or technologies in
areas which are within or adjacent to its strategic focus when acquired, all of
which are privately held and whose values are difficult to determine. The
Company accounts for minority interest investments in common stock under the
cost method for investments in companies over which it does not have the ability
to exercise significant influence.
Long-Lived Assets
The Company assesses
the impairment of long-lived assets, other than goodwill and other
indefinite-lived intangible assets, to determine if their carrying value may not
be recoverable. The determination of related estimated useful lives and whether
or not these assets are impaired involves significant judgments, related
primarily to the future profitability and/or future value of the assets. Changes
in the Company’s strategic plan and/or other-than-temporary changes in market
conditions could significantly impact these judgments and could require
adjustments to recorded asset balances. Long-lived assets are evaluated for
impairment at least annually in the fourth quarter of each year, as well as
whenever an event or change in circumstances has occurred that could have a
significant adverse effect on the fair value of long-lived assets.
F-11
Warranty
Unless otherwise
stated in the Company’s product literature or in its agreements with customers,
products sold by the Company’s Photonics and Precision Technologies (PPT)
Division generally carry a one-year warranty from the original invoice date on
all product materials and workmanship, other than filters, gratings and crystals
products, which generally carry a 90 day warranty. Products of this division
sold to original equipment manufacturer (OEM) customers generally carry longer
warranties, typically 15 to 19 months. Products sold by the Company’s Lasers
Division carry warranties that vary by product and product component, but that
generally range from 90 days to two years. In certain cases, such warranties for
Lasers Division products are limited by either a set time period or a maximum
amount of usage of the product, whichever occurs first. Defective products will
either be 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 at the time revenue for that product
is recognized.
Environmental Reserves
The Company accrues
for losses associated with environmental remediation obligations when such
losses are probable and reasonably estimable. Accruals for estimated losses from
environmental remediation obligations generally are recognized no later than
completion of the remedial feasibility study. Such accruals are adjusted as
further information develops or circumstances change. Costs of future
expenditures are discounted to their present value. Recoveries of environmental
remediation costs from other parties are recognized as assets when their receipt
is deemed probable.
Revenue Recognition
The Company
recognizes revenue after title to and risk of loss of products have passed to
the customer, or delivery of the service has been completed, provided that
persuasive evidence of an arrangement exists, the fee is fixed or determinable
and collectibility is reasonably assured. The Company recognizes revenue and
related costs for arrangements with multiple deliverables, such as equipment and
installation, as each element is delivered or completed based upon its relative
fair value, determined based upon the price that would be charged on a
standalone basis. If a portion of the total contract price is not payable until
installation is complete, the Company does not recognize such portion as revenue
until completion of installation; however, the Company records the full cost of
the product at the time of shipment. Revenue for extended service contracts is
recognized over the related contract periods. Certain sales to international
customers are made through third-party distributors. A discount below list price
is generally provided at the time the product is sold to the distributor, and
such discount is reflected as a reduction in net sales. Freight costs billed to
customers are included in net sales, and
freight costs incurred are included in selling, general and administrative expenses. Sales taxes collected from customers are
recorded on a net basis and any amounts not yet remitted to tax authorities are
included in accrued expenses and other current
liabilities.
Customers (including
distributors) generally have 30 days from the original invoice date (generally
60 days for international customers) to return a standard catalog product
purchase for exchange or credit. Catalog products must be returned in the
original condition and meet certain other criteria. Custom, option-configured
and certain other products as defined in the terms and conditions of sale cannot
be returned without the Company’s consent. For certain products, the Company
establishes a sales return reserve based on the historical product returns.
Advertising
The Company expenses
the costs of advertising as incurred, except for the costs of its product
catalogs, which are accounted for as prepaid supplies until they are distributed
to customers or are no longer expected to be used. Capitalized catalog costs
were not material at January 2, 2010 and January 3, 2009. Advertising costs,
including the costs of the Company’s participation at industry trade shows,
totaled $3.3 million, $4.1 million and $4.0 million for 2009, 2008 and 2007,
respectively.
F-12
Shipping and Handling
Costs
The Company expenses
the costs of shipping and handling as incurred. Shipping and handling costs of
$4.3 million, $5.3 million and $4.4 million are included in selling, general and administrative expenses for 2009, 2008 and 2007, respectively.
Research and Development
All research and
development costs are expensed as incurred.
Income Taxes
The Company utilizes
the asset and liability method of accounting for income taxes as set forth in
ASC 740, Income Taxes. Deferred income taxes are recognized for the
future tax consequences of temporary differences using enacted statutory tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Temporary differences
include the difference between the financial statement carrying amounts and the
tax bases of existing assets and liabilities and operating loss and tax credit
carryforwards. In accordance with the provisions of ASC 740, a valuation
allowance for deferred tax assets is recorded to the extent the Company cannot
determine that the ultimate realization of the net deferred tax assets is more
likely than not.
Effective at the
beginning of fiscal year 2007, the Company adopted ASC 740-10-25, Income Taxes - Recognition, for the recognition, measurement and
disclosure of uncertain tax positions. Under ASC 740-10-25, income tax positions
must meet the more-likely-than-not threshold to be
recognized in the financial statements. The Company’s policy is to record
interest and penalties associated with unrecognized tax benefits as income tax
expense.
Income (loss) per Share