Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 


 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended October 3, 2015

 

OR

 

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

 

For the transition period from            to            

 

Commission File Number:  000-01649

 


 

NEWPORT CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada

 

94-0849175

(State or other jurisdiction of

 

(IRS Employer Identification No.)

incorporation or organization)

 

 

 

1791 Deere Avenue, Irvine, California 92606

(Address of principal executive offices)   (Zip Code)

 

(949) 863-3144

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 


 

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

 

Yes x  No o

 

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

 

Yes x  No o

 

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

 

Large accelerated filer

x

Accelerated filer o

 

Non-accelerated filer

o

(Do not check if a smaller reporting company)

Smaller reporting company o

 

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

 

Yes o  No x

 

As of October 30, 2015, 38,576,708 shares of the registrant’s sole class of common stock were outstanding.

 

 

 



Table of Contents

 

NEWPORT CORPORATION

 

FORM 10-Q

 

INDEX

 

 

Page
Number

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements (unaudited):

 

 

 

 

 

Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended October 3, 2015 and September 27, 2014

3

 

 

 

 

Consolidated Balance Sheets as of October 3, 2015 and January 3, 2015

4

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended October 3, 2015 and September 27, 2014

5

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

Item 2.

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

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.

Controls and Procedures

28

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

Item 6.

Exhibits

30

 

 

SIGNATURES

31

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

NEWPORT CORPORATION

Consolidated Statements of Income and Comprehensive Income

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 3,

 

September 27,

 

October 3,

 

September 27,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

147,560

 

$

146,299

 

$

452,192

 

$

446,421

 

Cost of sales

 

85,133

 

80,334

 

255,565

 

245,109

 

Gross profit

 

62,427

 

65,965

 

196,627

 

201,312

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

37,730

 

39,122

 

117,029

 

120,413

 

Research and development expense

 

14,232

 

14,082

 

44,345

 

42,538

 

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

 

 

 

1,088

 

(411

)

Operating income

 

10,465

 

12,761

 

34,165

 

38,772

 

 

 

 

 

 

 

 

 

 

 

Interest and other expense, net

 

(1,353

)

(958

)

(3,320

)

(2,592

)

Income before income taxes

 

9,112

 

11,803

 

30,845

 

36,180

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

2,009

 

2,330

 

9,308

 

9,769

 

Net income

 

7,103

 

9,473

 

21,537

 

26,411

 

Net income attributable to non-controlling interests

 

 

3

 

 

103

 

Net income attributable to Newport Corporation

 

$

7,103

 

$

9,470

 

$

21,537

 

$

26,308

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

7,103

 

$

9,473

 

$

21,537

 

$

26,411

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation gains (losses)

 

673

 

(7,203

)

(5,290

)

(7,567

)

Unrecognized net pension gains, net of tax

 

79

 

204

 

508

 

306

 

Unrealized losses on investments and marketable securities, net of tax

 

(13

)

(155

)

(122

)

(177

)

Other comprehensive income (loss)

 

739

 

(7,154

)

(4,904

)

(7,438

)

Comprehensive income

 

$

7,842

 

$

2,319

 

$

16,633

 

$

18,973

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income attributable to non-controlling interests

 

$

 

$

(5

)

$

 

$

110

 

Comprehensive income attributable to Newport Corporation

 

7,842

 

2,324

 

16,633

 

18,863

 

Comprehensive income

 

$

7,842

 

$

2,319

 

$

16,633

 

$

18,973

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to Newport Corporation:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.18

 

$

0.24

 

$

0.55

 

$

0.66

 

Diluted

 

$

0.18

 

$

0.23

 

$

0.54

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

Shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Basic

 

38,982

 

39,921

 

39,434

 

39,776

 

Diluted

 

39,374

 

40,612

 

40,066

 

40,546

 

 

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

 

3



Table of Contents

 

NEWPORT CORPORATION

Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

 

 

October 3,

 

January 3,

 

 

 

2015

 

2015

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

30,440

 

$

46,883

 

Restricted cash

 

974

 

1,704

 

Marketable securities

 

 

57

 

Accounts receivable, net of allowance for doubtful accounts of $1,297 and $1,242 as of October 3, 2015 and January 3, 2015, respectively

 

103,714

 

96,512

 

Inventories

 

122,845

 

112,440

 

Current deferred tax assets

 

20,606

 

20,734

 

Prepaid expenses and other current assets

 

18,294

 

14,948

 

Total current assets

 

296,873

 

293,278

 

 

 

 

 

 

 

Property and equipment, net

 

84,362

 

82,793

 

Goodwill

 

103,854

 

97,524

 

Long-term deferred tax assets

 

6,049

 

5,005

 

Intangible assets, net

 

68,228

 

70,811

 

Investments and other assets

 

28,486

 

30,516

 

Total assets

 

$

587,852

 

$

579,927

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings

 

$

3,579

 

$

3,772

 

Accounts payable

 

31,281

 

31,448

 

Accrued payroll and related expenses

 

31,890

 

34,607

 

Accrued expenses and other current liabilities

 

30,785

 

31,797

 

Total current liabilities

 

97,535

 

101,624

 

 

 

 

 

 

 

Long-term debt

 

84,254

 

71,000

 

Pension liabilities

 

29,432

 

28,554

 

Long-term deferred tax liabilities

 

14,119

 

14,272

 

Other long-term liabilities

 

6,881

 

7,773

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $0.1167 per share, 200,000,000 shares authorized; 38,576,708 and 39,603,662 shares issued and outstanding as of October 3, 2015 and January 3, 2015, respectively

 

4,506

 

4,626

 

Capital in excess of par value

 

450,989

 

468,575

 

Accumulated other comprehensive loss

 

(22,886

)

(17,982

)

Accumulated deficit

 

(76,978

)

(98,515

)

Total stockholders’ equity

 

355,631

 

356,704

 

Total liabilities and stockholders’ equity

 

$

587,852

 

$

579,927

 

 

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

 

4



Table of Contents

 

NEWPORT CORPORATION

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

October 3,

 

September 27,

 

 

 

2015

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

21,537

 

$

26,411

 

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

 

 

 

 

 

Depreciation and amortization

 

21,363

 

22,271

 

Gain on sale of assets

 

 

(411

)

Provision for losses on inventories

 

6,115

 

4,429

 

Stock-based compensation expense

 

10,058

 

8,588

 

Provision for doubtful accounts

 

225

 

585

 

Loss on disposal of property and equipment

 

1,158

 

370

 

Deferred income taxes

 

(897

)

(929

)

Excess tax benefits from stock-based compensation

 

(2,596

)

(4,403

)

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

 

 

 

 

 

Accounts receivable

 

(6,950

)

(7,576

)

Inventories

 

(15,992

)

(20,183

)

Prepaid expenses and other assets

 

(345

)

27

 

Accounts payable

 

(3,105

)

3,763

 

Accrued payroll and related expenses

 

(3,497

)

2,569

 

Accrued expenses and other liabilities

 

816

 

4,447

 

Other long-term liabilities

 

490

 

(977

)

Net cash provided by operating activities

 

28,380

 

38,981

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of property and equipment

 

(15,511

)

(17,993

)

Restricted cash

 

661

 

600

 

Proceeds from divestiture of business

 

 

5,030

 

Acquisition of business, net of cash acquired

 

(7,865

)

 

Refundable amounts related to acquisition of a business

 

(2,319

)

 

Purchase of investments and marketable securities

 

(1,139

)

(1,414

)

Proceeds from the sale or maturity of investments and marketable securities

 

281

 

8,509

 

Net cash used in investing activities

 

(25,892

)

(5,268

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from long-term debt

 

28,000

 

4,000

 

Repayment of long-term debt and obligations under capital leases

 

(15,012

)

(20,200

)

Proceeds from short-term borrowings

 

1,916

 

5,766

 

Repayment of short-term borrowings

 

(6,123

)

(5,635

)

Purchases of non-controlling interests

 

 

(1,863

)

Proceeds from the issuance of common stock under employee plans

 

1,353

 

4,156

 

Tax withholding payments related to net share settlement of equity awards

 

(3,419

)

(2,940

)

Purchases of the Company’s common stock

 

(27,893

)

(4,480

)

Excess tax benefits from stock-based compensation

 

2,596

 

4,403

 

Net cash used in financing activities

 

(18,582

)

(16,793

)

Impact of foreign exchange rate changes on cash balances

 

(349

)

(1,650

)

Net (decrease) increase in cash and cash equivalents

 

(16,443

)

15,270

 

Cash and cash equivalents at beginning of period

 

46,883

 

53,710

 

Cash and cash equivalents at end of period

 

$

30,440

 

$

68,980

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for interest

 

$

1,498

 

$

1,490

 

Cash paid during the period for income taxes, net

 

$

7,003

 

$

4,065

 

Property and equipment accrued in accounts payable

 

$

292

 

$

123

 

 

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

 

5



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 3, 2015

 

NOTE 1                         BASIS OF PRESENTATION

 

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

 

The accompanying unaudited consolidated financial statements do not include certain footnotes and financial presentations normally required under generally accepted accounting principles (GAAP) and, therefore, should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended January 3, 2015.  The results for the interim periods are not necessarily indicative of the results the Company will have for the full year ending January 2, 2016.  The January 3, 2015 balances reported herein are derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended January 3, 2015.

 

NOTE 2                         RECENT ACCOUNTING PRONOUNCEMENTS

 

In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-16, Simplifying the Accounting for Measurement Period Adjustments.  ASU No. 2015-16 requires an acquirer in a business combination to recognize adjustments to the provisional amounts that are identified during the measurement period to be reported in the period in which the adjustment amounts are determined.  In addition, the effect on earnings of changes in depreciation or amortization, or other income effects (if any) as a result of the change to the provisional amounts, calculated as if the accounting had been completed as of the acquisition date, must be recorded in the reporting period in which the adjustment amounts are determined.  ASU No. 2015-16 will be effective for fiscal years and interim periods beginning after December 15, 2015, and is required to be applied prospectively.  Early adoption is permitted for financial statements that have not been issued prior to the effective date of this update.  The Company’s adoption of ASU No. 2015-16 is not expected to have a material impact on the Company’s financial position or results of operations.

 

NOTE 3                         ACQUISITION OF FEMTOLASERS

 

On February 11, 2015, the Company acquired all of the capital stock of FEMTOLASERS Produktions GmbH (FEMTOLASERS).  The initial purchase price of €9.1 million was paid in cash at closing and is subject to a net asset adjustment.  The Company has estimated a net asset adjustment of €2.1 million, resulting in a purchase price of €7.0 million (approximately $7.9 million).  The final amount of this net asset adjustment is currently under negotiation between the Company and the FEMTOLASERS selling shareholders.  Of the initial purchase price, €2.3 million was deposited at closing into escrow until 30 months after closing, to secure certain obligations of the FEMTOLASERS selling shareholders under the share purchase agreement, including the net asset adjustment.  The Company incurred $0.4 million in transaction costs, which have been expensed as incurred and are included in selling, general and administrative expense in the statements of income and comprehensive income.  FEMTOLASERS expands the Company’s offering of ultrafast laser products and enhances its technology base in this area.  The results of FEMTOLASERS have been included in the results of the Company’s Lasers Group as of the acquisition date.

 

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

 

The consideration paid by the Company for the acquisition of FEMTOLASERS is allocated to the assets acquired, net of the liabilities assumed, based upon their estimated fair values as of the date of the acquisition.  The excess of the purchase price over the estimated fair value of the assets acquired, net of the estimated fair value of the liabilities assumed, is recorded as goodwill.   As discussed above, the Company has not yet finalized the purchase price.  Any changes during the measurement period may have a further impact on goodwill.

 

6



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 3, 2015

 

 

 

October 3,
2015
Purchase
Price
Allocation

 

Assets acquired and liabilities assumed:

 

 

 

Cash

 

$

78

 

Accounts receivable

 

1,968

 

Inventories

 

2,759

 

Deferred tax assets

 

1,019

 

Other assets

 

2,015

 

Goodwill

 

6,681

 

Developed technology

 

1,811

 

In-process research and development

 

1,721

 

Other intangible assets

 

543

 

Accounts payable

 

(3,417

)

Debt

 

(4,021

)

Deferred tax liabilities

 

(1,019

)

Other liabilities

 

(2,195

)

 

 

$

7,943

 

 

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

 

The actual net sales and net income (loss) of FEMTOLASERS from February 11, 2015, the closing date of the acquisition, were included in the Company’s consolidated statements of income and comprehensive income for the three and nine months ended October 3, 2015, and are set forth in the table below.  Also set forth in the table below are the pro forma net sales and net income of the Company during the three and nine months ended October 3, 2015 and September 27, 2014, including the results of FEMTOLASERS as though the acquisition had occurred at the beginning of 2014.  This supplemental pro forma financial information is presented for information purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had occurred as of the beginning of 2014.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 3,

 

September 27,

 

October 3,

 

September 27,

 

(Unaudited, in thousands)

 

2015

 

2014

 

2015

 

2014

 

Actual:

 

 

 

 

 

 

 

 

 

Net sales

 

$

2,166

 

$

 

$

4,489

 

$

 

Net income (loss) attributable to Newport Corporation

 

$

339

 

$

 

$

(1,480

)

$

 

Supplemental pro forma information:

 

 

 

 

 

 

 

 

 

Net sales

 

$

147,560

 

$

148,057

 

$

452,461

 

$

453,786

 

Net income attributable to Newport Corporation

 

$

7,121

 

$

9,025

 

$

21,926

 

$

25,624

 

Net income per share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.18

 

$

0.23

 

$

0.56

 

$

0.64

 

Diluted

 

$

0.18

 

$

0.22

 

$

0.55

 

$

0.63

 

 

For the purposes of determining pro forma net income, adjustments were made to actual net income of the Company for all periods presented in the table above.  The pro forma net income assumes that amortization of acquired intangible assets began at the beginning of 2014 rather than on February 11, 2015.  The result is a net increase in amortization expense of $0.1 million and $0.4 million for the three and nine months ended September 27, 2014, respectively.  Transaction costs totaling $0.4 million, which were incurred prior to the closing of the acquisition, are excluded from pro forma net income.

 

7



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 3, 2015

 

NOTE 4                         FAIR VALUE MEASUREMENTS

 

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

 

The Company’s assets and liabilities measured at fair value on a recurring basis are categorized in the table below based upon their level within the fair value hierarchy as of October 3, 2015.

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

(In thousands)
Description

 

October 3, 2015

 

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

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Restricted Cash

 

$

974

 

$

974

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Derivative assets:

 

 

 

 

 

 

 

 

 

Option contracts

 

214

 

 

214

 

 

 

 

 

 

 

 

 

 

 

 

Funds in investments and other assets:

 

 

 

 

 

 

 

 

 

Israeli pension funds

 

11,926

 

 

11,926

 

 

Group insurance contracts

 

5,909

 

 

5,909

 

 

 

 

17,835

 

 

17,835

 

 

 

 

$

19,023

 

$

974

 

$

18,049

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

Option contracts

 

266

 

 

266

 

 

 

8



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 3, 2015

 

The Company’s assets and liabilities measured at fair value on a recurring basis are categorized in the table below based upon their level within the fair value hierarchy as of January 3, 2015.

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

(In thousands)
Description

 

January 3, 2015

 

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

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Restricted Cash

 

$

1,704

 

$

1,704

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Money market funds

 

7

 

7

 

 

 

Certificates of deposit

 

50

 

 

50

 

 

 

 

57

 

7

 

50

 

 

Derivative assets:

 

 

 

 

 

 

 

 

 

Option contracts

 

103

 

 

103

 

 

 

 

 

 

 

 

 

 

 

 

Funds in investments and other assets:

 

 

 

 

 

 

 

 

 

Israeli pension funds

 

11,090

 

 

11,090

 

 

 

Group insurance contracts

 

6,140

 

 

6,140

 

 

 

 

17,230

 

 

17,230

 

 

 

 

$

19,094

 

$

1,711

 

$

17,383

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

Option contracts

 

$

921

 

$

 

$

921

 

$

 

 

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

 

 

 

October 3, 2015

 

January 3, 2015

 

 

 

Carrying

 

 

 

Carrying

 

 

 

(In thousands)

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

Short-term borrowings

 

$

3,579

 

$

3,579

 

$

3,772

 

$

3,772

 

Long-term debt

 

$

84,254

 

$

83,497

 

$

71,000

 

$

69,761

 

 

NOTE 5                         SUPPLEMENTAL FINANCIAL INFORMATION

 

Inventories

 

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

 

 

 

October 3,

 

January 3,

 

(In thousands)

 

2015

 

2015

 

Raw materials and purchased parts

 

$

75,111

 

$

68,989

 

Work in process

 

18,747

 

16,564

 

Finished goods

 

28,987

 

26,887

 

Short-term inventories

 

$

122,845

 

$

112,440

 

 

9



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 3, 2015

 

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

 

 

 

October 3,

 

January 3,

 

(In thousands)

 

2015

 

2015

 

Raw materials and purchased parts

 

$

2,138

 

$

3,208

 

Finished goods

 

2,969

 

3,856

 

Long-term inventories

 

$

5,107

 

$

7,064

 

 

Accrued Warranty Obligations

 

Unless otherwise stated in the Company’s product literature or in its agreements with customers, products sold by the Company’s Photonics and Optics Groups generally carry a one-year warranty from the original invoice date on all product materials and workmanship, other than filters and gratings products, which generally carry a 90-day warranty, and laser beam profilers and dental CAD/CAM scanners, which generally carry a two-year warranty.  Products sold by the Photonics and Optics Groups to original equipment manufacturer (OEM) customers carry warranties generally ranging from 15 to 19 months.  Products sold by the Company’s Lasers Group carry warranties that vary by product and product component, but generally range from 90 days to two years.  In certain cases, such warranties for Lasers Group products are limited by either a set time period or a maximum amount of hourly usage of the product, whichever occurs first.  Defective products will be either repaired or replaced, generally at the Company’s option, upon meeting certain criteria.  The Company accrues a provision for the estimated costs that may be incurred for warranties relating to a product (based on historical experience) as a component of cost of sales.  Short-term accrued warranty obligations, which expire within one year, are included in accrued expenses and other current liabilities and long-term warranty obligations are included in other long-term liabilities in the accompanying consolidated balance sheets.

 

The activity in accrued warranty obligations was as follows:

 

 

 

Nine Months Ended

 

 

 

October 3,

 

September 27,

 

(In thousands)

 

2015

 

2014

 

Balance at beginning of year

 

$

3,556

 

$

3,285

 

Additions charged to cost of sales

 

2,278

 

2,134

 

Warranty claims

 

(2,386

)

(2,487

)

Balance at end of period

 

$

3,448

 

$

2,932

 

 

10



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 3, 2015

 

Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities were as follows:

 

 

 

October 3,

 

January 3,

 

(In thousands)

 

2015

 

2015

 

Deferred revenue

 

$

12,246

 

$

13,032

 

Deferred lease liability

 

4,743

 

5,094

 

Short-term accrued warranty obligations

 

3,254

 

3,324

 

Accrued third party commissions

 

1,551

 

1,395

 

Accrued income taxes

 

1,445

 

2,219

 

Other

 

7,546

 

6,733

 

 

 

$

30,785

 

$

31,797

 

 

Accumulated Other Comprehensive Loss

 

Accumulated other comprehensive loss consisted of the following:

 

 

 

October 3,

 

January 3,

 

(In thousands)

 

2015

 

2015

 

Cumulative foreign currency translation losses

 

$

(19,846

)

$

(14,556

)

Unrecognized net pension losses, net of tax

 

(4,347

)

(4,855

)

Unrealized gains on investments and marketable securities, net of tax

 

1,307

 

1,429

 

 

 

$

(22,886

)

$

(17,982

)

 

NOTE 6                         GOODWILL AND INTANGIBLE ASSETS

 

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

 

 

 

Photonics

 

Lasers

 

Optics

 

 

 

(In thousands)

 

Group

 

Group

 

Group

 

Total

 

Balance at January 3, 2015:

 

 

 

 

 

 

 

 

 

Goodwill

 

98,808

 

129,761

 

41,314

 

269,883

 

Accumulated impairment losses

 

(47,458

)

(104,562

)

(20,339

)

(172,359

)

 

 

51,350

 

25,199

 

20,975

 

97,524

 

Goodwill allocated to acquisition

 

 

6,681

 

 

6,681

 

Foreign currency impact

 

 

(351

)

 

(351

)

 

 

51,350

 

31,529

 

20,975

 

103,854

 

Balance at October 3, 2015:

 

 

 

 

 

 

 

 

 

Goodwill

 

98,808

 

136,091

 

41,314

 

276,213

 

Accumulated impairment losses

 

(47,458

)

(104,562

)

(20,339

)

(172,359

)

 

 

$

51,350

 

$

31,529

 

$

20,975

 

$

103,854

 

 

11



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 3, 2015

 

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

 

 

 

Amortization

 

Gross

 

Accumulated

 

Carrying

 

(In thousands)

 

Period

 

Value

 

Amortization

 

Value

 

Intangible assets subject to amortization:

 

 

 

 

 

 

 

 

 

Developed technology

 

10-20 years

 

$

39,888

 

$

(11,777

)

$

28,111

 

Customer relationships

 

up to 10 years

 

28,693

 

(20,839

)

7,854

 

In-process research and development

 

10 years

 

15,154

 

(2,075

)

13,079

 

Other

 

3 months-10 years

 

2,211

 

(1,332

)

879

 

 

 

 

 

85,946

 

(36,023

)

49,923

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

 

18,305

 

 

18,305

 

Intangible assets

 

 

 

$

104,251

 

$

(36,023

)

$

68,228

 

 

As of October 3, 2015, the gross values and accumulated amortization shown in the table above for intangible assets subject to amortization exclude amounts related to the Company’s acquisition of Spectra-Physics, Inc. (and certain related entities), as the purchased intangible assets related to that acquisition have been fully amortized.

 

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

 

 

 

Amortization

 

Gross

 

Accumulated

 

Carrying

 

(In thousands)

 

Period

 

Value

 

Amortization

 

Value

 

Intangible assets subject to amortization:

 

 

 

 

 

 

 

 

 

Developed technology

 

10-20 years

 

$

45,646

 

$

(16,782

)

$

28,864

 

Customer relationships

 

up to 10 years

 

47,827

 

(37,312

)

10,515

 

In-process research and development

 

10 years

 

13,461

 

(1,496

)

11,965

 

Other

 

3 months-10 years

 

7,461

 

(6,299

)

1,162

 

 

 

 

 

114,395

 

(61,889

)

52,506

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

 

18,305

 

 

18,305

 

Intangible assets

 

 

 

$

132,700

 

$

(61,889

)

$

70,811

 

 

Amortization expense related to intangible assets totaled $2.1 million and $1.9 million for the three months ended October 3, 2015 and September 27, 2014, respectively, and $6.3 million and $6.8 million for the nine months ended October 3, 2015 and September 27, 2014, respectively.

 

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

 

(In thousands)

 

Estimated
Aggregate
Amortization
Expense

 

2015 (remaining)

 

$

2,168

 

2016

 

8,283

 

2017

 

7,131

 

2018

 

4,966

 

2019

 

4,376

 

Thereafter

 

20,015

 

 

 

$

46,939

 

 

The Company has excluded $3.0 million of estimated amortization expense related to certain in-process research and development from the table above, as it was uncertain as of October 3, 2015 when the technology will be completed and when the amortization will begin.

 

12



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 3, 2015

 

NOTE 7                         INTEREST AND OTHER EXPENSE, NET

 

Interest and other expense, net, was as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 3,

 

September 27,

 

October 3,

 

September 27,

 

(In thousands)

 

2015

 

2014

 

2015

 

2014

 

Interest expense

 

$

(611

)

$

(522

)

$

(1,749

)

$

(1,779

)

Interest and dividend income

 

18

 

129

 

86

 

252

 

Derivative (loss) gain, net

 

(430

)

(372

)

103

 

(248

)

Bank and portfolio asset management fees

 

(322

)

(293

)

(1,015

)

(819

)

Other (expense) income, net

 

(8

)

100

 

(745

)

2

 

 

 

$

(1,353

)

$

(958

)

$

(3,320

)

$

(2,592

)

 

NOTE 8                         STOCK-BASED COMPENSATION

 

During the nine months ended October 3, 2015, the Company granted 0.5 million restricted stock units and 0.5 million stock-settled stock appreciation rights with weighted average grant date fair values of $19.06 and $7.60, respectively.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 3,

 

September 27,

 

October 3,

 

September 27,

 

(In thousands)

 

2015

 

2014

 

2015

 

2014

 

Cost of sales

 

$

367

 

$

271

 

$

1,048

 

$

762

 

Selling, general and administrative expense

 

2,490

 

2,508

 

7,812

 

6,809

 

Research and development expense

 

374

 

362

 

1,198

 

1,017

 

 

 

$

3,231

 

$

3,141

 

$

10,058

 

$

8,588

 

 

At October 3, 2015, the total compensation cost related to unvested stock-based awards granted to employees, officers and directors under the Company’s stock-based benefit plans that had not yet been recognized was $18.3 million, net of estimated forfeitures.  This future compensation expense will be amortized over a weighted-average period of 1.9 years using the straight-line attribution method.  The actual compensation expense that the Company will recognize in the future related to unvested stock-based awards outstanding at October 3, 2015 will be adjusted for actual forfeitures and will be adjusted based on the Company’s determination as to the extent to which performance conditions applicable to any stock-based awards have been or will be achieved.

 

13



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 3, 2015

 

At October 3, 2015, the Company’s outstanding and exercisable stock options and stock appreciation rights, and the weighted average exercise price or base value, the weighted average remaining contractual life and the aggregate intrinsic value thereof, were as follows:

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

Weighted

 

 

 

 

 

 

 

Exercise

 

Average

 

Aggregate

 

 

 

Number of

 

Price or

 

Remaining

 

Intrinsic

 

 

 

Shares

 

Base

 

Contractual

 

Value

 

 

 

(In thousands)

 

Value

 

Life (Years)

 

(In thousands)

 

Stock options outstanding and exercisable

 

30

 

$

13.86

 

0.3

 

$

 

Stock appreciation rights outstanding

 

2,354

 

$

15.61

 

4.4

 

$

2,197

 

Stock appreciation rights exercisable

 

1,328

 

$

13.88

 

3.2

 

$

2,187

 

 

NOTE 9                         DEBT AND LINES OF CREDIT

 

Total short-term borrowings were as follows:

 

 

 

October 3,

 

January 3,

 

(In thousands)

 

2015

 

2015

 

Japanese revolving lines of credit

 

$

3,117

 

$

3,163

 

Japanese receivables financing facilities

 

312

 

25

 

Israeli loans due October 2015

 

150

 

584

 

Total short-term borrowings

 

$

3,579

 

$

3,772

 

 

Total long-term debt was as follows:

 

 

 

October 3,

 

January 3,

 

(In thousands)

 

2015

 

2015

 

U.S. revolving line of credit expiring July 2018

 

$

84,000

 

$

71,000

 

Austrian loans due through March 2019

 

254

 

 

 

 

$

84,254

 

$

71,000

 

 

14



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 3, 2015

 

NOTE 10                                          NET INCOME PER SHARE

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 3,

 

September 27,

 

October 3,

 

September 27,

 

(In thousands, except per share data)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Newport Corporation

 

$

7,103

 

$

9,470

 

$

21,537

 

$

26,308

 

 

 

 

 

 

 

 

 

 

 

Shares:

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

38,982

 

39,921

 

39,434

 

39,776

 

Dilutive potential common shares, using treasury stock method

 

392

 

691

 

632

 

770

 

Weighted average shares outstanding - diluted

 

39,374

 

40,612

 

40,066

 

40,546

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to Newport Corporation:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.18

 

$

0.24

 

$

0.55

 

$

0.66

 

Diluted

 

$

0.18

 

$

0.23

 

$

0.54

 

$

0.65

 

 

For the three and nine months ended October 3, 2015, 1.5 million stock appreciation rights, and for the three and nine months ended September 27, 2014, an aggregate of 0.7 million stock options and stock appreciation rights, were excluded from the computations of diluted net income per share, as their inclusion would have been antidilutive.  For the three and nine months ended October 3, 2015, 0.5 million performance-based restricted stock units, and for the three and nine months ended September 27, 2014, 0.6 million performance-based restricted stock units, were excluded from the computations of diluted net income per share, as the performance criteria for their vesting had not been met as of the end of such periods.

 

NOTE 11                  INCOME TAXES

 

Income tax expense for each of the three and nine months ended October 3, 2015 and September 27, 2014 consisted of a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to the Company, adjusted for items which are considered discrete to a particular period.  The effective tax rates for the three and nine months ended October 3, 2015 were 22.0% and 30.2%, respectively, and the effective tax rates for the three and nine months ended September 27, 2014 were 19.7% and 27.0%, respectively.

 

The effective tax rates for the three and nine months ended October 3, 2015 were lower than the U.S. statutory rate of 35% due primarily to the benefit of income recorded in foreign jurisdictions that have tax rates that are lower than U.S. tax rates and an increased utilization of foreign tax credits that were previously unrecognized, necessitated by the completion and filing of the 2014 U.S. federal consolidated return during the third quarter, which was recorded as a discrete item.  The effective tax rate for the three months ended October 3, 2015 was also favorably impacted by profitable results recorded in jurisdictions where the Company maintains a full valuation allowance.  The effective tax rate for the nine months ended October 3, 2015 was unfavorably impacted by the passage of Japanese tax reform legislation on March 31, 2015, which lowered long-term corporate tax rates, necessitating a corresponding reduction of deferred tax assets applicable to the Company’s Japanese locations.  The effective tax rates for the three and nine months ended September 27, 2014 were lower than the rates for the three and nine months ended October 3, 2015, respectively, due primarily to the favorable impact of an extraterritorial income exclusion benefit and a reduction of the corresponding uncertain tax position, which was recorded as a discrete item during the third quarter of 2014.

 

NOTE 12                                          STOCKHOLDERS’ EQUITY TRANSACTIONS

 

In May 2008, the Board of Directors of the Company approved a share repurchase program, authorizing the purchase of up to 4.0 million shares of the Company’s common stock.  During the nine months ended October 3, 2015, the Company repurchased 1.7 million shares for a total of $27.9 million under this program.  As of October 3, 2015, 1.7 million shares remained available for purchase under the program.

 

15



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 3, 2015

 

During the nine months ended October 3, 2015, the Company cancelled 0.2 million shares of common stock underlying restricted stock units in payment by employees of taxes owed upon the vesting of restricted stock units issued to them under the Company’s stock incentive plans.  The value of these restricted stock units totaled $3.4 million at the time they were cancelled.

 

NOTE 13                  DEFINED BENEFIT PENSION PLANS

 

The Company has defined benefit pension plans covering substantially all full-time employees in France, Germany, Israel and Japan. In addition, the Company has certain pension liabilities relating to former employees of the Company in the United Kingdom.  The Company’s German plan is unfunded, as permitted under the plan and applicable laws.  For financial reporting purposes, the calculation of net periodic pension costs is based upon a number of actuarial assumptions, including a discount rate for plan obligations, an assumed rate of return on pension plan assets and an assumed rate of compensation increase for employees covered by the plan.  All of these assumptions are based upon management’s judgment, considering all known trends and uncertainties.  Actual results that differ from these assumptions would impact future expense recognition and the cash funding requirements of the Company’s pension plans.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 3,

 

September 27,

 

October 3,

 

September 27,

 

(In thousands)

 

2015

 

2014

 

2015

 

2014

 

Service cost

 

$

547

 

$

482

 

$

1,849

 

$

1,740

 

Interest cost on benefit obligations

 

120

 

198

 

362

 

514

 

Expected return on plan assets

 

(44

)

(70

)

(131

)

(211

)

Amortization of net loss

 

91

 

44

 

273

 

134

 

 

 

$

714

 

$

654

 

$

2,353

 

$

2,177

 

 

NOTE 14                  BUSINESS SEGMENT INFORMATION

 

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

 

16



Table of Contents

 

NEWPORT CORPORATION

Notes to Consolidated Financial Statements

October 3, 2015

 

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

 

(In thousands)

 

Photonics

 

Lasers

 

Optics

 

Total

 

 

 

 

 

 

 

 

 

 

 

Three months ended October 3, 2015:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

60,904

 

$

48,247

 

$

38,409

 

$

147,560

 

Segment income

 

$

14,274

 

$

4,278

 

$

3,168

 

$

21,720

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 27, 2014:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

59,757

 

$

44,228

 

$

42,314

 

$

146,299

 

Segment income

 

$

12,255

 

$

6,423

 

$

4,949

 

$

23,627

 

 

 

 

 

 

 

 

 

 

 

Nine months ended October 3, 2015:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

186,843

 

$

142,602

 

$

122,747

 

$

452,192

 

Segment income

 

$

46,703

 

$

10,943

 

$

12,803

 

$

70,449

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 27, 2014:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

182,693

 

$

137,815

 

$

125,913

 

$

446,421

 

Segment income

 

$

40,201

 

$

18,151

 

$

14,494

 

$

72,846

 

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 3,

 

September 27,

 

October 3,

 

September 27,

 

(In thousands)

 

2015

 

2014

 

2015

 

2014

 

Segment income

 

$

21,720

 

$

23,627

 

$

70,449

 

$

72,846

 

Unallocated operating expenses

 

(11,255

)

(10,866

)

(35,196

)

(34,485

)

(Loss) gain on disposal of assets

 

 

 

(1,088

)

411

 

Interest and other expense, net

 

(1,353

)

(958

)

(3,320

)

(2,592

)

 

 

$

9,112

 

$

11,803

 

$

30,845

 

$

36,180

 

 

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Table of Contents

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in conjunction with our Annual Report on Form 10-K for the year ended January 3, 2015 previously filed with the SEC.  This discussion contains descriptions of our expectations regarding future trends affecting our business.  Words such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “would,” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements.  In addition, any statements that refer to projections of our future financial performance or condition, trends in our business, or other characterizations of future events or circumstances are forward-looking statements.  These forward-looking statements and other forward-looking statements made elsewhere in this report are made in reliance upon safe harbor provisions in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Our actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, including, but not limited to those factors set forth and discussed in Item 1 (Business) and Item 1A (Risk Factors) of Part I, and Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II, of our Annual Report on Form 10-K for the year ended January 3, 2015.  In light of the significant uncertainties inherent in the forward-looking information included in this report, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved and readers are cautioned not to place undue reliance on such forward-looking information.  Except as required by law, we undertake no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

 

Overview

 

We are a global supplier of advanced-technology products and systems, including lasers, photonics instrumentation, precision positioning and vibration isolation products and systems, optical components, subassemblies and subsystems, and three-dimensional non-contact measurement equipment.  Our products are used worldwide in a variety of industries, including scientific research, defense and security, microelectronics, life and health sciences and industrial markets.  We operate within three distinct business segments: our Photonics Group, our Lasers Group and our Optics Group.  Each of these groups offers a broad array of advanced technology products and services to original equipment manufacturer (OEM) and end-user customers across a wide range of applications in all of our targeted end markets.

 

The following is a discussion and analysis of certain factors that have affected our results of operations and financial condition during the periods included in the accompanying unaudited consolidated financial statements.

 

Acquisition of FEMTOLASERS

 

On February 11, 2015, we acquired all of the capital stock of FEMTOLASERS Produktions GmbH (FEMTOLASERS).  The initial purchase price of €9.1 million was paid in cash at closing and is subject to a net asset adjustment.  We have estimated a net asset adjustment of €2.1 million, resulting in a purchase price of €7.0 million (approximately $7.9 million).  The final amount of this net asset adjustment is currently under negotiation between us and the FEMTOLASERS selling shareholders.  Of the initial purchase price, €2.3 million was deposited at closing into escrow until 30 months after closing, to secure certain obligations of the FEMTOLASERS selling shareholders under the share purchase agreement, including the net asset adjustment.  We incurred $0.4 million in transaction costs, which have been expensed as incurred and are included in selling, general and administrative expense in the statements of income and comprehensive income.  FEMTOLASERS expands our offering of ultrafast laser products and enhances our technology base in this area.  The results of FEMTOLASERS have been included in the results of our Lasers Group as of the acquisition date.

 

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

 

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Results of Operations for the Three and Nine Months Ended October 3, 2015 and September 27, 2014

 

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

 

 

 

Percentage of Net Sales

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 3,

 

September 27,

 

October 3,

 

September 27,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of sales

 

57.7

 

54.9

 

56.5

 

54.9

 

Gross profit

 

42.3

 

45.1

 

43.5

 

45.1

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

25.6

 

26.8

 

25.9

 

27.0

 

Research and development expense

 

9.6

 

9.6

 

9.8

 

9.5

 

Loss (gain) on sale of assets

 

 

 

0.2

 

(0.1

)

Operating income

 

7.1

 

8.7

 

7.6

 

8.7

 

 

 

 

 

 

 

 

 

 

 

Interest and other expense, net

 

(0.9

)

(0.6

)

(0.7

)

(0.6

)

Income before income taxes

 

6.2

 

8.1

 

6.9

 

8.1

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

1.4

 

1.6

 

2.1

 

2.2

 

Net income

 

4.8

 

6.5

 

4.8

 

5.9

 

Net income attributable to non-controlling interests

 

 

0.0

 

 

0.0

 

Net income attributable to Newport Corporation

 

4.8

%

6.5

%

4.8

%

5.9

%

 

Net Sales

 

Each of our operating groups sells products to customers in a wide range of industries, which we categorize into five key end markets: scientific research market; defense and security markets; microelectronics market; life and health sciences market; and industrial manufacturing and other end markets.  The tables below reflect our net sales for the three and nine months ended October 3, 2015 and September 27, 2014, by operating group and by key end market.

 

Sales by Operating Group

 

 

 

Three Months Ended

 

 

 

Percentage

 

 

 

October 3,

 

September 27,

 

Increase /

 

Increase /

 

(In thousands)

 

2015

 

2014

 

(Decrease)

 

(Decrease)

 

Photonics Group

 

$

60,904

 

$

59,757

 

$

1,147

 

1.9

%

Lasers Group

 

48,247

 

44,228

 

4,019

 

9.1

 

Optics Group

 

38,409

 

42,314

 

(3,905

)

(9.2

)

Total sales

 

$

147,560

 

$

146,299

 

$

1,261

 

0.9

%

 

 

 

Nine Months Ended

 

 

 

Percentage

 

 

 

October 3,

 

September 27,

 

Increase /

 

Increase /

 

(In thousands)

 

2015

 

2014

 

(Decrease)

 

(Decrease)

 

Photonics Group

 

$

186,843

 

$

182,693

 

$

4,150

 

2.3

%

Lasers Group

 

142,602

 

137,815

 

4,787

 

3.5

 

Optics Group

 

122,747

 

125,913

 

(3,166

)

(2.5

)

Total sales

 

$

452,192

 

$

446,421

 

$

5,771

 

1.3

%

 

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Table of Contents

 

Sales by End Market

 

 

 

Three Months Ended

 

 

 

Percentage

 

 

 

October 3,

 

September 27,

 

Increase /

 

Increase /

 

(In thousands)

 

2015

 

2014

 

(Decrease)

 

(Decrease)

 

Scientific research

 

$

36,414

 

$

32,228

 

$

4,186

 

13.0

%

Microelectronics

 

34,945

 

37,113

 

(2,168

)

(5.8

)

Life and health sciences

 

29,354

 

31,126

 

(1,772

)

(5.7

)

Defense and security

 

14,770

 

13,103

 

1,667

 

12.7

 

Industrial manufacturing and other

 

32,077

 

32,729

 

(652

)

(2.0

)

Total sales

 

$

147,560

 

$

146,299

 

$

1,261

 

0.9

%

 

 

 

Nine Months Ended

 

 

 

Percentage

 

 

 

October 3,

 

September 27,

 

Increase /

 

Increase /

 

(In thousands)

 

2015

 

2014

 

(Decrease)

 

(Decrease)

 

Scientific research

 

$

105,200

 

$

94,653

 

$

10,547

 

11.1

%

Microelectronics

 

113,770

 

111,935

 

1,835

 

1.6

 

Life and health sciences

 

88,281

 

97,781

 

(9,500

)

(9.7

)

Defense and security

 

44,241

 

39,161

 

5,080

 

13.0

 

Industrial manufacturing and other

 

100,700

 

102,891

 

(2,191

)

(2.1

)

Total sales

 

$

452,192

 

$

446,421

 

$

5,771

 

1.3

%

 

Our sales for the three and nine months ended October 3, 2015 were negatively impacted by the stronger U.S. dollar, which resulted in the translation of foreign currency denominated sales into fewer U.S. dollars, compared with the corresponding periods in 2014.  Our sales for both periods in 2015 were positively impacted compared with the corresponding periods in 2014 by the additional sales contributed by V-Gen Ltd. (V-Gen), which we acquired in the fourth quarter of 2014, and by FEMTOLASERS, which we acquired in the first quarter of 2015.  The aggregate sales of these acquired businesses, which are included in our Lasers Group, were $3.6 million and $10.7 million for the three and nine months ended October 3, 2015, respectively, and there were no corresponding sales in the three and nine months ended September 27, 2014.

 

The increases in sales to the scientific research market for the three and nine months ended October 3, 2015 compared with the corresponding periods in 2014 were due primarily to increased demand for products sold by our Lasers Group for research applications, and our acquisition of FEMTOLASERS, which contributed net sales to this market of $2.2 million and $4.5 million for the three and nine months ended October 3, 2015, respectively, for which there were no corresponding sales in the 2014 periods.  Generally, our net sales to this market by each of our operating groups may fluctuate from period to period due to changes in overall research spending levels and the timing of large sales relating to major research programs and, in some cases, these fluctuations may be offsetting between our operating groups or between such periods.

 

The decrease in sales to the microelectronics market for the three months ended October 3, 2015 compared with the corresponding period in 2014 was due primarily to lower sales by both our Lasers and Optics Groups to semiconductor equipment manufacturing customers, as well as a large sale of laser products for a solar equipment manufacturing application in the third quarter of 2014 that did not recur in the third quarter of 2015.  Such decreases were offset in part by higher sales by our Photonics Group to semiconductor equipment manufacturing customers.  The increase in sales to this market in the nine months ended October 3, 2015 compared with the corresponding period in 2014 was due primarily to higher sales by our Photonics Group to semiconductor equipment and mobile device manufacturing customers, offset in part by the lower sales by our Lasers and Optics Groups discussed above.  Our microelectronics market is comprised primarily of OEM customers in the semiconductor capital equipment industry, which has historically been characterized by sudden and severe cyclical variations in product supply and demand.  In addition, certain of our programs with these customers often comprise a significant portion of our sales to this market in any period.  As such, our net sales to this market may fluctuate significantly from period to period depending on the timing and severity of industry upturns and downturns, as well as the timing and success of new design wins and associated customer programs.

 

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Table of Contents

 

The decreases in sales to the life and health sciences market for the three and nine months ended October 3, 2015 compared with the corresponding periods in 2014 were due primarily to decreased sales of products used for surgical and dental imaging applications.  For the three month period, the decrease was offset in part by increased sales of products used in bioimaging applications.  Generally, our net sales to this market may fluctuate from period to period due to the timing of shipments to our OEM customers and, in some cases, these fluctuations may be offsetting between our operating groups or between such periods.

 

The increase in sales to the defense and security markets for the three months ended October 3, 2015 compared with the corresponding period in 2014 was due to moderately higher sales by each of our operating groups.  The increase in sales to these markets for the nine months ended October 3, 2015 compared with the corresponding period in 2014 was due primarily to increased sales of optics products for defense programs that had been previously delayed due to government funding constraints and for new programs.  Generally, our net sales to these markets by each of our operating groups may fluctuate from period to period due to changes in overall defense spending levels and the timing of large sales relating to major defense programs and, in some cases, these fluctuations may be offsetting between our operating groups or between such periods.

 

The decrease in sales to the industrial manufacturing and other end markets for the three months ended October 3, 2015 compared with the corresponding period in 2014 was due to general weakness in macro-economic conditions.  The decrease in sales to these markets for the nine months ended October 3, 2015 compared with the corresponding period in 2014 was due primarily to lower sales of test systems for diode laser manufacturing applications, as well as general weakness in macro-economic conditions.  These decreases were offset in part by our acquisition of V-Gen, which contributed net sales to these markets of $0.5 million and $3.8 million for the three and nine months ended October 3, 2015, respectively, for which there were no corresponding sales in the 2014 periods.

 

The table below reflects our net sales by geographic region.  Sales are attributed to each region based on the customer address to which the product is shipped.

 

 

 

Three Months Ended

 

 

 

Percentage

 

 

 

October 3,

 

September 27,

 

Increase /

 

Increase /

 

(In thousands)

 

2015

 

2014

 

(Decrease)

 

(Decrease)

 

United States

 

$

58,521

 

$

58,556

 

$

(35

)

(0.1

)%

Germany

 

16,413

 

19,408

 

(2,995

)

(15.4

)

Other European countries

 

22,281

 

20,344

 

1,937

 

9.5

 

Japan

 

12,646

 

10,754

 

1,892

 

17.6

 

Other Pacific Rim countries

 

27,516

 

27,741

 

(225

)

(0.8

)

Rest of world

 

10,183

 

9,496

 

687

 

7.2

 

 

 

$

147,560

 

$

146,299

 

$

1,261

 

0.9

%

 

 

 

Nine Months Ended

 

 

 

Percentage

 

 

 

October 3,

 

September 27,

 

Increase /

 

Increase /

 

(In thousands)

 

2015

 

2014

 

(Decrease)

 

(Decrease)

 

United States

 

$

177,748

 

$

169,079

 

$

8,669

 

5.1

%

Germany

 

49,924

 

60,702

 

(10,778

)

(17.8

)

Other European countries

 

67,122

 

63,278

 

3,844

 

6.1

 

Japan

 

40,202

 

40,486

 

(284

)

(0.7

)

Other Pacific Rim countries

 

85,056

 

81,217

 

3,839

 

4.7

 

Rest of world

 

32,140

 

31,659

 

481

 

1.5

 

 

 

$

452,192

 

$

446,421

 

$

5,771

 

1.3

%

 

The increase in sales to customers in the United States for the nine months ended October 3, 2015 compared with the corresponding period in 2014 was due primarily to increased sales to customers in our scientific research and defense and security end markets.

 

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Table of Contents

 

The decrease in sales to customers in Germany for the three months ended October 3, 2015 compared with the corresponding period in 2014 was due primarily to lower sales to customers in our life and health sciences and industrial manufacturing end markets, offset in part by higher sales to customers in our scientific research end market.  The decrease in sales to customers in Germany for the nine months ended October 3, 2015 compared with the corresponding period in 2014 was due to lower sales to customers in all of our end markets.

 

The increases in sales to customers in other European countries for the three and nine months ended October 3, 2015 compared with the same periods in 2014 were due primarily to higher sales to customers in our scientific research end market.  Such increases were offset in part by lower sales to customers in our industrial manufacturing and other end markets and, for the nine month period, such increases were also offset in part by lower sales to customers in our life and health sciences end market.

 

The increase in sales to customers in Japan for the three months ended October 3, 2015 compared with the corresponding period in 2014 was due primarily to increased sales to customers in our microelectronics end market, offset in part by lower sales to customers in our life and health sciences end market.  The decrease in sales to customers in Japan for the nine months ended October 3, 2015 compared with the corresponding period in 2014 was due primarily to lower sales to customers in our life and health sciences and scientific research end markets, offset in part by higher sales to customers in our microelectronics end market.

 

The decrease in sales to customers in other Pacific Rim countries for the three months ended October 3, 2015 compared with the corresponding period in 2014 was due primarily to lower sales to customers in our microelectronics end market, offset in large part by increased sales to customers in our scientific research end market.  The increase in sales to customers in other Pacific Rim countries for the nine months ended October 3, 2015 compared with the corresponding period in 2014 was due primarily to higher sales to customers in our scientific research end market, offset in part by lower sales to customers in our microelectronics and life and health sciences end markets.

 

The increases in sales to customers in the rest of the world for the three and nine months ended October 3, 2015 compared with the corresponding periods in 2014 were due primarily to higher sales to customers in our defense and security end markets, offset in part by lower sales to customers in our scientific research end market.

 

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

 

Gross Margin

 

Gross margin was 42.3% and 45.1% for the three months ended October 3, 2015 and September 27, 2014, respectively, and gross margin was 43.5% and 45.1% for the nine months ended October 3, 2015 and September 27, 2014, respectively.  The gross margin of our Lasers Group was negatively impacted for the three and nine months ended October 3, 2015 due to a higher proportion of sales of lower margin products, particularly products sold by recently acquired businesses, as we work to improve operational efficiencies and reduce costs as part of the integration of these businesses.  In addition, gross margins were negatively impacted due to lower absorption of manufacturing overhead resulting from the lower production levels.  For the nine month period, our Lasers Group’s gross margin was also negatively impacted by increased inventory charges.  The gross margin of our Optics Group was negatively impacted in both periods by lower absorption of manufacturing overhead at our North Andover facility, as we transition the operations of that facility to other facilities, and by increased inventory charges.  Our gross margins in both periods in 2015 were also negatively impacted by the stronger U.S. dollar, which resulted in the translation of our foreign currency denominated sales into fewer U.S. dollars.  This negative impact was offset in part by lower manufacturing costs in certain locations due to the stronger U.S. dollar.

 

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

 

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Table of Contents

 

Selling, General and Administrative (SG&A) Expense

 

SG&A expense totaled $37.7 million, or 25.6% of net sales, and $39.1 million, or 26.8% of net sales, for the three months ended October 3, 2015 and September 27, 2014, respectively.  SG&A expense totaled $117.0 million, or 25.9% of net sales, and $120.4 million, or 27.0% of net sales, for the nine months ended October 3, 2015 and September 27, 2014, respectively.  The decrease in SG&A expense for the three months ended October 3, 2015 compared with the corresponding period in 2014 was due primarily to lower depreciation expense and professional fees.  The decrease in SG&A expense for the nine months ended October 3, 2015 compared with the corresponding period in 2014 was due primarily to lower incentive compensation and travel expenses, as well as lower depreciation expense and professional fees.  The stronger U.S. dollar in certain locations also contributed to the decreases in SG&A expense for both periods in 2015.  The decreases for both periods in 2015 were offset in part by higher rental costs and software licensing fees, and by the addition of SG&A expenses for V-Gen and FEMTOLASERS, for which there were no corresponding expenses in the prior year periods.

 

We have implemented certain cost reduction actions during 2015, which have resulted in lower personnel costs; however, for both periods in 2015, such decreases in personnel costs were offset in large part by increased severance costs related to such actions.  We expect our SG&A expense to be more favorably impacted by our cost reduction actions in future periods once all actions have been completed.

 

In general, we expect that SG&A expense will vary as a percentage of net sales in the future based on our sales level in any given period.  Because the majority of our SG&A expense is fixed in the short term, changes in SG&A expense will likely not be in proportion to changes in net sales.  In addition, any acquisitions would increase our SG&A expense, and such increases may not be in proportion to the changes in net sales.

 

Research and Development (R&D) Expense

 

R&D expense totaled $14.2 million, or 9.6% of net sales, and $14.1 million, or 9.6% of net sales, for the three months ended October 3, 2015 and September 27, 2014, respectively.  R&D expense totaled $44.3 million, or 9.8% of net sales, and $42.5 million, or 9.5% of net sales, for the nine months ended October 3, 2015 and September 27, 2014, respectively.  The increases in R&D expense for the three and nine months ended October 3, 2015 compared with the corresponding periods in 2014 were due primarily to the addition of R&D expenses of V-Gen and FEMTOLASERS, for which there were no corresponding expenses in the prior year periods, offset in part by the impact of the stronger U.S. dollar in certain locations and the benefits of our cost reduction actions.

 

We believe that the continued development and advancement of our products and technologies is critical to our success, and we intend to continue to invest in R&D initiatives, while working to ensure that our efforts are focused and the resources are deployed efficiently.  In general, we expect that R&D expense as a percentage of net sales will vary in the future based on our sales level in any given period.  Because of our commitment to continued product development, and because the majority of our R&D expense is fixed in the short term, changes in R&D expense will likely not be in proportion to changes in net sales.  In addition, any acquisitions would increase our R&D expense, and such increases may not be in proportion to the changes in net sales.

 

Loss on Disposal of Assets

 

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

 

Interest and Other Expense, Net

 

Interest and other expense, net totaled $1.4 million and $1.0 million for the three months ended October 3, 2015 and September 27, 2014, respectively.  Interest and other expense, net totaled $3.3 million and $2.6 million for the nine months ended October 3, 2015 and September 27, 2014, respectively.  The increases in interest and other expense, net for the three and nine months ended October 3, 2015 compared with the same periods in 2014 were due primarily to foreign currency transaction losses.

 

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Table of Contents

 

Income Taxes

 

Our effective tax rate was 22.0% and 19.7% for the three months ended October 3, 2015 and September 27, 2014, respectively, and 30.2% and 27.0% for the nine months ended October 3, 2015 and September 27, 2014, respectively.  Our effective tax rates for the three and nine months ended October 3, 2015 were lower than the U.S. statutory rate of 35% due primarily to the benefit of income recorded in foreign jurisdictions that have tax rates that are lower than U.S. tax rates and an increased utilization of foreign tax credits that were previously unrecognized, necessitated by the filing of the 2014 U.S. federal consolidated tax return during the third quarter, which was recorded as a discrete item.  The effective tax rate for the three months ended October 3, 2015 was also favorably impacted by profitable results recorded in jurisdictions where we maintain a full valuation allowance.  The effective tax rate for the nine months ended October 3, 2015 was unfavorably impacted by the passage of Japanese tax reform legislation on March 31, 2015, which lowered long-term corporate tax rates, necessitating a corresponding reduction of deferred tax assets applicable to our Japanese locations.  The effective tax rates for the three and nine months ended September 27, 2014 were lower than the rates for the three and nine months ended October 3, 2015 due primarily to the favorable impact of an extraterritorial income exclusion benefit and a reduction of the corresponding uncertain tax position, which was recorded as a discrete item during the third quarter of 2014.

 

Liquidity and Capital Resources

 

Our cash and cash equivalents and restricted cash balances decreased to a total of $31.4 million as of October 3, 2015 from $48.6 million as of January 3, 2015.  This decrease was attributable primarily to cash used in connection with repurchases of our common stock, purchases of property and equipment and our acquisition of FEMTOLASERS, offset in part by net cash provided by our operating activities and net borrowings.

 

Net cash provided by our operating activities of $28.4 million for the nine months ended October 3, 2015 was attributable primarily to cash provided by our results of operations, offset in part by an increase in gross inventory of $16.0 million, an increase in accounts receivable of $7.0 million due to the timing of collections, and decreases in accrued payroll and other expenses of $3.5 million and accounts payable of $3.1 million due to the timing of payments.

 

Net cash used in investing activities of $25.9 million for the nine months ended October 3, 2015 was attributable primarily to purchases of property and equipment of $15.5 million and cash used in connection with our acquisition of FEMTOLASERS of $10.2 million, including amounts that are expected to be refunded pursuant to a net asset adjustment.

 

Net cash used in financing activities of $18.6 million for the nine months ended October 3, 2015 was attributable to payments of $27.9 million to repurchase our common stock and payments of $3.4 million in connection with the cancellation of shares of common stock underlying restricted stock units for taxes owed by employees upon vesting of restricted stock units issued under our stock incentive plans.  These cash payments were offset in part by net borrowings of $8.8 million, an excess tax benefit of $2.6 million related to employee stock plans, and proceeds of $1.4 million received from the issuance of common stock under employee stock plans.

 

On July 18, 2013, we entered into a credit agreement with certain lenders (Credit Agreement).  The Credit Agreement consists of a senior secured revolving credit facility of $275 million with a term of five years (Credit Facility).  The Credit Agreement also provides us with the option to increase the aggregate principal amount of loans in the form of additional revolving loans or a separate tranche of term loans, in an aggregate amount that does not exceed $50 million, in each case subject to certain terms and conditions contained in the Credit Agreement.  At October 3, 2015, the outstanding balance under the Credit Facility was $84.0 million, with an effective interest rate of 1.75%.

 

Our obligations under the Credit Agreement are secured by a lien on substantially all of the assets of Newport Corporation and certain of our domestic subsidiaries, which are guarantors under the Credit Agreement, as well as by a pledge of certain shares of our foreign subsidiaries.  Our ability to borrow funds under the Credit Facility is subject to certain conditions, including compliance with certain covenants and making certain representations and warranties.  In particular, our borrowing capacity under the Credit Facility is limited by our Consolidated Adjusted

 

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Table of Contents

 

EBITDA (as defined in the Credit Agreement) for the preceding four fiscal quarters.  At October 3, 2015, based on our Consolidated Adjusted EBITDA, the $84.0 million borrowed under the Credit Facility, additional indebtedness of $3.8 million and outstanding letters of credit of $4.9 million, we had approximately $140.3 million available for additional borrowing under the Credit Facility.

 

At October 3, 2015, we also had (i) revolving lines of credit with Japanese banks; (ii) an agreement with a Japanese bank under which we sell trade notes receivable with recourse; (iii) a loan with an Israeli bank; and (iv) loans from the Austrian government, as follows:

 

 

 

Principal
Amount
Outstanding

 

Additional
Amount
Available for
Borrowing

 

 

 

 

 

Description

 

(in millions)

 

(in millions)

 

Interest Rate(s)

 

Expiration Date(s)

 

Japanese lines of credit

 

$

3.1

 

$

1.9

 

1.27% to 2.20%

 

No expiration dates

 

Japanese agreements for sale of receivables

 

$

0.3

 

$

1.4

 

1.20%

 

No expiration dates

 

Israeli loan

 

$

0.2

 

$

 

2.97%

 

October 2015

 

Austrian loans

 

$

0.3

 

$

 

0.75% to 2.00%

 

Through March 2019

 

 

In May 2008, our Board of Directors approved a share repurchase program, authorizing the purchase of up to 4.0 million shares of our common stock.  The terms of the Credit Agreement permit us to purchase shares under the repurchase program, subject to certain conditions and limitations.  During the nine months ended October 3, 2015, we repurchased 1.7 million shares for a total of $27.9 million under this program.  As of October 3, 2015, 1.7 million shares remained available for purchase under the program.  The amount and timing of future repurchases will be dependent upon factors such as our share price level, our other capital requirements and the terms of our Credit Agreement.

 

During the remainder of 2015, we expect to use approximately $5 million to $7 million of cash for capital expenditures.

 

We expect that our current working capital position, together with our expected future cash flows from operations and the borrowing availability under our Credit Facility and other lines of credit, will be adequate to fund our operations in the ordinary course of business, anticipated capital expenditures, our debt payment requirements and other contractual obligations for at least the next twelve months.  While a substantial portion of our cash and cash equivalents and restricted cash is held outside of the United States, we currently do not intend or anticipate a need to repatriate such funds, as we expect that the cash and cash equivalents and restricted cash held in the United States, together with our cash flows from U.S. operations and the borrowing capacity under our Credit Facility, will be sufficient to fund our U.S. operations and cash commitments for investing and financing activities, including debt repayment and capital expenditures for at least the next twelve months and thereafter for the foreseeable future.  However, these expectations are based upon many assumptions and are subject to numerous risks, including those discussed in Item 1A (Risk Factors) of Part I of our Annual Report on Form 10-K for the year ended January 3, 2015.  In addition, under current tax laws and regulations, if cash and cash equivalents and investments held outside of the United States, which relate to undistributed earnings of certain of our foreign subsidiaries and are considered to be indefinitely reinvested, were to be distributed to the United States in the form of dividends or otherwise, we would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.  The potential tax liability related to any repatriation would depend on the tax laws of the United States and the respective foreign jurisdictions and on the facts and circumstances that exist at the time such repatriation is made.

 

Except for the aforementioned capital expenditures, we have no present agreements or commitments with respect to any material acquisitions of businesses, products, product rights or technologies or any other material capital expenditures.  We will continue to evaluate acquisitions of and/or investments in products, technologies, capital equipment or improvements and companies that complement our business and may make such acquisitions and/or investments in the future.  However, our Credit Agreement only permits us to make investments and acquisitions under certain circumstances, and restricts our ability to incur additional indebtedness, which limits to some extent our ability to make such acquisitions and investments.

 

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Critical Accounting Policies and Estimates

 

The preparation of our consolidated financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  We evaluate these estimates and assumptions on an ongoing basis.  We base our estimates on our historical experience and on various other factors which we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of certain expenses that are not readily apparent from other sources.  The accounting policies that involve the most significant judgments, assumptions and estimates used in the preparation of our financial statements are those related to revenue recognition, allowances for doubtful accounts, pension liabilities, inventory reserves, warranty obligations, asset impairment, income taxes and stock-based compensation.  The judgments, assumptions and estimates used in these areas by their nature involve risks and uncertainties, and in the event that any of them prove to be inaccurate in any material respect, it could have a material effect on our reported amounts of assets and liabilities at the date of the financial statements and on the reported amounts of revenues and expenses during the reporting periods.  A summary of these critical accounting policies is included in Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II of our Annual Report on Form 10-K for the fiscal year ended January 3, 2015.  There have been no material changes to the critical accounting policies disclosed in such Annual Report on Form 10-K.

 

Recent Accounting Pronouncements

 

In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-16, Simplifying the Accounting for Measurement Period Adjustments.  ASU No. 2015-16 requires an acquirer in a business combination to recognize adjustments to the provisional amounts that are identified during the measurement period to be reported in the period in which the adjustment amounts are determined.  In addition, the effect on earnings of changes in depreciation or amortization, or other income effects (if any) as a result of the change to the provisional amounts, calculated as if the accounting had been completed as of the acquisition date, must be recorded in the reporting period in which the adjustment amounts are determined.  ASU No. 2015-16 will be effective for fiscal years and interim periods beginning after December 15, 2015, and is required to be applied prospectively.  Early adoption is permitted for financial statements that have not been issued prior to the effective date of this update.  The adoption of ASU No. 2015-16 is not expected to have a material impact on our financial position or results of operations.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

Foreign Currency Risk

 

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

 

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

 

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As currency exchange rates change, translation of the statements of income of international operations into U.S. dollars affects the year-over-year comparability of operating results, particularly in translating foreign currency denominated sales into U.S. dollars.  However, because we have manufacturing facilities located globally, the impact of currency exchange rate fluctuations on our income is mitigated in part by the translation of foreign currency denominated expenses.  We do not generally hedge translation risks because cash flows from international operations are generally reinvested locally.  Changes in currency exchange rates that would have the largest impact on translating our future international operating results include changes to the exchange rates of the U.S. dollar to the euro and Japanese yen.

 

The following table provides information about our foreign currency derivative financial instruments outstanding as of October 3, 2015.  The information is presented in U.S. dollars, as presented in our consolidated financial statements:

 

 

 

October 3, 2015

 

 

 

Notional

 

Average

 

(In thousands)

 

Amount

 

Strike Price

 

Foreign currency options

 

 

 

 

 

Israeli Shekel - call options

 

$

21,352

 

4.03

 

Israeli Shekel - put options

 

(22,822

)

3.77

 

 

 

$

(1,470

)

 

 

Fair value

 

$

(52

)

 

 

 

Interest Rate Risk

 

Our investments in cash, cash equivalents and restricted cash, which totaled $31.4 million at October 3, 2015, are sensitive to changes in the general level of interest rates.  In addition, certain assets related to our pension plans are sensitive to interest rates and economic conditions in Europe and Asia.

 

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

 

The table below presents information about our debt obligations as of October 3, 2015:

 

 

 

Expected Maturity Date

 

 

 

(US$ equivalent in thousands)

 

2015

 

2016

 

2017

 

2018

 

2019

 

Thereafter

 

Total

 

Fair Value

 

Debt obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate (US$)

 

$

150

 

$

 

$

90

 

$

12

 

$

152

 

$

 

$

404

 

$

399

 

Weighted average interest rate

 

2.97

%

0.00

%

2.00

%

2.00

%

0.75

%

0.00

%

1.89

%

 

 

Variable rate (US$)

 

$

 

$

 

$

 

$

84,000

 

$

 

$

 

$

84,000

 

$

83,248

 

Weighted average interest rate

 

0.00

%

0.00

%

0.00

%

1.75

%

0.00

%

0.00

%

1.75

%

 

 

Variable rate (non-US$)

 

$

3,429

 

$

 

$

 

$

 

$

 

$

 

$

3,429

 

$

3,429

 

Weighted average interest rate

 

1.26

%

0.00

%

0.00

%

0.00

%

0.00

%

0.00

%

1.26

%

 

 

Total debt obligations

 

$

3,579

 

$

 

$

90

 

$

84,012

 

$

152

 

$

 

$

87,833

 

$

87,076

 

Weighted average interest rate

 

1.33

%

0.00

%

0.00

%

1.75

%

0.00

%

0.00

%

1.73

%

 

 

 

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ITEM 4.  CONTROLS AND PROCEDURES

 

(a)         Evaluation of Disclosure Controls and Procedures

 

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

 

(b)         Changes in Internal Control Over Financial Reporting

 

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

 

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PART II.  OTHER INFORMATION

 

ITEM 1A.             RISK FACTORS

 

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

 

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

 

The following table reflects purchases made by us during the quarter ended October 3, 2015, of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:

 

Period(1)

 

Total Number of
Shares (or Units)
Purchased

 

Average Price
Paid per Share
(or Unit)

 

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

 

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

 

July 5, 2015 – August 1, 2015(2)

 

 

$

 

 

 

August 2, 2015 – August 29, 2015(2)

 

656,414

 

$

15.64

 

656,414

 

2,022,753

 

August 30, 2015 – October 3, 2015(2)

 

368,586

 

$

14.86

 

368,586

 

1,654,167

 

Totals

 

1,025,000

 

$

15.36

 

1,025,000

 

 

 

 


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

 

(2)         Represents shares of our common stock repurchased in open market transactions under a share repurchase program approved by our Board of Directors in May 2008.  A total of 4.0 million shares have been authorized for repurchase under this program and this program has no fixed expiration date.  As of October 3, 2015, we had purchased a total of 2,345,833 shares and 1,654,167 shares remained available for purchase under the program.

 

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ITEM 6.  EXHIBITS

 

Exhibit
Number

 

Description of Exhibit

 

 

 

3.1

 

Amended and Restated Bylaws of the Registrant, as adopted by the Board of Directors of the Registrant effective as of August 16, 2010 and amended on December 17, 2014 and August 18, 2015 (incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 24, 2015).

 

 

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32.1

 

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

 

 

 

32.2

 

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

 

 

 

101.INS

 

XBRL Instance Document.

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

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SIGNATURES

 

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

 

Dated: November 12, 2015

NEWPORT CORPORATION

 

 

 

 

 

By:

      /s/ Charles F. Cargile

 

 

Charles F. Cargile,

 

 

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

 

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EXHIBIT INDEX

 

Exhibit
Number

 

Description of Exhibit

 

 

 

3.1

 

Amended and Restated Bylaws of the Registrant, as adopted by the Board of Directors of the Registrant effective as of August 16, 2010 and amended on December 17, 2014 and August 18, 2015 (incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 24, 2015).

 

 

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32.1

 

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

 

 

 

32.2

 

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

 

 

 

101.INS

 

XBRL Instance Document.

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

32