<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 June 30, 1999
-------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
--------------- ------------------
Commission File Number 0-1649
------
NEWPORT CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 94-0849175
------ --------------
(State or other Jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1791 Deere Avenue, Irvine, CA 92606
----------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949) 863-3144
--------------
N/A
- --------------------------------------------------------------------------------
(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
----- -----
The number of shares outstanding of each of the issuer's classes of common stock
as of June 30, 1999, was 9,151,479.
Page 1 of 16
Exhibit Index Sequentially Numbered Page 15
<PAGE>
NEWPORT CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1: Financial Statements:
Consolidated Income Statement and Condensed
Consolidated Statement of Stockholders' Equity for
the Three and Six Months ended June 30, 1999 and 1998. 3
Consolidated Balance Sheet at June 30, 1999 and
December 31, 1998. 4
Consolidated Statement of Cash Flows for the Three and Six
Months ended June 30, 1999 and 1998. 5
Notes to Condensed Consolidated Financial Statements. 6-9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10-14
Item 3: Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders. 15
Item 6: Exhibits and Reports on Form 8-K. 15
SIGNATURE 15
Page 2
<PAGE>
NEWPORT CORPORATION
Consolidated Income Statement and
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales $35,576 $33,833 $65,024 $67,496
Cost of sales 19,716 18,670 36,355 37,853
------- ------- ------- -------
Gross profit 15,860 15,163 28,669 29,643
Selling, general and administrative expense 9,390 8,419 17,285 16,731
Research and development expense 3,220 3,180 6,226 5,952
------- ------- ------- -------
Income from operations 3,250 3,564 5,158 6,960
Interest expense (457) (485) (905) (993)
Other income (expense), net 60 139 (130) 202
------- ------- ------- -------
Income before income taxes 2,853 3,218 4,123 6,169
Income tax provision 798 1,029 1,154 1,974
------- ------- ------- -------
Net income $ 2,055 $ 2,189 $ 2,969 $ 4,195
======= ======= ======= =======
Net income per share
Basic $ 0.23 $ 0.24 $ 0.33 $ 0.47
Diluted $ 0.22 $ 0.23 $ 0.32 $ 0.44
Number of shares used to calculate net income
per share
Basic 9,080 9,032 9,077 8,978
Diluted 9,336 9,497 9,374 9,441
Stockholders' equity, beginning of period $71,422 $63,736 $70,970 $60,658
Net income 2,055 2,189 2,969 4,195
Dividends (183) (183) (183) (183)
Unrealized translation gain (loss) (710) 328 (2,166) (127)
Unamortized deferred compensation 54 59 108 (148)
Repurchase of common stock (855) (1,387) (998) (1,387)
Issuance of common stock 76 751 1,159 2,485
------- ------- ------- -------
Stockholders' equity, end of period $71,859 $65,493 $71,859 $65,493
======= ======= ======= =======
</TABLE>
See accompanying notes
Page 3
<PAGE>
NEWPORT CORPORATION
Consolidated Balance Sheet
<TABLE>
<CAPTION>
(In thousands, except share data)
June 30, December 31,
1999 1998
----------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,686 $ 5,335
Customer receivables, net 26,338 25,798
Other receivables 2,289 2,367
Inventories 33,648 31,260
Deferred tax assets 2,646 2,703
Other current assets 2,817 1,643
-------- --------
Total current assets 70,424 69,106
Investments and other assets 7,633 6,451
Property, plant and equipment, at cost, net 21,470 22,696
Goodwill, net 11,220 12,220
-------- --------
$110,747 $110,473
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,666 $ 6,180
Accrued payroll and related expenses 4,160 5,566
Line of credit 3,500 -
Current portion of long-term debt 3,684 3,699
Other current liabilities 3,972 5,163
-------- --------
Total current liabilities 21,982 20,608
Long-term debt 15,499 17,536
Other liabilities 1,407 1,359
Commitments and contingencies
Stockholders' equity:
Common stock, $.35 stated value, 20,000,000 shares authorized;
9,151,000 shares issued and outstanding at June 30, 1999;
9,119,000 shares at December 31, 1998 3,203 3,192
Capital in excess of stated value 8,723 8,573
Unamortized deferred compensation (440) (548)
Unrealized translation loss (6,082) (3,916)
Retained earnings 66,455 63,669
-------- --------
Total stockholders' equity 71,859 70,970
-------- --------
$110,747 $110,473
======== ========
</TABLE>
See accompanying notes
Page 4
<PAGE>
NEWPORT CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
Six Months Ended
June 30
------------------
1999 1998
------- -------
<S> <C> <C>
Operating activities:
Net income $ 2,969 $ 4,195
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,274 3,083
Increase in provision for losses
on receivables and inventories 274 894
Other non-cash items, net 62 (222)
Changes in operating assets and liabilities:
Receivables (1,350) 1,873
Inventories (3,287) (3,229)
Other current assets (1,506) (705)
Other assets (35) 320
Accounts payable and other accrued expenses (1,424) (2,925)
Taxes based on income (106) 41
Other, net - (1)
------- -------
Net cash provided by (used in) operating activities (1,129) 3,324
------- -------
Investing activities:
Purchases of property, plant and equipment, net (2,205) (2,946)
Disposition of property, plant and equipment, net 108 2,395
Proceeds from sale of investment - 720
Payments for in-process technology (1,099) -
Other, net - 31
------- -------
Net cash provided by (used in) investing activities (3,196) 200
------- -------
Financing activities:
Increase in credit line 3,500 -
Decrease in long-term borrowings (1,841) (839)
Cash dividends paid (182) (180)
Repurchase of common stock (998) (1,387)
Issuance of common stock under employee
agreements, including associated tax benefit 1,159 2,217
------- -------
Net cash provided by (used in) financing activities 1,638 (189)
------- -------
Effect of foreign exchange rate changes on cash 38 4
------- -------
Net increase (decrease) in cash and cash equivalents (2,649) 3,339
Cash and cash equivalents at beginning of period 5,335 7,456
------- -------
Cash and cash equivalents at end of period $ 2,686 $10,795
======= =======
Cash paid in the period for:
Interest $ 909 $ 1,004
Taxes 1,205 1,293
</TABLE>
See accompanying notes
Page 5
<PAGE>
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(Unaudited)
1. Interim Reporting
General
The accompanying unaudited financial statements consolidate the accounts of the
Company and its wholly owned subsidiaries and have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Both the three- and six-month periods in 1999 include net sales of $2.5 million
representing one extra month of sales from Newport's European operations. The
additional net sales stem from a reporting change in the second quarter that
eliminated a one-month lag in the reporting of European results. Without the
change, net sales would have been $33.1 million and $62.5 million, respectively,
for the 1999 second quarter and first half. Earnings per share were not
impacted by the change.
In the opinion of management, all adjustments necessary for a fair presentation
of the information in the unaudited condensed consolidated financial statements
have been made and consist of only normal recurring accruals. Operating results
for the six-month period ended June 30, 1999, are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999.
Although the Company believes that the disclosures in these financial statements
are adequate to make the information presented not misleading, certain
information and footnotes normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to rules and regulations of the Securities and Exchange
Commission, and consequently, these statements should be read in conjunction
with the Company's consolidated financial statements and notes thereto,
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
Net Income per Share
Basic net income per share is based on the weighted average number of shares of
common stock outstanding during the period, excluding restricted stock, while
diluted net income per share is based on the weighted average number of shares
of common stock outstanding during the period and the dilutive effects of common
stock equivalents (mainly stock options), determined using the treasury stock
method, outstanding during the period.
Foreign Currency
Balance sheet accounts denominated in foreign currencies are translated at
exchange rates as of the date of the balance sheet and income statement accounts
are translated at average exchange rates for the period. Translation gains and
losses are accumulated as a separate component of stockholders' equity. The
Company has adopted local currencies as the functional currencies for its
subsidiaries because their principal economic activities are most closely tied
to the respective local currencies.
The Company may enter into foreign exchange contracts as a hedge against foreign
currency denominated receivables. It does not engage in currency speculation.
Market value gains and losses on contracts are recognized currently, offsetting
gains or losses on the associated receivables. Foreign currency transaction
gains and losses are included in current earnings. Foreign exchange contracts
totaled $6.6 million and $4.2 million at June 30, 1999, and December 31, 1998,
respectively.
Page 6
<PAGE>
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(Unaudited)
2. Customer Receivables
The Company maintains reserves for potential credit losses. Such losses have
been minimal and within management's estimates. Receivables from customers are
generally unsecured.
Customer receivables consist of the following:
June 30, December 31,
(In thousands) 1999 1998
-------- ------------
Customer receivables $26,643 $26,077
Less allowance for doubtful accounts 305 279
------- -------
$26,338 $25,798
======= =======
3. Inventories
Inventories are stated at cost, determined on either a first-in, first-out
(FIFO) or average cost basis and do not exceed net realizable value.
Inventories consist of the following:
June 30, December 31,
(In thousands) 1999 1998
-------- ------------
Raw materials and purchased parts $11,395 $12,412
Work in process 7,243 5,301
Finished goods 15,010 13,547
------- -------
$33,648 $31,260
======= =======
4. Property, Plant and Equipment
Property plant and equipment consist of the following:
June 30, December 31,
(In thousands) 1999 1998
-------- -------------
Land $ 1,136 $ 1,287
Buildings 6,370 7,218
Leasehold improvements 8,488 8,715
Machinery and equipment 24,098 24,063
Office equipment 12,371 11,715
------- -------
52,463 52,998
Less accumulated depreciation 30,993 30,302
------- -------
$21,470 $22,696
======= =======
Page 7
<PAGE>
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(Unaudited)
5. Other Income (Expense), Net
Other income (expense), net, consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
(In thousands) 1999 1998 1999 1998
-------- --------- -------- -------
<S> <C> <C> <C> <C>
Interest and dividend income $ 22 $ 126 $ 71 $ 212
Exchange gains (losses), net 15 (87) (197) (131)
Gains on sales of investments, net - 134 - 134
Other 23 (34) (4) (13)
------ ------ ------- ------
$ 60 $ 139 $ (130) $ 202
====== ====== ======= ======
</TABLE>
6. Comprehensive Income
The components of comprehensive income, net of related tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
(In thousands) 1999 1998 1999 1998
------ ------ ------- ------
<S> <C> <C> <C> <C>
Net income $2,055 $2,189 $ 2,969 $4,195
Unrealized translation gain (loss) (710) 328 (2,166) (127)
------ ------ ------- ------
$1,345 $2,517 $ 803 $4,068
====== ====== ======= ======
</TABLE>
Page 8
<PAGE>
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(Unaudited)
7. Segment Reporting
Selected financial information for the Company's reportable segments for the
three- and six-months ended June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
(In thousands) Components Instruments
and and
Subassemblies Systems Europe Total
------------- ----------- ------- -------
<S> <C> <C> <C> <C>
Three Months Ended June 30, 1999:
- ---------------------------------
Sales to external customers $ 9,982 $13,618 $10,018 $33,618
Intersegment sales 2,012 2,682 2,097 6,791
Segment income (loss) 2,999 (5) 344 3,338
Three Months Ended June 30, 1998:
- ---------------------------------
Sales to external customers $10,328 $16,002 $ 6,698 $33,028
Intersegment sales 1,482 1,036 2,256 4,774
Segment income (loss) 2,899 677 37 3,613
Six Months Ended June 30, 1999:
- -------------------------------
Sales to external customers $19,522 $25,984 $16,150 $61,656
Intersegment sales 3,342 4,610 3,813 11,765
Segment income (loss) 5,542 (661) 295 5,176
Six Months Ended June 30, 1998:
- -------------------------------
Sales to external customers $21,537 $30,906 $13,634 $66,077
Intersegment sales 3,041 2,474 3,937 9,452
Segment income (loss) 6,181 1,152 (190) 7,143
The following reconciles segment income to consolidated income before income
taxes.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
(In thousands) 1999 1998 1999 1998
------- -------- ------- -------
Segment income $ 3,338 $ 3,613 $ 5,176 $ 7,143
Income from non reportable segments 63 27 215 43
Unallocated corporate and other operating expense (151) (76) (233) (226)
Interest expense (457) (485) (905) (993)
Other income (expense) 60 139 (130) 202
------- ------- ------- -------
Income before income taxes $ 2,853 $ 3,218 $ 4,123 $ 6,169
======= ======= ======= =======
</TABLE>
Page 9
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three and Six Months Ended June 30, 1999 and 1998
INTRODUCTORY NOTE
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. For
this purpose, any statements contained in this Form 10-Q except for historical
information may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as "may," "will," "expect,"
"believe," "anticipate," "intend," "could," "estimate," or "continue" or the
negative or other variations thereof or comparable terminology are intended to
identify forward-looking statements. These forward-looking statements include
(i) the existence and development of the Company's technical and manufacturing
capabilities and product offerings, (ii) anticipated competition, (iii)
potential future growth in revenues and income, (iv) potential future decreases
in costs, and (v) the need for, and availability of, additional financing.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions that the Company will not lose a significant
customer or customers or experience increased fluctuations of demand or
rescheduling of purchase orders, that the Company's markets will continue to
grow, that the Company's products will remain accepted within their respective
markets and will not be replaced by new technology, that competitive conditions
within the Company's markets will not change materially or adversely, that the
Company will retain key technical and management personnel, that the Company's
forecasts will accurately anticipate market demand, that there will be no
material adverse change in the Company's operations or business, that
fluctuations in foreign currency exchange rates do not have a material adverse
impact on the Company's competitive position in international markets and that
the Company will not experience significant supply shortages with respect to
purchased components, sub-systems or raw materials. Additional factors that may
affect future operating results are discussed in more detail in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions, including those in Europe
and Asia and those related to its strategic markets, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. Although, the Company
believes that the assumptions underlying the forward-looking statements will be
realized. In addition, the business and operations of the Company are subject
to substantial risks that increase the uncertainty inherent in the forward-
looking statements. In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved. The Company
undertakes no obligation to revise the forward-looking statements contained
herein to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
The following is management's discussion and analysis of certain significant
factors that have affected the earnings and financial position of the Company
during the period included in the accompanying financial statements. This
discussion compares the three- and six-month periods ended June 30, 1999, with
the three- and six-month periods ended June 30, 1998. This discussion should be
read in conjunction with the financial statements and associated notes.
Page 10
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Six Months Ended June 30, 1999 and 1998
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FINANCIAL ANALYSIS
Period-to-Period
Increase (Decrease)
-------------------
Percentage of Net Sales Three Six
------------------------- Months Months
Three Months Ended Six Months Ended Ended Ended
June 30, June 30, June 30, June 30, June 30, June 30.
1999 1998 1999 1998 1999 1998
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 5.2% (3.7%)
Cost of sales 55.4 55.2 55.9 56.1 5.6 (4.0)
----- ----- ----- -----
Gross margin 44.6 44.8 44.1 43.9 4.6 (3.3)
Selling, general and
administrative expense 26.4 24.9 26.6 24.8 11.5 3.3
Research and
development expense 9.1 9.4 9.6 8.8 1.3 4.6
----- ----- ----- -----
Income from operations 9.1 10.5 7.9 10.3 (8.8) (25.9)
Interest expense (1.3) (1.4) (1.4) (1.5) (5.8) (8.9)
Other income (expense), net 0.2 0.4 (0.2) 0.3 (56.8) NM
Income taxes 2.2 3.0 1.8 2.9 (22.4) (41.5)
----- ----- ----- -----
Net income 5.8 6.5 4.6 6.2 (6.1) (29.2)
===== ===== ===== =====
</TABLE>
NM = not meaningful
NET SALES
Net sales for the three- and six-month periods ended June 30, 1999, were $35.6
million and $65.0 million, respectively, compared with $33.8 million and $67.5
million for the three- and six-month periods ended June 30, 1998. Both the
three- and six-month periods in 1999 include net sales of $2.5 million
representing one extra month of sales from Newport's European operations. The
additional net sales stem from a reporting change in the second quarter that
eliminated a one-month lag in the reporting of European results. Without the
change, net sales would have been $33.1 million and $62.5 million, respectively,
for the 1999 second quarter and first half. The increase over the second
quarter of 1998 is primarily attributable to the fiber optic communications and
general metrology markets, with sales growth of 49.1% and 16.5%, respectively,
over the prior year quarter. Partially offsetting this increase were declines
in sales to the computer peripherals, research and semiconductor markets of
24.9%, 12.7% and 6.9%, respectively, over the corresponding 1998 period. For
the six-month period, sales to the semiconductor, computer peripherals and
research markets decreased 25.6%, 21.8% and 15.1%, respectively. Partially
offsetting this decline was growth in sales to the fiber optic communications
market of 44.5% over the prior year period.
The Company's domestic sales totaled $20.6 million and $38.5 million for the
three- and six-month periods ended June 30, 1999, compared with $23.8 million
and $45.7 million for the three- and six-month periods ended June 30, 1998,
decreases of 13.8% and 15.9% versus the respective prior year periods. The
decrease in domestic sales for both the three- and six-month periods principally
was attributable to a decline in sales to the aerospace and defense portion of
the research market as well as lower sales to the semiconductor and computer
peripherals markets. Increases in sales to the fiber optic communications
market for both periods partially offset the previously mentioned declines.
The Company's international sales totaled $15.0 million and $26.5 million for
the three- and six-month periods ended June 30, 1999, compared with $10.0
million and $21.8 million for the corresponding prior year periods, increases of
50.4% and 22.0% respectively. European sales reflect a $2.5 million favorable
impact from the reporting change discussed previously. Excluding that impact,
European sales grew 15.7% to $7.5 million versus the prior year quarter, but
declined 1.4% to $13.9 million for the six-month period. The growth for the
quarter is primarily attributable to a significant increase in sales to
European-based OEM customers, primarily in the transportation and analytical
instrument industries. Canadian sales for the three- and six-month periods,
reflecting the strength of the fiber optic communications market, totaled $1.9
million and 3.4 million, respectively, representing increases of 208.4% and
191.5% over the comparable prior year periods. Sales to Pacific Rim markets
Page 11
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Six Months Ended June 30, 1999 and 1998
increased 16.9% and 9.3% to for the quarter and year to-date periods compared to
the corresponding prior year periods. The increase for the three-month period
is due primarily to significant sales increases in Korea and the ASEAN
countries, while the increase for the six-month period is attributable primarily
to sales increases in Korea and Australia of 220.3% and 117.1%, respectively.
Order rates for the second quarter increased 19.0% versus the prior year period
as increases of 85.9%, 35.3% and 17.0% in orders from the fiber optic
communications, semiconductor and general metrology markets, respectively were
partially offset by a 38.6% decline in orders from the computer peripherals
market. Second quarter orders from the research market were flat versus the
prior year quarter. These order rates include an additional $2.7 million,
representing one extra month of orders from Newport's European operations.
Excluding that impact, order rates for the second quarter increased 10.4% versus
the prior year quarter.
Management expects that net sales to the fiber optic communications and
semiconductor markets will increase in the second half of the year but that
sales to the computer peripherals market and sales of its video metrology
products will continue to be weak for the remainder of the year. Overall,
management anticipates that net sales in 1999 will increase over 1998; however,
such growth may be affected by many factors, and cannot be assured.
GROSS PROFIT
Gross profit increased 4.6% on sales growth of 5.2% for the three-month period
ended June 30, 1999, compared with the three-month period ended June 30, 1998.
For the six-month ended June 30, 1999, gross profit decreased 3.3% on a sales
decrease of 3.7%, compared with the six-month period ended June 30, 1998. Gross
margins (gross profit as a percentage of sales) of 44.6% and 44.1% for the three
and six months ended June 30, 1999, did not vary significantly from the 44.8%
and 43.9% gross margins realized in the comparable 1998 periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the three- and six-month
periods ended June 30, 1999, increased 11.5% and 3.3% compared with the three-
and six-month periods ended June 30, 1998. SG&A expenses when stated as a
percentage of sales were 26.4% and 26.6%, compared with 24.9% and 24.8% for the
prior year periods. The increase in SG&A is primarily due to the inclusion of
an additional month of expenses from the aforementioned reporting change.
Absent this change, SG&A expenses would have increased $0.1 million for the
three-month period while decreasing $0.3 million for the six-month period versus
the comparable prior year periods.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development (R&D) expenses for the three- and six-month periods
ended June 30, 1999, increased 1.3% and 4.6% compared with the three- and six-
month periods ended June 30, 1998. As a percentage of sales, R&D expenses were
9.1% and 9.6% for the three- and six-month periods ended June 30, 1999, versus
9.4% and 8.8% for the prior year periods. Similar to SG&A expenses, the
increase in R&D expenses is due to the inclusion of an additional month of
expenses from the change in European reporting. Absent this change, R&D
expenses would have decreased $0.1 million for the three-month period while
increasing $0.1 million for the six-month period versus the comparable prior
year periods. Expenses for both the three- and six-month periods ended June 30,
1999, are in line with management's commitment to continued product development
and enhancement of existing products.
INTEREST EXPENSE AND OTHER INCOME (EXPENSE), NET
Interest expense totaled $0.5 million and $0.9 million for the three- and six-
month periods ended June 30, 1999, versus $0.5 million and $1.0 million for the
three- and six-month periods ended June 30, 1998. Other income (expense), net
was a $0.1 million for both the 1999 and 1998 second quarters. Year-to-date,
Other income (expense), net was a $0.1 million loss for 1999 versus a $0.2
million gain in 1998. The year-to-date decline versus prior year is primarily
attributable to higher foreign exchange losses related to the strengthening of
the U.S. dollar against the euro that occurred in the first quarter of 1999.
Page 12
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Six Months Ended June 30, 1999 and 1998
PROVISION FOR TAXES
The effective annual tax rate for the three- and six-month periods ended June
30, 1999, was 28.0% versus 32.0% for the corresponding prior year periods. The
lower rate in 1999 is primarily the result of increased utilization of foreign
tax loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities of $1.1 million for the six-month period
ended June 30, 1999, was principally attributable to payments on accounts
payable and other accrued expenses ($1.4 million), increases in certain other
operating assets, principally inventories ($3.3 million), receivables ($1.4
million) and other current assets ($1.5 million). Partially offsetting these
amounts were the Company's net income ($3.0 million) and depreciation and
amortization ($3.3 million). Current assets totaled $70.4 million at June 30,
1999, and exceeded current liabilities ($22.0 million) at that date.
Net cash used in investing activities of $3.2 million for the six-month period
ended June 30, 1999, was principally attributable to the Company's purchases of
property, plant and equipment and the payments for in-house technology.
Net cash provided by financing activities of $1.6 million for the six-month
period ended June 30, 1999, was primarily due to the utilization of $3.5 million
of the Company's line of credit and the issuance of common stock under employee
agreements. Partially offsetting these amounts were a $1.5 million principal
repayment on the Company's long-term debt and the repurchase of common stock
under the Company's share repurchase program. At June 30, 1999, there was $3.5
million outstanding under the Company's line of credit with $21.3 million
available after considering outstanding letters of credit.
Although the Company has no present agreements or commitments with respect to
any material acquisitions of other businesses, products, product rights or
technologies, the Company continues to evaluate acquisitions of products,
technologies or companies that complement the Company's business and may make
such acquisitions in the future, and there can be no assurance that the Company
will not need to obtain additional sources of capital to finance any such
acquisitions.
The Company believes its current working capital position together with
estimated cash flows from operations and its existing credit availability are
adequate to fund operations in the ordinary course of business, anticipated
capital expenditures and debt repayment requirements over at least the next
year.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Impact of Year 2000
Certain business operations software programs were written using two digits
rather than four to define the applicable year. As a result, those software
programs are time-sensitive and recognize a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or miscalculations
causing disruptions of operations, including but not limited to, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company initiated a review of its business operations software requirements
in early 1996 as part of the normal course of upgrading its systems to support
current and anticipated growth. Among the criteria for acquiring new or
upgraded software was that it be Year 2000 compliant. In 1997 the Company
acquired new operating software that is Year 2000 compliant. Testing and
implementation occurred throughout 1998 with final conversion at year-end.
Following this conversion, the Company believes that its operations software and
hardware are substantially Year 2000 compliant. The cost of acquiring the
upgraded computer hardware and software was approximately $1.2 million and has
been capitalized.
Page 13
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three and Six Months Ended June 30, 1999 and 1998
Newport sells certain products that include various software applications. The
Company believes that, since January 1, 1996, its product software has been Year
2000 compliant. The Company has also requested assurance from its goods and
services providers that they are, or have programs in place to be, Year 2000
compliant.
The Company has established an Information Technology Steering Committee, which
reports directly to the President and Chief Executive Officer. The committee
members include executive management and employees with expertise from various
disciplines including, but not limited to, information technology, engineering,
finance, customer service, communications, facilities, procurement and human
resources. The committee is responsible for addressing Year 2000 issues
associated with the Company's (1) business application systems including, but
not limited to, the Company's customer service, operations and financial systems
and end-user applications; (2) embedded systems, including equipment that
operates such items as the Company's telecommunications and facilities; (3)
software applications embedded in certain of the Company's products; (4) vendor
and supplier relationships; and (5) contingency planning.
While the Company anticipates no major interruption of its business activities
due to Year 2000 issues, this will depend in part upon Year 2000 compliance of
third parties. The Company's most likely potential risk is the inability of
some customers to order and/or pay on a timely basis and/or the inability of
some suppliers to receive orders and/or deliver on a timely basis. Although the
Company has implemented the actions described above to address third party
issues, it has no direct ability to influence the compliance actions by such
parties. Accordingly, while the Company believes its actions in this regard
should reduce Year 2000 risks, it is unable to eliminate them or to estimate the
ultimate effect Year 2000 risks may have.
While the Company currently believes that neither the software developed by it
as part of its products nor the software licensed by it for its internal use
will be materially affected by Year 2000 problems, there can be no assurance
that the Company's product software, its internal computer systems and networks
or those of its key vendors, developers, distributors and customers will not be
affected by such Year 2000 issues, which could have a material adverse effect on
the Company's business, operating results and financial condition.
European Economic and Monetary Union (EMU) - New European Currency
On January 1, 1999, eleven of the fifteen member countries of the European
Economic and Monetary Union established fixed conversion rates between their
existing national currencies and one common currency - the euro. The euro
trades on currency exchanges and, during a three-year dual-currency transition
period, either the euro or the national currencies may be used in business
transactions. Beginning in January 2002, new euro-denominated bills and coins
will be issued, and the national currencies will be withdrawn from circulation.
The Company's operating subsidiaries affected by the euro conversion have
established plans to address the systems and business issues raised by the euro
currency conversion. These issues include, among others, (1) the need to adapt
computer and other business systems and equipment to accommodate euro-
denominated transactions; and (2) the competitive impact of cross-border price
transparency, which may make it more difficult for businesses to charge
different prices for the same products on a country-by-country basis,
particularly once the euro currency is issued in 2002. While, the Company
currently anticipates that the euro conversion will not have a material adverse
impact on its financial condition or results of operations, there can be no
assurance that the Company or its key vendors, customers and distributors will
not be affected by such euro currency issues, which could have an adverse effect
on the Company's business, operating results and financial condition. Further,
there can be no assurance that currency market volatility will not increase,
which could have an adverse effect on the Company's euro exposures.
PENDING ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes new standards
for recording derivatives in interim and annual financial reports requiring that
all derivative instruments be recorded as assets or liabilities, measured at
fair value. SFAS No. 133 is effective for fiscal years beginning after June 15,
2000, and therefore the Company will adopt the new requirements effective with
the filing of its Quarterly Report on Form 10-Q for the quarter ended March 31,
2001. Management does not anticipate that the adoption of SFAS No. 133 will
have a significant impact on the Company's results of operations, financial
position or cash flow.
Page 14
<PAGE>
NEWPORT CORPORATION
Quantitative and Qualitative Disclosures
About Market Risk
Three and Six Months Ended June 30, 1999 and 1998
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which the Company is exposed is foreign exchange
rates which may generate translation and transaction gains and losses.
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 the Company 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 the Company to adjust
its financing and operating strategies. Consequently, isolating the effect of
changes in currency does not incorporate these other important economic factors.
International operations constituted approximately 12.5% of the Company's
consolidated operating profit for the three-months ended June 30, 1999. As
currency exchange rates change, translation of the income statements of
international operations into U.S. dollars affects year-over-year comparability
of operating results. The Company does not generally hedge translation risks
because cash flows from international operations are generally reinvested
locally. The Company does not currently enter into hedges to minimize
volatility of reported earnings because it does not believe it is justified by
the exposure or the cost.
NEWPORT CORPORATION
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Stockholders was held on May 20, 1999.
(b) Set forth below is the name of each Class I director elected at the
meeting and the number of votes cast for their election, the number
of votes against their election, the number of votes abstained and
the number of broker non-votes:
<TABLE>
<CAPTION>
Number of
Number of Number of Number of Broker
Name Votes "For" Votes "Against" Votes "Abstain" "Non-Votes"
---- ----------- --------------- --------------- -----------
<S> <C> <C> <C> <C>
C. Kumar N. Patel 8,582,510 0 24,219 568,044
Kenneth F. Potashner 8,582,714 0 24,015 568,044
</TABLE>
(c) Proposal Two to appoint Ernst & Young LLP as the Company's independent
auditors resulted in the following number of votes for, against,
abstain, withheld and non-vote:
<TABLE>
<CAPTION>
Number of
Number of Number of Number of Number of Broker
Votes "For" Votes "Against" Votes "Abstain" Votes "Withheld" "Non-Votes"
----------- --------------- --------------- ---------------- -----------
<S> <C> <C> <C> <C>
8,590,173 10,989 5,565 0 568,046
</TABLE>
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURE
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.
NEWPORT CORPORATION
(Registrant)
Dated: August 12, 1999
By: /s/ROBERT C. HEWITT
-------------------------------------
Robert C. Hewitt, Principal Financial
Officer, duly authorized to sign on
behalf of the Registrant
Page 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated statements of income, consolidated balance sheets and
consolidated statements of cash flows and is qualified in its entirety by
reference to such financial statements contained within the Company's Form 10-Q
for the period ended June 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,686
<SECURITIES> 0
<RECEIVABLES> 26,643
<ALLOWANCES> 305
<INVENTORY> 33,648
<CURRENT-ASSETS> 70,424
<PP&E> 52,463
<DEPRECIATION> 30,993
<TOTAL-ASSETS> 110,747
<CURRENT-LIABILITIES> 21,982
<BONDS> 15,499
0
0
<COMMON> 3,203
<OTHER-SE> 68,656
<TOTAL-LIABILITY-AND-EQUITY> 110,747
<SALES> 35,576
<TOTAL-REVENUES> 35,576
<CGS> 19,716
<TOTAL-COSTS> 19,716
<OTHER-EXPENSES> 12,524
<LOSS-PROVISION> 26
<INTEREST-EXPENSE> 457
<INCOME-PRETAX> 2,853
<INCOME-TAX> 798
<INCOME-CONTINUING> 2,055
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,055
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.22
</TABLE>
