<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 September 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 September 30, 1999, was 9,150,375.
Page 1 of 16
Exhibit Index on Sequentially Numbered Page 15
<PAGE>
NEWPORT CORPORATION
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION Page Number
Item 1: Financial Statements:
Consolidated Income Statement and Condensed
Consolidated Statement of Stockholders' Equity for the
Three and Nine Months ended September 30, 1999 and 1998. 3
Consolidated Balance Sheet at September 30, 1999 and
December 31, 1998. 4
Consolidated Statement of Cash Flows for the Nine
Months ended September 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. 10-15
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
</TABLE>
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 Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1999 1998 1999 1998
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $35,427 $33,456 $100,451 $100,952
Cost of sales 19,939 18,939 56,294 56,792
------- ------- -------- --------
Gross profit 15,488 14,517 44,157 44,160
Selling, general and administrative expense 8,673 7,931 25,958 24,662
Research and development expense 3,440 3,061 9,666 9,013
------- ------- -------- --------
Income from operations 3,375 3,525 8,533 10,485
Interest expense (466) (446) (1,371) (1,439)
Other income, net 330 46 200 248
------- ------- -------- --------
Income before income taxes 3,239 3,125 7,362 9,294
Income tax provision 907 907 2,061 2,881
------- ------- -------- --------
Net income $ 2,332 $ 2,218 $ 5,301 $ 6,413
======= ======= ======== ========
Net income per share
Basic $ 0.26 $ 0.25 $ 0.58 $ 0.71
Diluted $ 0.25 $ 0.24 $ 0.57 $ 0.68
Number of shares used to calculate
net income per share
Basic 9,068 9,003 9,074 8,986
Diluted 9,398 9,337 9,382 9,408
Stockholders' equity, beginning of period $71,859 $65,493 $70,970 $60,658
Net income 2,332 2,218 5,301 6,413
Dividends - - (183) (183)
Unrealized translation gain (loss) 620 1,313 (1,546) 1,186
Unamortized deferred compensation (32) 60 76 (88)
Repurchase of common stock (587) (1,489) (1,585) (2,876)
Issuance of common stock 453 704 1,612 3,189
------- ------- ------- -------
Stockholders' equity, end of period $74,645 $68,299 $74,645 $68,299
======= ======= ======= =======
</TABLE>
See accompanying notes
Page 3
<PAGE>
NEWPORT CORPORATION
Consolidated Balance Sheet
<TABLE>
<CAPTION>
(In thousands, except share data)
September 30, December 31,
1999 1998
-------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,861 $ 5,335
Customer receivables, net 26,810 25,798
Other receivables 1,846 2,367
Inventories 34,394 31,260
Deferred tax assets 2,673 2,703
Other current assets 2,915 1,643
-------- --------
Total current assets 73,499 69,106
Investments and other assets 7,130 6,451
Property, plant and equipment, at cost, net 21,558 22,696
Goodwill, net 11,076 12,220
-------- --------
$113,263 $110,473
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,947 $ 6,180
Accrued payroll and related expenses 5,187 5,566
Taxes based on income 1,911 95
Line of credit 150 -
Current portion of long-term debt 3,719 3,699
Other current liabilities 3,915 5,068
-------- --------
Total current liabilities 21,829 20,608
Long-term debt 15,382 17,536
Other liabilities 1,407 1,359
Commitments and contingencies
Stockholders' equity:
Common stock, $.35 stated value, 20,000,000 shares authorized;
9,150,000 shares issued and outstanding at September 30, 1999,
9,119,000 shares at December 31, 1998 3,203 3,192
Capital in excess of stated value 8,589 8,573
Unamortized deferred compensation (472) (548)
Unrealized translation loss (5,462) (3,916)
Retained earnings 68,787 63,669
-------- --------
Total stockholders' equity 74,645 70,970
-------- --------
$113,263 $110,473
======== ========
</TABLE>
See accompanying notes
Page 4
<PAGE>
NEWPORT CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
Nine Months Ended
September 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 5,301 $ 6,413
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,998 4,646
Increase in provision for losses
on receivables and inventories 391 790
Other non-cash items, net (412) (354)
Changes in operating assets and liabilities:
Receivables (1,107) 349
Inventories (3,919) (2,685)
Other current assets (1,760) (562)
Other assets (20) 318
Accounts payable and other accrued expenses (141) (2,443)
Taxes based on income 1,801 (534)
Other, net - (1)
------- -------
Net cash provided by operating activities 5,132 5,937
------- -------
Investing activities:
Purchases of property, plant and equipment, net (3,244) (3,906)
Disposition of property, plant and equipment, net 162 2,443
Proceeds from sale of investment 1,054 720
Payments for in-process technology (1,553) -
Other, net - 49
------- -------
Net cash used in investing activities (3,581) (694)
------- -------
Financing activities:
Increase in credit line 150 -
Decrease in long-term borrowings (1,972) (990)
Cash dividends paid (365) (362)
Repurchase of common stock (1,585) (2,876)
Issuance of common stock under employee
agreements, including associated tax benefit 1,612 2,927
------- -------
Net cash used in financing activities (2,160) (1,301)
------- -------
Effect of foreign exchange rate changes on cash 135 (160)
------- -------
Net increase (decrease) in cash and cash equivalents (474) 3,782
Cash and cash equivalents at beginning of period 5,335 7,456
------- -------
Cash and cash equivalents at end of period $ 4,861 $11,238
======= =======
Cash paid in the period for:
Interest $ 948 $ 1,092
Taxes 4 2,712
</TABLE>
See accompanying notes
Page 5
<PAGE>
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 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.
The nine-month period in 1999 includes 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 $98.0 million for the nine-month period in 1999. 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 nine-month period ended September 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 $4.7 million and $4.2 million at September 30, 1999 and December 31,
1998, respectively.
Page 6
<PAGE>
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 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:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1999 1998
------------- ------------
<S> <C> <C>
Customer receivables $27,076 $26,077
Less allowance for doubtful accounts 266 279
------- -------
$26,810 $25,798
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1999 1998
------------- ------------
<S> <C> <C>
Raw materials and purchased parts $11,615 $12,412
Work in process 6,185 5,301
Finished goods 16,594 13,547
------- -------
$34,394 $31,260
======= =======
</TABLE>
4. Property, Plant and Equipment
Property plant and equipment consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1999 1998
------- -------
<S> <C> <C>
Land $ 1,174 $ 1,287
Buildings 6,585 7,218
Leasehold improvements 8,576 8,715
Machinery and equipment 24,630 24,063
Office equipment 13,089 11,715
------- -------
54,054 52,998
Less accumulated depreciation 32,496 30,302
------- -------
$21,558 $22,696
======= =======
</TABLE>
Page 7
<PAGE>
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
5. Other Income, Net
Other income, net, consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
(In thousands) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest and dividend income $ 9 $ 141 $ 80 $ 353
Exchange gains (losses), net 36 36 (161) (95)
Gains (losses) on investments, net 142 (9) 298 126
Other 143 (122) (17) (136)
------ ------ ------- ------
$ 330 $ 46 $ 200 $ 248
====== ====== ======= ======
</TABLE>
6. Comprehensive Income
The components of comprehensive income, net of related tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
(In thousands) 1999 1998 1999 1998
-------- ------ ------- ------
<S> <C> <C> <C> <C>
Net income $2,332 $2,218 $ 5,301 $6,413
Unrealized translation gain (loss) 620 1,313 (1,546) 1,186
------ ------ ------- ------
$2,952 $3,531 $ 3,755 $7,599
====== ====== ======= ======
</TABLE>
Page 8
<PAGE>
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
7. Segment Reporting
Selected financial information for the Company's reportable segments for the
three- and nine-months ended September 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 September 30, 1999:
- --------------------------------------
Sales to external customers $10,730 $15,828 $ 7,501 $34,059
Intersegment sales 1,530 2,834 1,905 6,269
Segment income (loss) 3,456 (32) (114) 3,310
Three Months Ended September 30, 1998:
- --------------------------------------
Sales to external customers $10,728 $14,614 $ 6,990 $32,332
Intersegment sales 1,498 1,689 2,016 5,203
Segment income (loss) 3,133 128 (87) 3,174
Nine Months Ended September 30, 1999:
- -------------------------------------
Sales to external customers $30,252 $41,812 $23,651 $95,715
Intersegment sales 4,872 7,444 5,718 18,034
Segment income (loss) 8,998 (693) 181 8,486
Nine Months Ended September 30, 1998:
- -------------------------------------
Sales to external customers $32,265 $45,520 $20,624 $98,409
Intersegment sales 4,539 4,163 5,953 14,655
Segment income (loss) 9,314 1,280 (277) 10,317
</TABLE>
The following reconciles segment income to consolidated income before income
taxes.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------
(In thousands) 1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Segment income $ 3,310 $ 3,174 $ 8,486 $10,317
Income from non reportable segments 87 45 302 88
Unallocated corporate and other operating expense (22) 306 (255) 80
Interest expense (466) (446) (1,371) (1,439)
Other income, net 330 46 200 248
------- ------- ------- -------
Income before income taxes $ 3,239 $ 3,125 $ 7,362 $ 9,294
======= ======= ======= =======
</TABLE>
Page 9
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Result of Operations
Three and Nine Months Ended September 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 nine-month periods ended September 30, 1999,
with the three- and nine-month periods ended September 30, 1998. This
discussion should be read in conjunction with the financial statements and
associated notes.
ACQUISITIONS
In October 1999 the Company entered into a stock purchase agreement providing
for the acquisition by Newport of the west coast commercial optics subsidiary of
Corning OCA Corporation, a subsidiary of Corning Incorporated, based in Garden
Grove, California. The transaction, completed on October 21, 1999, was
accounted for as a purchase and the commercial optics subsidiary (renamed
Newport Precision Optics Corporation), a manufacturer of specialized precision
optical products and systems, became a wholly owned subsidiary of Newport.
Page 10
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three and Nine Months Ended September 30, 1999 and 1998
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FINANCIAL ANALYSIS Period-to-Period
Increase (Decrease)
-------------------
Percentage of Net Sales Three Nine
------------------------- Months Months
Three Months Ended Nine Months Ended Ended Ended
September 30, September 30, September 30,
1999 1998 1999 1998 1999 1998
----- ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 5.9% (0.5)%
Cost of sales 56.3 56.6 56.0 56.3 5.3 (0.9)
----- ----- ----- -----
Gross margin 43.7 43.4 44.0 43.7 6.7 -
Selling, general and
administrative expense 24.5 23.7 25.9 24.4 9.4 5.3
Research and
development expense 9.7 9.2 9.6 8.9 12.4 7.2
----- ----- ----- -----
Income from operations 9.5 10.5 8.5 10.4 (4.3) (18.6)
Interest expense (1.3) (1.3) (1.4) (1.4) 4.5 (4.7)
Other income (expense), net 0.9 0.1 0.2 0.3 NM (19.4)
Income taxes 2.5 2.7 2.0 2.9 - (28.5)
----- ----- ----- -----
Net income 6.6 6.6 5.3 6.4 5.1 (17.3)
===== ===== ===== =====
</TABLE>
NM = not meaningful
NET SALES
Net sales for the three- and nine-month periods ended September 30, 1999, were
$35.4 million and $100.5 million, respectively, compared with $33.5 million and
$101.0 million for the three- and nine-month periods ended September 30, 1998.
The nine-month period in 1999 includes net sales of $2.5 million representing
one extra month of sales from Newport's European operations, which results 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
$98.0 million for the nine-month period in 1999. The increase over the third
quarter of 1998 is primarily attributable to the fiber optic communications,
semiconductor and general metrology markets, with sales growth of 62.8%, 32.2%
and 30.0%, respectively, over the prior year quarter. Partially offsetting this
increase were declines in sales to the computer peripherals and research markets
of 53.6% and 22.9%, respectively, versus the corresponding 1998 period. For the
nine-month period, growth in sales to the fiber optic communications and general
metrology markets of 51.4% and 9.8% over the prior year period offset declines
in the computer peripherals, research and semiconductor markets of 34.0%, 17.7%
and 8.7%, respectively, leaving year to date sales virtually even with the prior
year.
The Company's domestic sales totaled $23.3 million and $61.8 million for the
three- and nine-month periods ended September 30, 1999, compared with $22.1
million and $67.9 million for the three- and nine-month periods ended September
30, 1998, an increase of 5.5% and a decrease of 8.9% versus the respective prior
year periods. The growth in domestic sales for the three-month period was
attributable principally to increases in sales to the fiber optic
communications, semiconductor and general metrology markets partially offset by
declines in the computer peripherals market and the aerospace and defense
portion of the research market. The decline in domestic sales for the nine-
month period was due primarily to lower sales to the computer peripherals market
as well as to the aerospace and defense portion of the research market, offset
partially by increases in sales to the fiber optic communications market.
The Company's international sales totaled $12.1 million and $38.7 million for
the three- and nine-month periods ended September 30, 1999, compared with $11.4
million and $33.1 million for the corresponding prior year periods, increases of
6.7% and 16.8% respectively. European nine-month sales reflect a $2.5 million
favorable impact from the reporting change discussed previously. Without the
change, international sales would have been $36.2 million for the nine-month
period in 1999. European sales grew 3.5% versus the prior year quarter to $7.6
million, but were essentially flat at $21.5 million for the nine-month period
after exclusion of the additional month. The growth for
Page 11
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Result of Operations
Three and Nine Months Ended September 30, 1999 and 1998
the quarter and year to date 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 nine-month
periods, reflecting the strength of the fiber optic communications market,
totaled $1.5 million and $4.9 million, respectively, representing increases of
41.5% and 120.5% over the comparable prior year periods. Sales to Pacific Rim
markets increased 59.2% and 21.4% 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 Japan, Korea and
Taiwan, while the increase for the nine-month period is attributable primarily
to sales increases in Korea and Australia of 181.9% and 110.0%, respectively.
Order rates for the third quarter increased 18.2% versus the prior year period
as increases of 80.4% and 166.3% in orders from the fiber optic communications
and semiconductor markets, respectively were partially offset by declines of
31.4% and 9.0% in orders from the computer peripherals and research markets,
respectively.
Management expects that net sales to the fiber optic communications and
semiconductor markets will increase in the last quarter of 1999 but that sales
to the computer peripherals market and the aerospace and defense portion of the
research market aerospace market 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 6.7% on sales growth of 5.9% for the three-month period
ended September 30, 1999, compared with the three-month period ended September
30, 1998. For the nine-month ended September 30, 1999, sales and gross profit
were essentially flat versus the nine-month period ended September 30, 1998.
Gross margins (gross profit as a percentage of sales) of 43.7% and 44.0% for the
three and nine months ended September 30, 1999, did not vary significantly from
the 43.4% and 43.7% gross margins realized in the comparable 1998 periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the three- and nine-
month periods ended September 30, 1999 increased 9.4% and 5.3% compared with the
three- and nine-month periods ended September 30, 1998. SG&A expenses when
stated as a percentage of sales were 24.5% and 25.9%, compared with 23.7% and
24.4% for the prior year periods. The increase of $0.7 million in SG&A expenses
for the three-month period is primarily a result of higher international trade
show activity and the inclusion of expenses for Environmental Optical Sensors,
Inc. (EOSI) in the current year quarter for which there were no comparable
expenses in the prior year quarter. For the nine-month period the SG&A expense
increase over prior year is primarily a result of the inclusion of an additional
month of expenses from the change in European reporting. Absent this change,
SG&A expenses would have increased $0.4 million for the nine-month period.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development (R&D) expenses for the three- and nine-month periods
ended September 30, 1999, increased 12.4% and 7.2% compared with the three- and
nine-month periods ended September 30, 1998. As a percentage of sales, R&D
expenses were 9.7% and 9.6% for the three- and nine-month periods ended
September 30, 1999, versus 9.1% and 8.9% for the prior year periods. R&D
expenses increased $0.4 million and $0.7 million for the three- and nine-month
periods versus the comparable prior year periods. The three-month period
increase is primarily a result of expansion efforts currently underway at the
Company's photonics manufacturing facility in San Luis Obispo, California. The
increase for the nine-month period includes $0.2 million representing an
additional month of expenses from the aforementioned reporting change and $0.2
million in R&D spending at EOSI, for which there were no comparable prior year
amounts. Expenses for both the three- and nine-month periods ended September
30, 1999, are in line with management's commitment to continued product
development and enhancement of existing products.
Page 12
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Result of Operations
Three and Nine Months Ended September 30, 1999 and 1998
INTEREST EXPENSE AND OTHER INCOME, NET
Interest expense totaled $0.5 million and $1.4 million for the three- and nine-
month periods ended September 30, 1999, versus $0.4 million and $1.4 million for
the three- and nine-month periods ended September 30, 1998. Other income, net
was $0.3 million and $0.05 million, respectively, for the 1999 and 1998 third
quarters. Year-to-date, other income, net was $0.2 million for both 1999 and
1998. The third quarter increase versus prior year is primarily attributable to
higher income from equity investments. For the nine-months ended September 30,
1999, other income, net is flat with the prior year period as foreign exchange
losses related to the strengthening of the U.S. dollar against the euro that
occurred in the first quarter of 1999 offset the third quarter equity income
increase.
PROVISION FOR TAXES
The effective annual tax rate for the three- and nine-month periods ended
September 30, 1999, was 28.0% versus 29.0% and 31.0%, respectively, for the
corresponding prior year periods. The lower rate in 1999 is primarily the
result of increased utilization of foreign tax loss carryforwards and is
consistent with the overall 1998 rate.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities of $5.1 million for the nine-month
period ended September 30, 1999, was principally attributable to the Company's
net income ($5.3 million), depreciation and amortization ($5.0 million) and
taxes based on income ($1.8 million, including a refund). Partially offsetting
these amounts were increases in certain other operating assets, principally
inventories ($3.9 million), receivables ($1.1 million) and other current assets
($1.8 million). Current assets totaled $73.5 million at September 30, 1999, and
exceeded current liabilities ($21.8 million) at that date.
Net cash used in investing activities of $3.6 million for the nine-month period
ended September 30, 1999, was principally attributable to the Company's
purchases of property, plant and equipment and the payments for in-house
technology ($3.2 million and $1.6 million, respectively), partially offset by
the sale of an equity investment for net proceeds of $1.1 million.
Net cash used in financing activities of $2.2 million for the nine-month period
ended September 30, 1999, was primarily due to decrease in long-term borrowings
($2.0 million, including 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 ($1.6 million). Partially offsetting these amounts was $1.6
million from the issuance of common stock under employee agreements. At
September 30, 1999, there was $0.2 million outstanding under the Company's line
of credit with $22.9 million available after considering outstanding letters of
credit.
At September 30, 1999 the Company had no agreements or commitments with respect
to any material acquisitions of other businesses, products, product rights or
technologies. However, subsequent to the end of the quarter, on October 21,
1999 the Company utilized its line of credit to acquire the west coast
commercial optics operation of Corning OCA Corporation. 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
Page 13
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Result of Operations
Three and Nine Months Ended September 30, 1999 and 1998
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.
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.
Page 14
<PAGE>
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Result of Operations
Three and Nine Months Ended September 30, 1999 and 1998
Pending Adoption of Statement of Financial Accounting Standards No. 133
In September 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
September 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.
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 a negligible portion of the Company's
consolidated operating profit for the three-months ended September 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 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: November 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 September 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,861
<SECURITIES> 0
<RECEIVABLES> 27,076
<ALLOWANCES> 266
<INVENTORY> 34,394
<CURRENT-ASSETS> 73,499
<PP&E> 54,054
<DEPRECIATION> 32,496
<TOTAL-ASSETS> 113,263
<CURRENT-LIABILITIES> 21,829
<BONDS> 15,382
0
0
<COMMON> 3,203
<OTHER-SE> 71,442
<TOTAL-LIABILITY-AND-EQUITY> 113,263
<SALES> 35,427
<TOTAL-REVENUES> 35,427
<CGS> 19,939
<TOTAL-COSTS> 19,939
<OTHER-EXPENSES> 11,697
<LOSS-PROVISION> 86
<INTEREST-EXPENSE> 466
<INCOME-PRETAX> 3,239
<INCOME-TAX> 907
<INCOME-CONTINUING> 2,332
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,332
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.25
</TABLE>
