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 March 31, 2001
-----------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number 0-1649
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NEWPORT CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 94-0849175
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(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
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(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 March 31, 2001, was 36,344,191.
Page 1 of 15
Exhibit Index on Sequentially Numbered Page 15
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 Months ended March 31, 2001 and 2000. 3
Consolidated Balance Sheet at March 31, 2001 and
December 31, 2000. 4
Consolidated Statement of Cash Flows for the Three
Months ended March 31, 2001 and 2000. 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 14-15
PART II. OTHER INFORMATION
Item 2: Recent Sales of Unregistered Securities 15
Item 6: Exhibits and Reports on Form 8-K. 15
SIGNATURE 15
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NEWPORT CORPORATION
Consolidated Income Statement and
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
(In thousands, except per share amounts) Three Months Ended
March 31,
---------
2001 2000
-------- -------
Net sales $106,741 $52,437
Cost of sales, including asset writedown
related to acquisition integration of $1,788
in the three months ended March 31, 2001 61,164 28,123
-------- -------
Gross profit 45,577 24,314
Selling, general and administrative expense 20,237 11,184
Research and development expense 8,211 5,098
Acquisition and other non-recurring charges 10,683 -
-------- -------
Income from operations 6,446 8,032
Interest and other income, net of expense 3,915 (628)
-------- -------
Income before income taxes 10,361 7,404
Income tax provision 3,419 1,172
-------- -------
Net income $ 6,942 $ 6,232
======== =======
Earnings per share:
Basic $0.19 $0.20
Diluted $0.18 $0.18
Number of shares used to calculate earnings per share:
Basic 36,165 31,526
Diluted 37,988 33,913
Proforma information reflecting the tax effect of the
conversion of Kensington Laboratories, Inc. from an
S-Corporation to a C-Corporation
Net income $ 6,942 $ 5,042
Earnings per share:
Basic $ 0.19 $ 0.16
Diluted $ 0.18 $ 0.15
Stockholders' equity, beginning of period $485,965 $83,246
Net income 6,942 6,232
Dividends (3,814) (456)
Other comprehensive loss (789) (1,047)
Deferred compensation 80 (2,017)
Issuance of common stock 4,986 5,223
-------- -------
Stockholders' equity, end of period $493,370 $91,181
======== =======
See accompanying notes
Page 3
NEWPORT CORPORATION
Consolidated Balance Sheet
(In thousands, except share data)
March 31, December 31,
2001 2000
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 16,572 $ 16,861
Marketable securities 257,345 289,781
Customer receivables, net 79,647 70,241
Income tax receivable - 4,110
Inventories 102,395 80,585
Deferred tax assets 17,674 17,720
Other current assets 6,884 7,836
-------- --------
Total current assets 480,517 487,134
Investments and other assets 8,498 9,773
Property, plant and equipment, at cost, net 43,632 41,308
Goodwill, net 28,412 18,805
-------- --------
$561,059 $557,020
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,833 $ 24,797
Accrued payroll and related expenses 10,179 13,313
Deferred revenue 3,602 2,696
Other current liabilities 10,619 12,444
Current portion of long-term debt 8,094 7,590
======== ========
Total current liabilities 59,327 60,840
Long-term debt 7,075 9,540
Other liabilities 1,287 675
Commitments and contingencies
Stockholders' equity:
Common stock, $.1167 stated value, 75,000,000 shares
authorized; 36,344,000 shares issued and outstanding
at March 31, 2001; 36,168,000 shares at December 31, 2000 4,241 3,813
Capital in excess of stated value 379,943 375,385
Unamortized deferred compensation (916) (996)
Accumulated other comprehensive loss (8,024) (7,235)
Retained earnings 118,126 114,998
-------- --------
Total stockholders' equity 493,370 485,965
-------- --------
$561,059 $557,020
======== ========
See accompanying notes
Page 4
NEWPORT CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
March 31,
---------
2001 2000
---- ----
Operating activities:
Net income $ 6,942 $ 6,232
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,767 2,663
Increase in provision for losses
on receivables and inventories 664 573
Other non-cash items, net 1,365 (94)
Changes in operating assets and liabilities:
Receivables (8,230) (6,185)
Income tax receivable 4,110 -
Inventories (21,904) (3,831)
Other current assets 614 (700)
Other assets 804 (102)
Accounts payable and other accrued expenses (3,865) 990
Deferred revenue (833) (508)
Other, net 612 (12)
--------- --------
Net cash used in operating activities (15,954) (974)
Investing activities:
Purchases of property, plant and equipment, net (4,949) (1,774)
Acquisition of businesses, net of cash acquired (10,446) (50)
Purchases of marketable securities (197,388) -
Sales of marketable securities 231,332 -
Payments for in-process technology - (309)
--------- --------
Net cash provided by (used in) investing activities 18,549 (2,133)
========= ========
Financing activities:
Increase in line of credit - 2,000
Decrease in long-term borrowings (1,895) (129)
Cash dividends paid (4,146) (652)
Issuance of common stock under employee
agreements, including associated tax benefit 3,247 3,015
========= ========
Net cash provided by (used in) financing activities (2,794) 4,234
--------- --------
Effect of foreign exchange rate changes on cash (90) (71)
--------- --------
Net increase (decrease) in cash and cash equivalents (289) 1,056
Cash and cash equivalents at beginning of period 16,861 9,241
--------- --------
Cash and cash equivalents at end of period $ 16,572 $10,297
========= ========
Cash paid in the period for:
Interest $ 140 $ 243
Taxes - 367
See accompanying notes
Page 5
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2001
(Unaudited)
1. Interim Reporting
General
The accompanying unaudited financial statements consolidate the accounts of the
Company and its wholly owned subsidiaries and have been restated to reflect the
acquisition of Kensington Laboratories, Inc. (see Note 2) which has been
accounted for as a pooling of interests. The unaudited financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information.
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 three-month period ended March 31, 2001, are not necessarily indicative
of the results that may be expected for the year ending December 31, 2001.
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, 2000.
Earnings per Share
Basic earnings per share is computed using the weighted average number of shares
of common stock outstanding during the periods, excluding restricted stock.
Diluted earnings per share is computed using the weighted average number of
shares of common stock outstanding during the periods, including restricted
stock, and the dilutive effects of common stock equivalents (stock options),
determined using the treasury stock method, outstanding during the periods.
New Accounting Standard
The Company adopted FAS 133, "Accounting for Derivative Instruments and Hedging
Activities" as of the beginning of fiscal 2001. FAS 133 requires certain
derivative instruments to be recorded at fair value. Derivative instruments
held by the Company are comprised of foreign exchange contracts held as a hedge
against foreign currency denominated receivables. The adoption of this standard
did not have a material impact on the results of operations, financial position
or cash flows of the Company.
Foreign Currency
Balance sheet accounts denominated in foreign currencies are translated at
exchange rates as of the date of the balance sheet. Income statement accounts
denominated in foreign currencies 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 $4.3 million at March 31, 2001, and December 31, 2000,
respectively.
Page 6
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2001
(Unaudited)
2. Acquisitions
Kensington Laboratories, Inc.
In February 2001, the Company acquired Kensington Laboratories, Inc. ("KLI"), a
manufacturer of high-precision robotic and motion control equipment for the
semiconductor and fiber optic communications industries. The Company issued
3,526,000 shares in the transaction. The transaction was accounted for as a
pooling of interests, and, accordingly, the accompanying unaudited condensed
consolidated financial statements have been restated to incorporate the results
of operations, financial position and cash flows of KLI for all periods
presented. KLI's results are included in our Industrial and Scientific
Technologies reportable segment in Note 9. Costs associated with this
acquisition of $9.2 million were charged to operations in the first quarter of
2001.
Net sales and net income of Newport and KLI were the following:
Three Months Ended
March 31,
-------------------
2001 2000
-------- -------
(In thousands, except per share amounts)
Net sales:
Newport $ 93,608 $46,767
KLI 15,659 7,016
Less: Intercompany sales (2,526) (1,346)
-------- -------
Combined $106,741 $52,437
======== =======
Net income :
Newport $ 6,344 $ 3,258
KLI 598 2,974
-------- -------
Combined $ 6,942 $ 6,232
======== =======
Earnings per share:
Basic
Newport $ 0.18 $ 0.12
KLI 0.01 0.08
-------- -------
Combined $ 0.19 $ 0.20
======== =======
Diluted
Newport $ 0.17 $ 0.11
KLI 0.01 0.07
-------- -------
Combined $ 0.18 $ 0.18
======== =======
Number of shares used to calculate earnings per share:
Basic 36,165 31,526
Diluted 37,988 33,913
Prior to its acquisition by the Company, KLI was an S-Corporation, and,
accordingly, its income was not subject to taxation. The proforma information
in the accompanying consolidated income statement reflects the Company's net
income and earnings per share as if KLI was a taxpayer at an effective tax rate
of 40%.
Design Technology Corporation
In February 2001, the Company acquired Design Technology Corporation ("DTC"), a
systems integrator specializing in the use of robotics and flexible automation
solutions for manufacturing processes. The acquisition was accounted for using
the purchase method.
Page 7
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2001
(Unaudited)
3. Marketable Securities
Marketable securities consist of money market funds, certificates of deposit,
commercial paper and funding agreements, U.S. agency notes, corporate notes and
bonds and asset-backed securities. These securities are stated at current fair
market value. The excess of fair market value over book value is included as a
component of comprehensive income (see Note 8).
4. 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:
March 31, December 31,
2001 2000
(In thousands) -------- -----------
Customer receivables $80,297 $70,918
Less allowance for doubtful accounts 650 677
------- -------
$79,647 $70,241
======= =======
5. 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:
March 31, December 31,
2001 2000
(In thousands) -------- -----------
Raw materials and purchased parts $ 28,863 $24,949
Work in process 20,927 17,124
Finished goods 52,605 38,512
-------- -------
$102,395 $80,585
======== =======
6. Property, Plant and Equipment
Property, plant and equipment consist of the following:
March 31, December 31,
2001 2000
(In thousands) -------- -----------
Land $ 861 $ 920
Buildings 4,967 5,304
Leasehold improvements 14,604 14,725
Machinery and equipment 52,024 49,652
Office equipment 22,648 20,786
------- -------
95,104 91,387
Less accumulated depreciation 51,472 50,079
------- -------
$43,632 $41,308
======= =======
Page 8
NEWPORT CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2001
(Unaudited)
7. Interest and Other Income, net
Other expense, net, consists of the following:
Three Months Ended
March 31,
--------------------
2001 2000
(In thousands) ------- -------
Interest and dividend income $4,090 $ 105
Interest expense (370) (653)
Exchange losses, net (55) (10)
Gains on sale of investments, net 344 -
Other (94) (70)
------ -----
$3,915 $(628)
====== =====
8. Comprehensive Income
The components of comprehensive income, net of related tax, are as follows:
Three Months Ended
March 31,
--------------------
2001 2000
(In thousands) ------- -------
Net income $ 6,942 $ 6,232
Foreign currency translation loss (2,297) (1,047)
Unrealized gain on marketable securities 1,508 -
------- -------
$ 6,153 $ 5,185
======= =======
9. Segment Reporting
The Company operates in three reportable segments, Industrial & Scientific
Technologies, Fiber Optics & Photonics and Industrial Metrology Systems
(formerly Video Metrology). Selected financial information for these segments
for the three months ended March 31, 2001 and 2000 follows:
Industrial Industrial
& Scientific Fiber Optics Metrology
Technologies & Photonics Systems Total
(In thousands) ------------ ------------ ---------- -----
Three Months Ended March 31, 2001:
- ---------------------------------
Sales to external customers $63,781 $35,288 $ 7,672 $106,741
Segment income (loss) 18,692 1,814 (1,589) 18,917
Three Months Ended March 31, 2000:
- ---------------------------------
Sales to external customers 35,732 $15,005 $ 1,700 $ 52,437
Segment income (loss) 7,399 2,227 (1,594) 8,032
The following reconciles segment income to consolidated income before income
taxes.
Three Months Ended
March 31,
--------------------
2001 2000
(In thousands) ------- -------
Segment income $ 18,917 $8,032
Unallocated acquisition and other non-recurring charges (12,471) -
Interest and other income, net of expense 3,915 (628)
-------- ------
Income before income taxes $ 10,361 $7,404
======== ======
Page 9
NEWPORT CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation for the Three Months Ended March 31, 2001 and 2000
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 we intend 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 our 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 certain assumptions, including that we will not lose a
significant customer or customers or experience increased fluctuations of demand
or rescheduling of purchase orders, that our markets will continue to grow, that
our products will remain accepted within their respective markets and will not
be replaced by new technology, that competitive conditions within our markets
will not change materially or adversely, that we will retain key technical and
management personnel, that our forecasts will accurately anticipate market
demand, that there will be no material adverse change in our operations or
business, that fluctuations in foreign currency exchange rates do not have a
material adverse impact on our competitive position in international markets and
that we will not experience significant supply shortages with respect to
purchased components, sub-systems or raw materials. 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 our strategic markets, whether our products, particularly
those targeting our strategic markets, will continue to achieve customer
acceptance, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that the assumptions underlying the forward-looking
statements will be realized, the business and operations of the Company are
subject to substantial risks that increase the uncertainty inherent in the
forward-looking statements. Certain of these risks are discussed in more detail
in our Annual Report on Form 10-K for the year ended December 31, 2000. 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 our
objectives or plans will be achieved. We undertake no obligation to revise the
forward-looking statements contained herein to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
The following is our 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-month period ended March 31, 2001, with the three-month
period ended March 31, 2000. This discussion should be read in conjunction with
the financial statements and associated notes.
ACQUISITIONS AND OTHER Q1 2001 EVENTS
During the three-month period ended March 31, 2001, the Company recorded non-
recurring charges of $12.5 million primarily related to acquisitions. Of this
amount, $9.2 million was related to the acquisition of Kensington Laboratories,
Inc. ("KLI") and consisted of banking, legal and accounting fees. The Company
also recorded a charge of $1.8 million for asset writedowns related to
integration charges in connection with its December 2000 acquisition of the
business of CE Johansson AB.
Page 10
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three Months Ended March 31, 2001 and 2000
Net income excluding the non-recurring charges incurred during the quarter ended
March 31, 2001, and reflecting the pro forma tax effect of the conversion of
Kensington Laboratories, Inc. from an S-Corporation to a C-Corporation on the
three-month period ending March 31, 2000 is presented below:
Three Months Ended
March 31,
------------------
2001 2000
------- -------
(In thousands)
Net income $15,330 $ 5,042
Earnings per share:
Basic $ 0.42 $ 0.16
Diluted $ 0.40 $ 0.15
Kensington Laboratories, Inc.
In February 2001, the Company acquired KLI, a manufacturer of high-precision
robotic and motion control equipment for the semiconductor and fiber optic
communications industries. The Company issued 3,526,000 shares in the
transaction. The transaction was accounted for as a pooling of interests, and
accordingly, the accompanying unaudited condensed consolidated financial
statements have been restated to incorporate the results of operations,
financial position and cash flows of KLI for all periods presented.
Design Technology Corporation
In February 2001, the Company acquired Design Technology Corporation ("DTC"), a
systems integrator specializing in the use of robotics and flexible automation
solutions for manufacturing processes. The acquisition was accounted for using
the purchase method.
RESULTS OF OPERATIONS
FINANCIAL ANALYSIS Percentage of Net Sales
-----------------------
Three Months Ended
March 31, Period-to-Period
2001 2000 Increase (decrease)
----- ----- -------------------
Net sales 100.0% 100.0% 103.6%
Cost of sales, including asset writedown related
to acquisition integration of $1,788,000 in the
three months ended March 31, 2001 57.3 53.6 117.5
----- -----
Gross profit 42.7 46.4 87.5
Selling, general and
administrative expense 19.0 21.4 80.9
Research and
development expense 7.7 9.7 61.1
Acquisition and other non-recurring charges 10.0 - 100.0
----- -----
Income from operations 6.0 15.3 (19.7)
Interest and other income, net of expense 3.7 (1.2) NM
----- -----
Income before income taxes 9.7 14.1 39.9
Income tax provision 3.2 2.2 191.7
----- -----
Net income 6.5 11.9 11.4
===== =====
NM = not meaningful
Page 11
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three Months Ended March 31, 2001 and 2000
Net Sales Net sales for the three-month period ended March 31, 2001 were
$106.7 million, compared with $52.4 million for the three-month period ended
March 31, 2000, representing an increase of 103.6%. The sales increase for the
three-month period was due primarily to sales increases in the fiber optic
communications, semiconductor equipment market and general metrology markets.
Sales to the fiber optic communications market during the quarter were
$44.6 million, an increase of $27.8 million, or 164.9%, compared with the
corresponding prior year quarter. Sales to the semiconductor equipment market
totaled $27.1 million for the three-month period ended March 31, 2001, an
increase of $15.3 million, or 129.6%, compared with the corresponding period in
2000. Sales to the general metrology market were $20.6 million, an increase of
$10.1 million, or 95.8%, compared with the corresponding period in 2000. Sales
to the other market segments, including aerospace and research and computer
peripherals, were $14.4 million, an increase of $1.1 million, or 8.7%, compared
with the corresponding prior year quarter.
Domestic sales totaled $70.0 million for the three-month period ended March 31,
2001, compared with $38.3 million for the corresponding period in 2000. The
increase for the quarter of $31.7 million, or 82.6%, was due primarily to sales
increases in the fiber optic communications and semiconductor equipment markets
of $15.5 million, or 127.6%, and $15.2 million, or 141.2%, respectively.
Domestic sales to other market segments increased $1.0 million, or 6.6% over
first quarter 2000.
International sales totaled $36.7 million for the three-month period ended
March 31, 2001, compared with $14.1 million for the corresponding prior year
period, an increase of 160.3%. The increase was due to increases in sales to the
international fiber optic communications and general metrology markets of
$12.3 million, or 260.0%, and $8.0 million, or 214.6%, respectively.
International sales to other markets increased $2.3 million, or 47.8% over first
quarter 2000. Geographically, first quarter 2001 sales to Europe, Canada and the
Pacific Rim increased $12.6 million, or 151.3%; $3.5 million, or 175.1%; and
$6.0 million, or 185.1%, respectively. European sales for the three-month period
were reduced by $0.5 million, compared with the same period in 2000, because of
a negative foreign exchange rate impact due to the strength of the U.S. dollar
versus the euro in the current year period.
Gross Margin Gross margin for the first quarter of 2001 was 42.7% and included
an asset writedown related to acquisition integration of $1.8 million.
Excluding this charge, gross margin for the first quarter of 2001 would have
been 44.4%, versus 46.4% in the first quarter of 2000. The decrease in gross
margin was due primarily to increased costs required to meet customer delivery
requirements.
Selling, General and Administrative (SG&A) Expense SG&A expenses totaled
$20.2 million, or 19.0% of net sales for the three-month period ending March 31,
2001. SG&A expenses, which increased $9.0 million, or 80.9% versus first quarter
2000, were leveraged against the net sales increase of 103.6% and primarily
resulted from increases in expenses tied to sales and profit growth. Excluded
from these costs are acquisition and other non-recurring charges which are
discussed below.
Research and Development (R&D) Expense R&D expenses totaled $8.2 million, or
7.7% of net sales, for the three-month period ending March 31, 2001 versus
expenses of $5.1 million, or 9.7% of sales, for the three-month period ending
March 31, 2000. R&D expenses in the 2001 period increased $3.1 million, or
61.1% compared with the prior year period. The increase was attributable
primarily to increased personnel costs related to the development of a number of
new products and product enhancements including extending the range of our
automated packaging and test equipment product lines for the fiber optic
communications market, technology enhancements to the LaserWeld and AutoAlign
packaging workstation and development of laser diode burn-in and
characterization. We are committed to continued product development and expect
that R&D expenditures will increase in absolute dollars in future periods.
Acquisition and Other Non-Recurring Charges Acquisition and other non-recurring
charges of $10.7 million consisted primarily of banking, legal and accounting
fees associated with acquisitions.
Interest and Other Income, Net Interest and other income, net of expense
totaled $3.9 million for the three-month period ending March 31, 2001, compared
with expense of $0.6 million for the three-month period ending March 31,
Page 12
NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three Months Ended March 31, 2001 and 2000
2000. The increase in the income is attributable to the investment of the
proceeds of the secondary offering completed in July 2000.
Income Taxes The effective tax rate for the three-month period ended March 31,
2001, was 33.0% versus 15.8%, for the corresponding prior year period. The
increase in the effective tax rate was primarily the result of earnings
attributable to KLI for which a tax provision was not recorded in the prior year
due to KLI's S-Corp income tax status.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in our operating activities of $16.0 million for the three-month
period March 31, 2001 was primarily attributable to increases in our receivables
and inventories resulting from our increased sales levels, offset in part by our
operating income plus non-cash items, principally depreciation and amortization
and other non-cash items. Our customer receivables increased by $9.4 million,
or 13.4%, from the fourth quarter of 2000. Additionally, the days sales
outstanding ratio improved to 65 days in the first quarter 2001 from 68 days in
the fourth quarter of 2000. Our inventories increased $21.8 million, or 27.1%,
in the first quarter of 2001 compared with the fourth quarter of 2000 due
primarily to production planning associated with our goal of maintaining
competitive manufacturing lead times and to meet requirements of existing
customer orders. Our accounts payable increased $2.0 million, or 8.2%, in the
first quarter of 2001 due primarily to higher inventory procurement activity.
Net cash provided by investing activities of $18.5 million for the three-month
period ended March 31, 2001, was principally attributable to the net sales of
marketable securities, offset in part by net purchases of property, plant and
equipment and the acquisition of DTC.
Net cash used in financing activities of $2.8 million for the three-month period
ended March 31, 2001, was principally attributable to the payment of cash
dividends and a decrease in long-term borrowings, offset in part by the
issuance of common stock in connection with stock option and purchase plans.
At March 31, 2001, we had in place a $10.0 million unsecured line of credit
expiring March 5, 2004 and a $10.0 million unsecured line of credit expiring
March 4, 2002. Both lines bear interest at either the prevailing prime rate, or
the prevailing London Interbank Offered Rate plus 1.0%, at our option, plus an
unused line fee of 0.2% per year. At March 31, 2001, there were no balances
outstanding under the lines of credit, with $18.4 million available under the
combined lines, after considering outstanding letters of credit.
We believe our current working capital position together with estimated cash
flows from operations and existing credit availability are adequate to fund
operations in the ordinary course of business, anticipated capital expenditures
and debt payment requirements for at least the next twelve months. However,
this belief is based upon many assumptions and is subject to numerous risks, and
there can be no assurance that we will not require additional funding in the
future.
Although we have no present agreements or commitments with respect to any
material acquisitions of other businesses, products, product rights or
technologies, we continue to evaluate acquisitions of products, technologies or
companies that complement our business and may make such acquisitions in the
future. Accordingly, there can be no assurance that we will not need to obtain
additional sources of capital to finance any such acquisitions.
Additional Factors That May Affect Future Operating Results
European Economic and Monetary Union (EMU) - New European Currency
On January 1, 1999, 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. Our operating subsidiaries
affected by the euro conversion have implemented and are implementing plans to
address the systems and business issues raised by the
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NEWPORT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont'd)
Three Months Ended March 31, 2001 and 2000
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 we anticipate that
the euro conversion will not have a material adverse impact on our financial
condition or results of operations, there can be no assurance that key vendors,
customers and distributors will not be affected by such euro currency issues,
which could have an adverse effect on our business, operating results and
financial condition. Further, there can be no assurance that the currency market
volatility will not increase, which could have an adverse effect on our euro
exposures.
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 foreign exchange rates
which may generate translation and transaction gains and losses and interest
rate risk.
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.
International operations constituted approximately 70% of our consolidated
operating profit for the three-months ended March 31, 2001. Excluding non-
recurring charges, international operations would have constituted approximately
24% of our consolidated operating profit for the three-months ended March 31,
2001. 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. We do not generally hedge translation risks
because cash flows from international operations are generally reinvested
locally. We do not enter into hedges to minimize volatility of reported
earnings because we do not believe it is justified by the exposure or the cost.
Changes in currency exchange rates that would have the largest impact on
translating future international operating profit include the euro, British
pound, Canadian dollar, Swedish krona and Swiss franc. We estimate that a 10%
change in foreign exchange rates would have affected reported net income by
approximately $0.3 million for the three-month period ended March 31, 2001. We
believe that this quantitative measure has inherent limitations because, as
discussed in the first paragraph of this section, it does not take into account
any governmental actions or changes in either customer purchasing patterns or
financing and operating strategies.
Transaction gains and losses arise from monetary assets and liabilities
denominated in currencies other than a subsidiary's functional currency. Net
foreign exchange gains and losses were not material to our earnings for the last
three years.
Interest Rate Risk
The interest rates we pay on certain of our debt instruments are subject to
interest rate risk. Our unsecured lines of credit bear interest at either the
prevailing prime rate, or the prevailing London Interbank Offered Rate plus
1.0%, at our option. Our long term debt instruments carry fixed interest rates.
We estimate that a 10% increase in interest rates on our unsecured lines of
credit would not have a material impact on our reported net income.
Our investments in marketable securities, which totals $257.3 million at
March 31, 2001, are sensitive to changes in the general level of U.S. interest
rates. We estimate that a 10% decline in the interest earned on our investment
portfolio would have resulted in an after tax decline in our net income of
$0.3 million for both the three-month period ended March 31, 2001.
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NEWPORT CORPORATION
Qualitative and Quantitative Disclosures
About Market Risks
The sensitivity analyses presented in the interest rate and foreign exchange
discussions above disregard the possibility that rates can move in opposite
directions and that gains from one category may or may not be offset by losses
from another category and vice versa.
PART II - OTHER INFORMATION
Item 2. Recent Sales of Unregistered Securities.
---------------------------------------
During the quarter ended March 31, 2001, the Company acquired all of the issued
and outstanding capital stock of Kensington Laboratories, Inc., a California
corporation ("KLI"), in accordance with the terms and conditions of the
Agreement and Plan of Merger, dated as of December 22, 2000 (the "Agreement") by
and among the Company, KLI Acquisition Corp., a California corporation, KLI and
the three shareholders of KLI, Paul Bacchi, Paul Filipski and David Harris (the
"Kensington Shareholders"). Pursuant to the terms of the Agreement, 10,000
shares of KLI common stock outstanding and held by the Kensington Shareholders
were exchanged for 3,525,727 shares of the Company's common stock. The shares
were issued pursuant to the exemption provided by Section 3(a)(10) of the
Securities Exchange Act of 1933, as amended (the "Securities Act"). The terms
and conditions of such issuance and exchange were approved by the California
Department of Corporations following a hearing on the fairness of such terms and
conditions.
Item 6. Exhibits and reports on Form 8-K.
--------------------------------
(a) Exhibits
Exhibit 10.1 Amendment to 364 Day $10,000,000 Revolving Credit Agreement,
dated as of March 9, 2001, between Newport Corporation and
ABN AMRO Bank, N.V. (incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000)
Exhibit 10.2 Amendment to 3 Year $15,000,000 Revolving Credit Agreement,
dated as of March 9, 2001, between Newport Corporation and
ABN AMRO Bank, N.V. (incorporated by reference to
Exhibit 10.16 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000)
Exhibit 10.3 Agreement and Plan of Merger, dated as of December 22, 2000,
by and among Newport Corporation, KLI Acquisition Corp.,
Kensington Laboratories, Inc., and the Shareholders of
Kensington Laboratories, Inc. (incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K filed
on February 20, 2001)
(b) Reports on Form 8-K
On February 20, 2001, the Company filed a Current Report on Form 8-K
reporting under Item 2 the completion of its acquisition of Kensington
Laboratories, Inc. on February 2, 2001.
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: May 9, 2001
By: /S/CHARLES F. CARGILE
--------------------------------
Charles F. Cargile, Principal
Financial Officer, duly
authorized to sign on behalf of
the Registrant
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